In 2021, Russian oil and gas exports made up about 45% of the countries’ total budget. As policymakers considered their range of options in response to Russian aggression against Ukraine, sharply limiting Russian oil export revenues stood out as an opportunity to prevent Russia from further funding the war. Policymakers also recognized a key challenge: oil is the life blood of the global economy. Is there a way to restrict Russia’s revenue without restricting the global supply of oil?

The result was a novel diplomatic policy that, if successful, would reduce Russia’s revenues and capacity to wage war in Ukraine while letting the global economy continue to move forward. On December 3, 2022, in an effort to reduce Russian oil revenues, the United States and other G-7 countries enacted a mandatory cap on the price Russia receives for its oil exports at $60/barrel.

On January 24, EPIC and the Becker Friedman Institute hosted a discussion on the implementation of the Russian oil price cap with Ben Harris, US Department of Treasury’s Assistant Secretary for Economic Policy. Harris joined a discussion with the University of Chicago’s Ryan Kellogg and Konstantin Sonin, moderated by The Washington Post’s Catherine Rampell.

In the event’s opening remarks, Harris set the scene for how the United States approached the policy: “We had two primary goals from the outset: the first was to maintain stability in global energy markets as much as possible…So if there was a spike in energy prices like we saw at the start of the war, that meant not just more pain for the United States, it meant more pain for the Global South and countries that bear disproportionate pain when energy prices spike, including Ukraine. The second goal was to reduce revenue received by Russia.”

The discussants came to agreement that the policy is working. “The way I think about it, and reason why I was supportive of this policy from the very beginning, is that even with all the uncertainty, doing a policy like this is clearly better than doing nothing at all. It has a very good chance at having impact,” said Ryan Kellogg, Professor and Deputy Dean for Academic Programs at the Harris School of Public Policy.

“Russia started this war being in a good financial position…the impact is visible, it is clear that it is in decline, but still its capacity to keep doing what Russia does is still high,” added Konstantin Sonin, Distinguished Service Professor at the Harris Public Policy and Co-Director of BFI Political Economics Initiative. “[The price cap] is painful, and at some point it will become intolerable because the war costs more and more, it is more difficult to recruit people and [Russia will] have to spend more money to keep the war going.”

Rampell opened discussion around the secrecy of Russian energy trade data and reporting, monitoring and enforcement, and the possibility of Russian retaliation— more specifically, a shut in— in response to the policy. Sonin responded, “Pay attention to what [Putin] does, not what he says…Shutting down oil production will actually be a huge violation of Putin’s contract, not with the general Russian population, but with his supporters who support him because they benefit from his rule.”

Treasury’s Harris believes a shut in won’t happen because “energy is the Russian economy. And this is an economy which is increasingly desperate, which is seeing financial flight, human capital flight, seeing companies flee as fast as they can get out of Russia, and it is turning from surplus to deficit. They cannot afford to turn off [energy] to the States.” Other reasons, including the chance that oil wells could dry up, politics, and the inability to compensate for loss of revenue were also brought to attention.

When asked if this novel policy tool is something that could apply beyond Russia, for instance, through a ‘global buyers club’, the discussants emphasized that this policy is specifically and distinctly aimed to restrict Russian oil exports. “There are very few countries in the world that have oil reserves like Russia… and none of them pose as much as a threat as Russia,” Sonin said. “The current cap relies on a very diverse coalition of countries with different interests and some of them certainly are hurt by these sanctions, but because they consider the Russian invasion of Ukraine contradicts what we exist for, they are willing to participate in this cap. That is why it works.”

Kellogg noted that there is one way to do it – by using a carbon price: “What does a carbon price do? It drives down demand for oil, that is going to reduce the global pre-tax for oil.”

In closing, Harris presented lessons to be drawn from this conflict, both for the United States and countries around the world. “The central economic message out of the Biden administration’s economic policy has been resiliency – not just for energy, but for all supply chains. Economies around the globe are looking at the sourcing for everything from energy to other critical minerals and are asking about the reliability of those producers,” he said. Harris recalled a recent trip to the Baltics and Poland, where government buildings enforced energy-saving measures by using one lightbulb to light up a room or taking the stairs instead of the elevator.

According to Harris, “The solidarity around this type of invasion is crystal clear.”