As Prepared for Delivery
Introduction
It’s an honor to be here today to discuss the price cap on Russian oil alongside our other efforts to limit Putin’s ability to finance his illegal war. It’s especially an honor to do so in India, alongside our government and industry partners. As one of the most significant global consumers of oil, we know that the Indian economy has much at stake in the Russian oil trade, and has much at stake from the global supply disruptions that the price cap is designed to avoid. The price cap’s goals are to limit Putin’s revenue and maintain global oil supply—essentially by creating a mechanism for India and other partners to access Russian oil at discounted prices.
The price cap’s first year was a successful one by those standards: global oil markets remained well-supplied while Russian oil traded at a significant discount to global oil. This past summer and fall, we saw Russia’s investments in new infrastructure to sell oil outside the price cap’s jurisdiction begin to bear fruit, and the discount on Russian oil narrowed. In response, the United States and the Price Cap Coalition have reinvigorated our enforcement efforts and focused on constraining Russia’s options to sell outside the price cap. Today, even the Kremlin has acknowledged that these efforts are forcing Russia to sell at bigger discounts to global consumers like India.
Adoption and successful implementation of such a novel policy is an important diplomatic achievement, reflecting the unity of the Coalition opposed to Putin’s war. Our engagement with Indian partners—in the public and private sectors—was an essential part of the process given India’s critical role in the global oil trade.
Today, we will review the inception of the price cap policy and the economics behind it. Then, we will move into a discussion of how enforcement of the price cap has evolved and how we are continuing to support its success through expanded and targeted enforcement actions.
Origins of the Price Cap
Over two years have passed since Putin launched his illegal full-scale invasion of Ukraine. The United States and the global Coalition opposed to Russia’s war then faced an important choice on how to address Russian oil exports, the Kremlin’s most important revenue source. Permitting an unrestricted Russian oil trade was and remains unacceptable: it would allow Putin to profit from a price spike he created. However, taking steps to suddenly remove Russian oil from the market—such as by banning the use of Coalition services in any Russian oil trade—would risk spiking global oil prices further for the emerging economies most dependent on imported energy.
The Coalition identified the price cap as the way to best navigate these risks. The price cap has two goals: to limit Putin’s oil profits and to maintain stable global oil supply. Effectively, the price cap is designed to force Russia to continue selling its oil but for lower prices than it could otherwise obtain.
The price cap leverages an important feature of global oil markets: G7 service providers (like insurers and ship owners) are central to the Russian oil trade, even when the Coalition is not the buyer. The price cap permits service providers in Coalition countries to support the Russian oil trade only if the oil is sold at or below a specific cap. The price cap is designed to foster a market in which Russia supplies energy at a heavily discounted price: maintaining the volume of energy supplied, while minimizing Putin’s profit earned from it.
In 2022, the price cap was met with considerable skepticism. But over the year following its announcement, the United States and our international coalition were pleased with the effectiveness of the policy. We saw the Kremlin’s tax revenue from oil drop more than 40 percent over the first nine months of 2023, compared to the same period a year earlier, and we were gratified to see that the price cap worked in practice as well as in theory—that this policy mechanism made it possible to stunt a major source of funding for Putin’s war machine was possible while also maintaining a stable energy supply to Europe and to emerging markets. Emerging markets like India benefited from the discounted price of Russian oil relative to global markets.
The Price Cap’s Second Phase
In the second half of 2023, we observed Russian efforts to build up an infrastructure of ships, insurers, and other maritime services with providers with opaque ownership structures and a history of sanctions evasion activities: sometimes colloquially known as the “shadow fleet.” It’s a standard feature of sanctions regimes that the target will invest to avoid the legal reach of sanctions. Indeed, Russia’s investments diverted money from the battlefield: they were forced to buy tankers rather than tanks. Nonetheless, the changing market conditions did result in a narrowing of the discount on Russian oil, and they drove us to expand our approach to enforcing and implementing the price cap regime.
