How Washington Persuaded Europe to Put a Price Cap on Russian Oil

Seventy-two hours before they hoped to launch an unprecedented new plan to set a cap on the price of Russian oil, Biden administration officials faced a problem: Poland hadn’t yet signed off on the final design.

With support from Ukrainian President Volodymyr Zelensky, Poland had pushed for setting the cap as low as $30 a barrel, an attempt to deeply cut the Kremlin’s oil revenues. But the U.S. and other Group of Seven advanced democracies sought a deal at $60 a barrel to hedge against the risk of sending global crude prices soaring.

The last-minute negotiations put on display the problem that has defined Western economic statecraft ever since Russia invaded Ukraine: How to punish a large economy without creating a global recession. Russia’s oil industry—the largest exporter of crude and petroleum products in the world—was the West’s most difficult target yet.

Within minutes of Polish officials in Brussels requesting more time to review the proposal for a $60 cap, senior U.S. and Western officials began calling Warsaw—again.

Treasury Secretary Janet Yellen had already called Polish Prime Minister Mateusz Morawiecki on Thanksgiving Day. Deputy Treasury Secretary Wally Adeyemo was in touch with Polish counterparts throughout the talks, while Ms. Yellen huddled in Washington with Bjoern Seibert, a top aide to European Commission President Ursula von der Leyen leading the sanctions efforts, on Dec. 1. Meanwhile, U.S. Secretary of State Antony Blinken raised the issue on the sidelines of a NATO summit in Bucharest.

The lobbying worked. On Dec. 2, Poland agreed to the plan, clearing the way for the European Union and G-7 to implement a tool unlike any previous Western penalty on an oil-rich nation.

The crux of the plan: leveraging Europe’s dominant position in insuring, financing and shipping oil to shape how Russia sells crude around the world. The U.S. and its allies banned their companies from providing these services unless the oil is sold below $60 a barrel. The goal is to keep Russian supply on global markets while also limiting the Kremlin’s revenues from the sales.

Brent crude prices dropped to less than $80 a barrel last week, as a slowing global economy weighs on demand. The price move came even as the sanctions have prompted Turkish officials to hold up oil tankers in its waters. Whether the calm in oil markets holds will depend both on macroeconomic dynamics as well as Russian President Vladimir Putin ‘s as-yet unclear plans to respond.

The experimental intervention in oil markets has left some wondering if the plan could become a template for the West to influence global prices, a prospect that U.S. officials play down but that has still worried major suppliers The West also will cap the price of Russian petroleum products in February.

 “Once you’ve created the lever there is going to be a lot of pressure to use it,” said Simon Johnson, a former chief economist at the International Monetary Fund.

The price cap wasn’t the West’s first choice for how to address Russian oil during the bloody invasion of Ukraine. In Europe, officials initially envisaged stricter penalties, moving in June to ban the import of Russian oil into the EU—and cut off the insurance and financing of Russian oil shipments to anywhere else in the world.

The proposals alarmed officials in Washington. Insurers and banks in Europe underpin much of the world’s seaborne oil trade. Ms. Yellen, who steered Washington’s push for the price cap, worried that cutting Russia off from those services would amount to a blockade on the country’s oil industry.

U.S. officials encouraged their European counterparts to reconsider their plans for an embargo on Russian oil and instead place a tariff or price cap for their own purchases. Echoing Wall Street forecasts, a Treasury Department analysis showed as many as five million barrels a day of Russian oil could come off the market because of the services ban, raising global prices to $150 a barrel.

European officials told their U.S. counterparts that popular opinion against the invasion of Ukraine made importing Russian oil politically unacceptable. They doubted U.S. market estimates and feared that Washington’s concerns would embolden skeptics of sanctioning Russia like Hungarian Prime Minister Viktor Orban.

Europe moved ahead with the embargo, eventually agreeing to stop imports of Russian oil starting Dec. 5. U.S. officials switched tack and focused on trying to peel back the ban on insurance and financing Russian oil. At a May 10 meeting with President Biden, Ms. Yellen and Italy’s then-Prime Minister Mario Draghi, U.S. officials hoped to secure high-level support for the price cap.

Mr. Draghi, an economist and former central banker close to Ms. Yellen, had been pushing for the creation of a price cap for Russian natural gas. Mr. Biden broached the possibility of capping the price of Russian oil as well during the meeting with Mr. Draghi and Ms. Yellen in the Oval Office, according to people familiar with the meeting.

 “We thought: We can sell this to the Europeans because Draghi likes the gas price cap, we can take this idea Draghi has and apply it to oil,” a U.S. official said.

About a week later, Ms. Yellen discussed the idea of a price cap based on insurance and financing with Ms. von der Leyen at a meeting in Brussels. After Mr. Biden directly pitched French President Emmanuel Macron on the idea in Germany in May, the G-7 committed to exploring the possibility.

Oil traders, analysts and financiers were skeptical. In briefings at the Treasury Department and around the world, market participants warned that Russia would refuse to sell oil under the cap, while bankers and insurers said they would struggle to verify that a Russian oil shipment was sold below the cap. The initial skepticism frustrated Treasury officials, who crafted the compliance requirements to accommodate industry concerns.

“In my 30 years as an ambassador between planet market and planet Washington, I’ve never seen an issue where there is so much confusion,” said Bob McNally, president of Rapidan Energy Group.

Major purchasers of Russian oil like India and China never signed on to the plan, a fact that U.S. officials said posed no problem to the cap’s outlook, even as some European officials fretted about the lack of broader support.

As early as this past summer, Treasury officials had crafted models assessing prices at which Russia would retain an incentive to keep selling its oil on global markets, with estimates converging around $60 a barrel. They hoped to have the cap in place by mid-October or early November, to give markets time to prepare for its planned beginning on Dec. 5.

But the plan faced delays. Some officials at the White House became uneasy with the plan, worried about unsettling oil markets. Officials pushed back talks on the level of the cap until after the midterm elections. Some Treasury staffers explored delaying the imposition of the cap to early February 2023, among other options, according to people familiar with the talks. A Treasury spokesman said delaying the start of the cap was never seriously considered.

At the same time, some European capitals worried Washington’s idea wouldn’t do enough to meet what they considered their central goal: to cut Russian energy revenue. Washington and other G-7 partners, meanwhile, argued that too-low of a cap could dramatically lower global supply and raise prices, allowing the Kremlin to keep netting high profits at lower volume. They said the cap could always be lowered later.

When talks on the level of the cap started on Nov. 23 in Brussels, Poland and the Baltic states charged that the European Commission’s pitch to set the price between $65 and $70 was above the market price of Russian oil and therefore far too high.

The Estonian finance minister agreed to a $65-a-barrel price cap on a call with Treasury officials that day, according to people familiar with the discussions. But her ministry wasn’t dealing with the price cap and Estonian officials quickly made it clear to Washington they weren’t on board. Ms. Yellen soon spoke with the Estonian prime minister to gain her support for the plan.

To try to reach a deal, the European Commission presented an amended plan on Dec. 1. Under the eventual agreement, the cap would be set at $60 a barrel with a bimonthly process for reviewing the price. The EU promised to keep the price cap in the future at least 5% below Russia’s market prices.

 “The most important goal is to reduce the income of the Russian budget,” said Andrzej Sados, Poland’s EU ambassador, after reaching the deal on Dec. 2. “Now, we have to monitor how the price-cap system works and see if some additional price adjustment needs to be made.”