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The United States and its allies are leaning heavily on economic sanctions to punish Russia for its invasion of Ukraine. But a key element in that strategy, restrictions on Russian oil exports, mostly appears to be causing pain for ordinary people in other countries. European nations, in particular, are causing considerable damage to their own economies without reducing Russia's oil revenue.
Nations seeking to help Ukraine are aiming at the wrong target. They have focused on reducing Russia's energy exports instead of reducing Russia's earnings from energy exports. Russia is exporting less oil but, in a perverse twist, it is earning more money, according to the Center for Research on Energy and Clean Air, based in Finland. The sanctions have raised prices, more than offsetting the decline in exports. In May 2022, Russia earned 883 million euros per day from oil exports, up from 633 million euros per day in May 2021.
The situation is about to take a turn for the worse. New sanctions that the European Union and Britain have agreed to impose on Russia by year's end are likely to drive oil prices even higher. That could easily push Western economies into a recession.
The Biden administration has a plan that could avert this crisis. It would establish a buyer's cartel -- an agreement among Russia's customers to put a price ceiling on Russian oil. That ceiling would be significantly lower than the current market price, sharply reducing the role of Western consumers in funding the Russian military. But the price would still allow Russia to make some profit, so that it has an incentive to export its oil to members of the cartel. Some of the key participants in the plan, including the United States, have banned the importation of Russian oil, but other nations that America hopes to enlist, notably India, continue to import large volumes of Russian oil.
It is an audacious and untested idea. It also appears to be the best available option. If it works, it could deprive Russia of revenue without devastating the economies of nations that are trying to support Ukraine.
Constructing a cartel is not easy. The United States has already secured the agreement in principle of the other members of the Group of 7, a coordinating body for the major democratic economic powers. American officials, including Treasury Secretary Janet Yellen, are working with their counterparts to hammer out the details. The buyers' cartel would be strengthened if other big buyers of Russian oil, notably India and China, could be persuaded to participate. That seems unlikely. But U.S. officials argue the cartel could still increase pressure on Russia by allowing nations that are not participating to extract larger discounts, too.
A key piece of the new sanctions by the European Union and Britain is a ban on insuring tankers that carry Russian oil.
The Russian government has sought to forestall the plan by warning that it would refuse to go along with it. "As far as I understand, we won't be supplying oil to those countries which would impose such a cap, and our oil, oil products will be redirected to the countries which are ready to cooperate with us," Elvira Nabiullina, the governor of Russia's central bank, said at a news conference last week. Analysts, however, say that if a cartel is established, Russia's real choice would be between accepting its terms and leaving a large share of current oil production in the ground.
In the meantime, Ukraine needs the sustained support of its allies in what may be a prolonged struggle. It is counterproductive to impose unnecessary pain.
* Guest editorial excerpt by The New York Times.