Russia’s oil price cap would save emerging markets billions, US says

The US Treasury Department estimates that the G7 plan to cap the price of Russian oil exports could save the 50 largest emerging economies $160 billion a year, as Washington insists the program it is championing will undercut energy costs around the world will hold control.

The analysis was developed ahead of next week’s annual meetings of the IMF and World Bank, which will focus on high energy costs triggered by Russia’s invasion of Ukraine as one of the heaviest strains on the global economy. At the same time, the Opec+ cartel of oil producers is planning new supply cuts at its meeting this week.

The G7 last month approved plans to cap the price of Russian oil purchases in a bid to cut revenue for the Kremlin to wage war in Ukraine. From December it would allow Western companies to service and insure Russian oil cargoes around the world and exempt them from EU and other Western embargoes as long as sales are made below the cap.

The western allies still have to agree on the height of the upper limit. Wally Adeyemo, the deputy finance minister, told CNBC last week that it would be “well above” Russia’s production costs to punish Moscow without spurring Russian oil companies to cut supplies.

However, there are still doubts and uncertainties in the oil market as to how far any of the new international economic policy experiments ever attempted will work in practice, what impact it will have on the market and how Russia will react.

The US Treasury Department study, which is set to be shared with outside partners in the coming weeks, compares the impact of a working Russian oil price cap plan on the global oil market to a scenario in which embargoes with no exceptions apply to supplies under a price cap. The Treasury declined to specify what price level would result in $160 billion in savings.

“Although there is significant uncertainty, a Treasury Department analysis finds that the price cap exemption could collectively save the 50 largest emerging (EM) and low-income (LIC) countries about $160 billion annually in oil import spending.” a Treasury official said.

“This means that countries have a significant incentive to benefit from the price cap, including buyers like China and India, and that all emerging market countries that are net oil importers would benefit from lower oil prices,” the official added.

According to a Treasury Department official, the Europe and Central Asia region is most dependent on net imports of oil and oil products, which account for 4.7 percent of gross domestic product, or $55 billion. In 16 emerging markets, from Mali to Turkey, El Salvador and Thailand, net oil imports account for more than 5 percent of GDP, the finance ministry said.

Washington is using carrots more than sticks to persuade governments and companies around the world to embrace the G7 plan, even if they don’t formally sign the coalition to adopt the price cap.

So far, a drop in Russian oil exports to Europe has been largely offset by supplies being diverted to customers including China, India and Turkey. However, the International Energy Agency has forecast that Russian oil production will fall sharply once the EU embargo takes full effect – a risk that could push up energy prices with no price cap, US officials say.

“[The price cap] would stabilize world energy prices and from that point of view we [in the US] benefit, but we are a net exporter of energy. The impact is far greater under any reasonable assumptions for emerging markets, which are hitting the bottom right now,” a Treasury Department official said.

“So from a geopolitical perspective, we just wanted to address a couple of really simple points about who gains and who loses from a massive lockup into Russian oil,” the official added.

https://www.ft.com/content/5f102e4e-e92b-482c-adb9-86d66c919673 Russia’s oil price cap would save emerging markets billions, US says

Adam Bradshaw

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