Environment and Natural Resources Program Policy Brief
The Price Cap on Russian Oil Exports, Explained
Catherine Wolfram, Simon Johnson, and Łukasz Rachel
2022
Press Release
Cambridge, MA - The price cap on Russian oil implemented today by the G7 countries plus Australia represents a novel approach to sanctions, according to a policy brief authored by Catherine Wolfram, Simon Johnson, and Łukasz Rachel and released today by Harvard Kennedy School’s Belfer Center for Science and International Affairs and the Mossavar-Rahmani Center for Business and Government.
The G7 price cap applies to any purchase of crude oil exported by sea from Russia after December 5 providing the purchase involves maritime, financial, or other services from any entity based in the G7 or Australia. Petroleum products will fall under the cap after February 5, 2023.
In the brief, Wolfram, Visiting Professor at the Kennedy School and former Deputy Assistant Secretary for Climate and Energy Economics at the U.S. Treasury, and her co-authors explain the basic economic principles at work and discuss some of the critiques of the price cap.
Unlike a standard price cap, which typically bans the trade of a good and imposes costs on both the sanctioned and the sanctioning countries, the G7 price cap limits the price received by a single supplier – Russia – and only if the transaction uses particular services. According to the brief’s authors, this will reduce Russia’s foreign exchange revenues and reduce its capacity to wage war in Ukraine, while also making it possible for Russian oil to stay on the world market in the face of the impending complete European Union embargo and services ban.
"The world is just beginning to understand [the price cap’s] impacts on Russian oil revenues, geopolitical alignments, and oil trade," the authors write. "For example, in the months before it was implemented, reports suggested that the prospect of the price cap likely led Russia to offer crude oil at a cut-rate to importers in Indonesia. In addition, in the coming months, without a price cap, EU sanctions would likely take millions of barrels off the market daily and thereby put pressure on global prices."
Oil traders, oil service providers, analysts, journalists, and sanctions officials, the authors argue, "will watch these developments carefully, but one thing is sure: economic incentives are powerful and given the large dollar volumes at play in the oil markets, it is particularly crucial to understand how they might shape decisions going forward."