A top Treasury Department official said Thursday that the cap on the price of Russia's oil is severely curtailing its greatest source of revenue as it wages war in Ukraine.
When the United States and other economic powers in the Group of Seven, along with the European Union and Australia, last year announced an ambitious plan to cap the price of Russian oil, U.S. officials said it would deliver a crippling blow to Russia’s economy.
“In just six months, the price cap has contributed to a significant decline in Russian revenue at a key juncture in the war,” Deputy Treasury Secretary Wally Adeyemo said in remarks Thursday at the Center for a New American Security, pointing to a nearly 50% drop in Russian oil revenues compared with a year prior.
The price cap was rolled out to equal parts skepticism and hopefulness that the policy would stave off Russian President Vladimir Putin's invasion of Ukraine.
In addition to the price cap, the allied nations have hit Russia with thousands of sanctions over the course of the nearly 16 months of war. The sanctions are aimed at bank and financial transactions, technology imports, manufacturing and Russians with government connections.
Adeyemo said most recently the Kremlin's new tax on oil companies, designed to make up for the lack of revenues, is evidence of the cap's success.
“This change will constrain Russia’s oil companies going forward, leaving them with fewer funds to invest in exploration and production and over time diminishing the productive capacity of Russia’s oil sector," he said. “There is clear evidence of its success."
Lauri Myllyvirta, a Finland-based analyst at the Centre for Research on Energy and Clean Air, said while the price cap has made an impact on Russia’s economy, the EU’s import ban has had more effect in reducing Russian oil revenues.
The EU last year announced a ban on the importation of Russian oil and other products from Russian refineries. And in February, Europe imposed a ban on Russian diesel fuel.
“The combination of the EU's oil import ban and the price cap did have an impact,” Myllyvirta said, “but the EU import ban has been the more impactful measure.”
Myllyvirta also said the cap is too high for to have a more meaningful impact on Russian oil revenues. The price cap on Russian oil has remained at $60 per barrel.
In response to the punitive measures, Russia has cut its oil production, and announced this month that it would extend the cuts by 500,000 barrels per day until the end of December 2024.
“This is a precautionary measure taken in coordination with the countries participating in the OPEC+ agreement, which previously announced voluntary oil cuts in April,” Alexander Novak, Russia’s deputy prime minister, wrote on the government’s website.
The voluntary cuts may also be due in part to waning demand.
The International Energy Agency this week issued its five-year forecast on oil demand, which suggests that fossil fuels’ dominance over drivers is starting to wane.
It’s part of a larger trend in which countries’ efforts to address climate change by moving to renewable energy sources will begin to lessen demand, which in turn could lessen the economic strength of countries like Russia.
The forecast indicates that demand for gasoline will peak in 2023, while demand for overall transport fuels would top out in 2026. The IEA specifies that this is “the result of a pivot towards lower-emission sources triggered by the global energy crisis,” in addition to better efficiency and the growth in sales of electric vehicles.