Beginning in October 2023, the Coalition tightened enforcement of the price cap by 1) imposing more stringent enforcement on oil trade using Coalition services and 2) increasing the costs to the Kremlin of selling oil via the “shadow fleet.” For Treasury’s part, we began and have continued to publicly sanction vessels involved in oil trade above the price cap.
The United States has designated vessel owners, shipping companies, and an oil trader that used Coalition services to trade above the cap, as well as identified several of these companies’ vessels as blocked property. We have designated obscure and opaque supply chain intermediaries supporting Russia’s oil trade.
Our enforcement efforts continue:
- On February 1, the U.S. Treasury issued a Price Cap Coalition Compliance and Enforcement Alert directed at both government and industry stakeholders. This alert reflects our commitment to support governments and industry stakeholders to comply with the cap. The enforcement alert provides examples of specific evasion methods, and potential mitigation measures. It also provides avenues to report suspected oil price cap breaches to each of the Coalition members.
- And on February 23, Treasury designated Joint Stock Company Sovcomflot, Russia’s state-owned shipping company and fleet operator, and publicly identified 14 of Sovcomflot’s crude oil tankers as blocked property. As Deputy Secretary Adeyemo said when these designations were announced, this is part of our plan to increase the costs on Russia, but do so in a responsible manner to mitigate risks to the broader market.
Since our enforcement push began four months ago, we’re seeing strong indicators of the success of this approach: Russian oil prices have fallen, even relative to global prices, which reduced Putin’s revenue. The discount on the loading price of Russian Urals oil moved from a low of $12-13 below world prices, to a peak of $18 in January 2024 and around $17-18 in February, the latest month with data available.
Oil markets are complex, but for several months, market commentators and analysts—including the International Energy Agency—have credited our enforcement actions with hurting the Kremlin’s budget. Quoting IEA’s January 2024 Oil Market Report[1]: “Russian oil export revenues lowest since June 2023: Crude price discounts to benchmarks for Urals have deepened under pressure from the expanded US Treasury investigation into ships, their owners and related traders that have transported Russian oil purchased above the G7 price cap.”
Further, in January, Clear View Energy Partners also wrote: “Notwithstanding our usual caveats regarding small sample sizes and energy data quality limitations, OFAC’s [Treasury’s sanctions administration and enforcement arm] ramp-up of enforcement actions appears to be achieving its stated goals: preserving Russian export flows while diminishing proceeds to the Kremlin. Per Bloomberg ship-tracking data on a four-week moving average basis, seaborne crude volumes have risen back towards mid-October levels[.] Meanwhile, Urals – Brent differentials appear to have widened—either a little, or materially, depending on the data source used[.]”
Beyond this industry validation, even the Kremlin’s own oil czar acknowledged that the sanctions issued to enforce the price cap were forcing Russia to sell at lower prices. On January 31, Bloomberg reported that “Deputy Prime Minister Alexander Novak told reporters in Moscow that Russian prices have seen bigger reductions relative to global prices since the most recent sanctions packages were brought into effect at the end of last year.”
And, in addition to all this, Russian oil export volumes have remained stable in recent months. The price cap is helping maintain a steady supply of energy to global consumers and businesses.
Our efforts are bolstered by international support for these enforcement actions, like the recent decision from private and publicly owned refineries to halt imports on Sovcomflot ships.
Conclusion
We continue to monitor the price cap, and we acknowledge that oil markets are complex and can be opaque. As we saw last summer, Russia will react to an effective price cap by continuing invest money to avoid our sanctions, requiring us to continue to adapt and innovate in our strategy.
We’ve seen evidence of Russia’s revenue losses – the discount between Brent and Urals, the acknowledgement of the costs from their own political leadership, and their willingness make substantial investments in a shadow fleet for the sole purpose of evasion of the price cap. This has been achieved without significant losses to global oil supply.
The United States, together with the rest of the Coalition, will need to remain vigilant and ensure that the policy, its implementation, and enforcement are deployed to inflict financial burden on Russia and keep global energy markets stable.
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