President of Ukraine

The West should complement the sanctions policy by setting limits on the price that Russia receives per barrel of oil - Oleg Ustenko and German Galushchenko

24 June 2022 - 15:48

The European Union, the United States and other partners in Ukraine must complete the strengthening of sanctions against the Russian Federation by imposing a limit on the price of seaborne crude oil, which still brings income to the Russian military machine. This is stated in a joint article by President's Adviser on Economic Affairs Oleg Ustenko and Minister of Energy German Galushchenko for the international media organization Project Syndicate.

The authors note that the West has made significant progress in developing sanctions that could prevent Russian President Vladimir Putin's war of aggression in Ukraine. The financial sanctions imposed after the Russian invasion were effective, as the freezing of Russia's central bank reserves largely eliminated much of the country’s buffer against shocks. The ruble’s stability has since rested merely on strong capital controls and the continued inflow of hard currency from the sale of oil and gas. 

After much debate, EU member states decided to stop buying Russian oil transported by ship, starting just over five months from now. Given that Russia is still exporting around 1.25 million barrels per day to the EU by sea, curtailing these shipments could have a major impact on Putin’s revenue stream, the ruble’s strength, and the already-fragile Russian financial system.

But, according to Oleg Ustenko and German Galushchenko, it is unacceptable to wait five months before hobbling the Russian military vehicle.

“Every day, more Ukrainians are being killed by Russian forces. We cannot wait. We need the final piece of the strategy to lower the price paid to Russia for its crude and refined products, thereby limiting the Kremlin’s revenues,” the authors note.

In May, the EU alone imported more than $5 billion worth of Russian crude by sea, and it is on track to purchase a similar amount in June. 

According to the authors, a complete zero-shipment embargo that outlaws oil exports by ship in EU-owned vessels to the rest of the world would likely drive up the price of oil. That would cause economic pain around the world and increase the revenue of Russia. Therefore, this decision must be adapted to the new conditions.

Immediate measures must be taken to limit the price Russia receives for a barrel of oil sold.

“We support recent proposals by US Secretary of the Treasury Janet Yellen and Italian Prime Minister Mario Draghi that would cap the price that Russia receives per barrel of oil. The EU could do this by leveraging its buying power over the next five months, and by exploiting the fact that most Russian oil – around 70% – is carried in ships that are owned, insured, and financed by entities in the EU, the United Kingdom, and other allied countries. These measures are being actively discussed among EU members, and we would encourage all other countries to line up behind them,” the authors note.

According to the experts, the marginal cost of production in existing Russian oil fields is exceptionally low, so the price cap could be set at rock-bottom levels to squeeze revenues of Vladimir Putin’s regime. Therefore, oil would continue to be supplied to the international market, preventing a short-run negative effect on price levels worldwide.

This price cap could be implemented in several ways, either as a direct restriction or as a tariff. The advantage of a tariff or tax-type structure is that it would generate revenue that could be used to cover the costs of hosting the roughly five million Ukrainian refugees who are currently sheltering in the EU, or to help other low-income people who have been hit hard by the consequences of Vladimir Putin’s war of aggression.

According to the authors, if Russia refuses to supply oil at this lower price and stops the production, it will damage its oil wells and effectively resign its membership in OPEC+. The loss to the Russian economy would be immediate, and the pressure on the ruble would become immense.

“Without hard currency, Putin would have a difficult time buying components for his rockets and other weaponry from other countries. Without government revenue, Russia will need to print more money to support its war effort – causing its inflation to accelerate and leading to its subsequent collapse,” Oleg Ustenko and German Galushchenko summed up.