It was one year ago that the West put into force a novel idea designed to weaken Vladimir Putin’s war machine without upending the world economy: a price cap on Russian oil.
The strategy uses Western shipping, finance, and insurance companies as levers to limit the price of seaborne Russian oil at $60 per barrel for any transaction using these Western services. The aim is to keep Russia's export volume steady while simultaneously depriving Putin of the oil revenue critical for his war effort in Ukraine.
The unorthodox approach had some early successes and noticeably cut into Russian government revenue in the early months of 2023, but it hasn't stopped a second winter of war in Ukraine.
And there is ample evidence that attempts by Putin to evade the cap through the development of his own "shadow fleet" and a pressure campaign on independent shippers have been increasingly successful.
Even Treasury Secretary Janet Yellen acknowledged "some reduction in the effectiveness of the price cap" in September. Her department recently unveiled new enforcement actions in October, November, and just this past week to try and regain the cap's footing.
Here is a closer look at how the cap came to be, the debate about its effectiveness, and where it could go from here — in the words of the Biden officials who circled the globe to put the policy in place and the energy experts who closely tracked its implementation.
Early 2022: A policy forged amid chaos
When Russia first invaded Ukraine in February 2022, the danger was immediately apparent. Crude oil prices spiked after the fighting began, prompting fears of both a global recession and an almost unlimited funding source for Putin's war.
Ben Harris, former assistant Treasury secretary for economic policy: It was definitely a nerve-racking moment when we saw the price spike after the invasion.
Robin Brooks, chief economist at the Institute of International Finance: It's fair to say that the world was taken by surprise. There was a scramble on how to respond.
Craig Kennedy, associate at Harvard’s Davis Center: Blocking Russian seaborne exports completely would have meant removing six million barrels a day of crude and refined products from the global marketplace, which would've been a massive shock.
Inside President Biden’s Treasury Department — next door to the White House — the call was open for ideas.
Wally Adeyemo, deputy secretary of the Treasury: [Before the invasion even began] I remember being in a meeting where the president's instructions to the secretary were, I want you to go out and design a set of sanctions that meet two tests. One, if Russia does invade, it would maximize the pain for Russia while taking steps to minimize the impact on our allies and partners. That was what we started from.
Harris: We started to realize, we may actually have leverage here. Over the next few months, the private sector helped design this through a sort of Socratic method.
Eric Van Nostrand, acting assistant Treasury secretary for economic policy: [We spoke] with industry participants, executives from trading houses, shippers, trade financiers, and importantly some of the buyers of Russian oil to understand what we needed to learn.
Catherine Wolfram, former deputy assistant Treasury secretary for climate and energy economics: Eventually, administration leaders tasked me to write a memo on price cap and tariff approaches...I think this early to mid-April memo was the first time we were articulating them specifically with respect to oil.
Elizabeth Rosenberg, assistant Treasury secretary for terrorist financing and financial crimes: The fact that it was unprecedented really lent just about everyone to be highly skeptical.
Summer 2022: Convincing the skeptics
The price cap soon began to win out within the administration over other approaches like a tariff on Russian oil. But as details of the plan began to circulate, it drew consternation among some energy observers.
David Wessel, senior fellow in economic studies at the Brookings Institution: It was widely derided, and I think it was derided because it sounded like something that was cooked up in some graduate school seminar room.
Bill Browder, British financier and head of the Global Magnitsky Justice campaign: My reaction was the idea of a price cap is some crazy negotiation with ourselves, which effectively doesn't achieve the objective, which is to cut off the supply of money.
Kennedy: There was a lot of skepticism about whether it could simply work at all. Part of it was a certain dismissiveness on the part of oil traders who seemed to think that no one else can understand the markets the way they do.
Biden officials also faced a more serious challenge in selling the idea to the world. Europe was a key stumbling block as the European Union began to coalesce behind a plan that aimed to block Russian access to the Western oil services completely.
A hastily organized trip was planned for early June to change Europe’s mind.
Harris: It was a brutal trip — four countries in three days — and our concern at the time was that the proposed sanctions package would force Russia to shut in, which would roil global energy prices and potentially cause a global recession.
Wolfram: We went to the UK and then Brussels and then Paris and then Berlin.
Rosenberg: That trip was crucial for rolling up our sleeves, everyone, and discussing the model, the economic assumptions, what we thought the impact would be.
Harris: There was ample skepticism to start. We left that trip not knowing how the rest of the EU would react.
Later 2022: Finding a middle ground
But over the remainder of that summer — which included negotiations at a G7 summit in Germany and repeated trips across the Atlantic — the price cap idea began to win out.
