Janet Yellen embarks on a journey to Asia to gain support for Russia’s oil price ceiling

TOKYO – Finance Minister Janet Yellen launched an international campaign to lobby for a proposal she says will prevent a global recession and address the technical and diplomatic challenges of her plan. To determine the price of Russian oil.

The purpose of setting the proposed price cap, which Ms Yellen has been advocating for months, is twofold: to lower energy prices, keep Russian oil flowing into the world market and reduce Russian sales revenue.

The new proposal has grown in popularity in recent weeks, and President Biden and other leaders of the Group of Seven Rich Nations have recently backed the consideration. On her first trip to Asia as Finance Minister, Ms Yellen will focus on filling in key details to make the plan work. He is expected to discuss the price cap with his colleagues this week during his trip to Japan, as well as at upcoming meetings of G20 finance ministers from Indonesia’s major economies and during the stopover in South Korea.

There are many outstanding issues with the idea of ​​a price cap. These include learning exactly how to apply it, convincing other countries to participate, and determining the selling price at which Western countries are allowed to buy Russian oil. The proposal also assumes that Russia will continue to sell oil at the price of the US and its allies.

But as Russia makes billions from oil sales and rising fuel prices, contributing to its highest inflation in decades, officials in the Biden administration and Western countries are looking for new economic tools to counter the devastating Russian invasion of Ukraine. to slow down.

During her trip to Europe in May, Ms. Yellen admitted that it is difficult to force price cuts.

“While I think a lot of people, myself included, find it attractive from an overall economic point of view, the reality is that getting started with it is challenging and not all of these problems have been solved,” she said in Germany.

Higher oil prices have benefited OPEC+, the oil-producing alliance that controls more than half of world production. Shelby Holiday of the Wall Street Journal explains what OPEC+ countries are doing with this surprise and why they are unlikely to drift away from Russia. Illustration by Adele Morgan

The current price cap proposal stems from the EU sanctions package, which included an embargo on Russian oil imports and a ban on European Union companies to ensure the supply of Russian oil by sea. These steps are planned to begin at the end of the year. Because many supplies of Russian oil to countries around the world are insured with the European Union and the United Kingdom, Yellen repeatedly said she was concerned that EU plans could take Russian oil off the global market.

A sharp drop in global supply could drive prices up enough. Russia could reap similar gains from falling sales, while potentially turning the global economy into recession, Yellen said. Some analysts predict that oil, which costs about $105 a barrel, could rise to $200 a barrel if Russian production slows significantly.

“It’s hard to get started and not all of these problems have been solved yet”


Janet Yellen on the oil price ceiling in Russia

A Treasury official traveling with Ms. Yellen said the ministry’s estimates indicated that the price of oil could rise to about $140 a barrel with a significant loss of production, although the official said the estimate was uncertain.

Now Ms. Yellen and western officials are asking for a deduction from the insurance ban. The change will allow companies from the European Union, Britain and other countries to secure and finance the supply of Russian oil if the sale price falls below the limit. The plan aims to preserve the ability of many developing countries, as well as China and India, to buy oil from Russia. The country’s oil has already been sold at a discount compared to world standards as the US and European Union try to lock it down.

The main question in the project is how to check whether the tankers carrying Russian oil are complying with a price cap that insurers have indicated is difficult to enforce.

According to a senior Treasury official, the oil letters of credit — which generally cover the selling price of the oil — and customs controls are ways officials try to enforce the price cap.

The official added that even if countries had not signed the limit, Russian oil delivered without Western insurance and financial support would likely still be sold at an additional discount. This would lower Russian revenue from such a sale, the official said.

Oil mill in the Far East of Russia. Western countries are trying to limit Moscow’s influence on oil sales.

image:
Poczta Tatiana / Reuters

Some question whether Russia will stick to the economic logic underlying the plan. The President of Russia will demand…

Russian President Vladimir Putin

Sell ​​crude oil at a big discount to avoid closing oil wells and permanently reducing the country’s production capacity. Reuters said a senior Russian official recently said his country would not sell oil below the limit.

“While it’s marketed as very pragmatic, I think it’s more on paper than in practice, it basically assumes Russia will say, ‘Well, I can’t get this award, I think I now get half that price. – said Adam Posen, president of the Peterson Institute for International Economics.

Japanese media reported that Japanese Prime Minister Fumio Kishida said in a recent speech that the ceiling would be set at about half the current price of Russian oil.

Ms Yellen’s efforts to push prices began when she presented the idea to G7 finance ministers at a dinner she hosted in the Treasury in April at the IMF and World Bank spring meetings, a senior official from the treasury. †

While the oil price cap has since gained popularity, the political and practical barriers to achieving it may ultimately be too great. From Ms. Yellen’s Past International Achievements, The Global Tax Treaty In principle approved by more than 100 countries, not yet enacted Because it is embroiled in complex political dynamics in the European Union and the US Congress.

For the oil price ceiling to work, the United States will once again have to form a large international coalition to stick to it. This will require convincing the 27 EU Member States to review elements of the latest sanctions package, which has itself been the subject of weeks of difficult negotiations. And while India and China could benefit from lower Russian oil prices, some analysts speculate they may be reluctant to participate in US-led efforts against Russia. Another senior Treasury official said the US is reaching several countries, including India, as part of a containment effort.

write to Andrew Dohren in [email protected]

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