It was formally announced by G7 finance ministers on Sept. 2, but another challenge awaited: deciding what the cap level should be. Outsiders and governments around the world began to weigh in.
Brooks: When the discussions around the cap first started, the level being discussed that I heard was around $40 or $50 a barrel, so it was actually pretty aggressive.
Ben Cahill, senior energy security fellow at the Center for Strategic and International Studies: There were definitely hawkish voices in the European Union calling for a lower price cap, and the Treasury Department wanted a higher price cap and Treasury won out in my reading.
The cap was eventually set at $60 a barrel.
Rosenberg: We felt good about where it landed.
Van Nostrand: $60 is a level that meaningfully reduces Russian revenue. A significantly lower cap would give Putin an incentive to shut the oil inside Russia and not sell it — denying it to the emerging economies that need it most.
Early 2023: Putin’s evasion
The cap came into force on Dec. 5, 2022, backed by a coalition that included the G7 nations, the European Union, and Australia. In the early months, even as Russia increased its oil production, the Kremlin’s energy revenues declined 44%, according to Treasury department estimates.
Detractors acknowledged the initial success of the cap while concerns soon rose about evasion as Putin continued to apply pressure on shippers to flout the cap and develop his own "shadow fleet" of oil tankers not subject to the West's restrictions.
Wessel: Whether it worked perfectly or not, it worked a whole lot better than the critics suggested.
Kennedy: What you've done is you've created a situation where the bargaining power has shifted strongly in favor of Indian buyers who have used it to extract eye-watering discounts from Russian exporters.
Adeyemo: The reason this works as a strategy is because it allies with everybody's incentives except the Russians.
Kennedy: Sanctions remain vulnerable to subversion, especially fraud and the steadily expanding shadow fleet. Policymakers are now well aware of these vulnerabilities.
Brooks: Tanker sales by Greek and Cypriot shipowners have continued and substantially further undercut the functioning of the G7 cap. All these tanker sales are well known in Brussels, and it’s really up to the EU to prohibit them.
Cahill: We never expected perfect compliance, but the fact is, Russia's losing revenue, and so any lost revenue is good. The more you introduce these kinds of measures, the more incentive you give countries to find a way around them.
Fall 2024: The debate about what to do now
By the fall, while an estimate found that the cap was still having a bite and perhaps costing Putin about $36 per barrel, rising global oil prices put acute pressure on the cap and Yellen publicly acknowledged concerns about the evasion efforts.
Inside the Biden administration, Deputy Secretary Adeyemo met with senior officials at Lloyd's of London, a leading global insurance market, as the administration launched a "phase 2" aimed at both increasing Putin's tanker costs while also adding new scrutiny of western shipping and insurance companies.
Van Nostrand: It’s completely unsurprising that Russia has invested in an infrastructure to sell oil without coalition services; in all sanctions regimes, the adversary has an incentive to move outside our jurisdiction, and we modeled for that up front. The point is that new infrastructure has cost Russia significantly: They sunk money into tankers that otherwise would have gone to tanks.
Wolfram: I get a little bit frustrated when people say, "Oh, there are these violations, therefore it's not working," because I feel like we have laws against shoplifting. People still shoplift. That doesn't mean that you should get rid of those laws. You just want to figure out how to increase their enforcement.
Was this cap effective enough? Can it be applied elsewhere during future conflicts? Would harsher measures have brought the Ukraine war to an end, at the cost of more economic pain globally? The debate on these questions is far from over.
Browder: From my perspective, this oil price cap is somebody trying to be too clever by half, and it looks to me like one of these things where the Western governments want to do something and to be seen to be doing something, but at the same time, no one really has the stomach to impose a real oil embargo on Russia.
Brooks: If we had done an embargo and Russia had gone into a big financial crisis, I'm not sure the war would still be going on. It would be painful, but it might be short. Whereas what we have now is kind of a forever war.
Cahill: If you're a price cap architect, what you care about is how much money the Russian Treasury is getting and judged on that metric, it is working.
Harris: Moving forward, the key is to continue to subject a sizable share of Russian oil exports to the coalition’s restrictions on price. This doesn’t mean that every barrel needs to be sold under the price cap — we just need enough volume under coalition control to provide leverage.
Wessel: Treasury has the right to celebrate that, but what's not clear is that it had any effect whatsoever on Russia's conduct of the war. So that seems like a rather unfortunate detail.
Ben Werschkul is Washington correspondent for Yahoo Finance.