Remarks by Undersecretary of the Treasury Wally Adeyemo at the Brookings Institution

As delivered

Thank you all so much for being here today, and to David and the Brookings Institution for having me. It has been just over six months since Russia began its brutal and unprovoked invasion of Ukraine, the most significant threat in generations to the post-World War II international order. During these six months, we have worked with our allies and partners to mount an unprecedented global response to help end Russia’s unwarranted aggression. As part of our overall strategy to end the invasion of Russia, we have deployed sanctions with two main objectives in mind: to deprive Putin of revenue to pursue the war of his choice and to erode the capacity of the Russia to wage war in the future by disrupting critical supply chains that feed the Russian military. -industrial complex.

According to an independent Yale academic analysis, Russian imports have plummeted by half, domestic production has been hammered due to shortages of key inputs, and foreign companies accounting for 40% of Russian GDP have left the country.[1] Moreover, our sanctions and export controls targeting their military-industrial complex have denied Russia access to critical equipment and imports, degrading their military capabilities in ways we are already seeing on the battlefield – the Russia increasingly dependent on obsolete Soviet-era weapons without access. fleas needed to replenish their stocks of modern ammunition.

However, there is a part of the Russian economy that is doing even better than at the start of the war: its oil industry. This summer, Russia received prices 60% higher than last year for its energy exports, which more than compensated for the drop in its export volumes.[2] This situation is unacceptable for us, for our allies and for the Ukrainian people.

But this situation is also complicated. Consumers and businesses in the United States and around the world are already facing high energy prices. Simply banning or sanctioning Russian oil purchases could deprive Russia of some revenue, but it would have the perverse effect of sharply raising the cost of living for global consumers and increasing the risk of a global recession.

It is important to remember that the United States and a number of our G7 allies have already banned the import of Russian oil into our countries. The impact of further actions to prevent the export of Russian oil to other countries would fall disproportionately on low- and middle-income countries that still buy it. These countries are already facing high energy and food prices due to Russia’s unprovoked invasion of Ukraine. We know that economic instability in low-income countries often leads to political instability, and the last thing we want is for other countries to be destabilized by Russia’s actions. And, more generally, we know that ensuring the continued flow of as much oil as possible into the world market is essential to reducing prices in our country and around the world.

That’s why, last Friday, G7 finance ministers agreed to finalize and implement an innovative policy that puts downward pressure on global energy costs by allowing Russian oil to keep flowing. in the world market while reducing Russian revenues: a cap on Russian oil prices. Today, I’d like to share why we think price caps are so important, explain how it will work, and dispel a few myths we’ve heard along the way.

Let’s start with how it will work. In June, the EU agreed to a sixth sanctions package which will not only ban imports of Russian oil transported by sea into the EU, but, as of December 5, will also ban the provision of associated maritime services such as insurance, trade finance, banking, brokerage and shipping services provided by EU companies to those associated with Russian crude oil exports by sea, regardless of the destination of such shipments. These marine services are often essential – in many cases, marine oil shipments cannot proceed without them.

Importantly, the providers of some of these services are highly concentrated in EU and G7 countries. For example, the EU and the G7 provide 90% of global marine insurance and provide the majority of financing and payment services for the oil trade. A potential by-product of this package could be a substantial shutdown of Russian oil and refined products production, and associated high prices, which could limit or reverse the action’s intentions. This price increase would undermine the well-intended goal of limiting Russia’s revenue from oil sales while imposing an additional, unintended burden on global oil consumers.

The price cap is designed to remedy this outcome by creating an exception for services related to the shipping of Russian oil sold at or below the cap level – keeping that oil in the market and getting it to consumers. who need it, while restricting income Russian. Countries outside the G7 can continue to buy Russian oil, and G7 companies can continue to offer services to support those sales, as long as the oil those services support is purchased at or below a certain price. And in particular, some of the world’s most vulnerable countries – low- and middle-income oil importers – will benefit the most from access to this cheap oil.

When it comes to enforcement, two critical things are compliance and enforcement: how market participants know the oil is from Russia and therefore needs to be priced below the cap, and how we deter and punish evasion and knowledge of violations. On the compliance side, we are working with the G7 to develop a robust yet simple documentation and attestation system that can give service providers confidence that they are appropriately complying. Upon enforcement, those who evade the price cap by falsifying documents or otherwise concealing the true origin or price of oil would face consequences under the domestic law of the jurisdictions implementing the price cap. .

Our approach to implementation is guided by the principle that Russian oil should continue to reach the global market, provided buyers and service providers abide by the price cap in good faith.

So today, to provide greater clarity to the marketplace and help achieve that goal, I am announcing that the Treasury’s Office of Foreign Assets Control is releasing preliminary guidance on how this compliance system will work. OFAC will provide additional official guidance in the coming weeks to ensure that these compliance expectations are clear enough to facilitate the flow of Russian oil. This action helps formalize the United States’ commitment to implement the price cap.

Finally, from a technical perspective, one of the questions I hear most often is how the price will be set. And this is closely related to a common objection that I have heard, which is that Russia will not sell oil at or below the cap and will simply refuse to export. The way the cap is set is why we think this won’t happen. Russia can brag and say it won’t sell below the price cap, but the economics of withholding oil just doesn’t make sense: the price cap creates a clear economic incentive to sell below the cap. .

We intend to set the ceiling price above Russia’s marginal cost of production, at a level consistent with the prices they have historically accepted. Russia doesn’t have much oil storage capacity, and many of its wells and equipment are far from state-of-the-art, making it difficult for them to shut down and restart production later. without incurring significant costs. And this problem will only get worse as our sanctions continue to deny them access to critical software and drilling equipment. As a result, Russia will be forced to continue selling or risk a long-term degradation of its production capacity.

This leaves some room below the prevailing market prices and the price Russia receives today. This means we have the opportunity to deprive Russia of the revenue needed to continue its impermissible war while reducing some of the economic pressures that countries around the world are under.

Russia knows this, and that is why it is already reacting to these clear economic incentives. They are already offering long-term contracts to potential buyers at deep discounts – of 30% or more – long before the price cap was implemented. The fact that they are doing so reveals how worried they are and shows how price caps are already working to depress Russia’s revenues. We see this as one of the key features of the policy: that it can achieve its goals even if some buyers choose not to officially join because they also want to pay lower prices for Russian oil. The price cap gives them greater price transparency and leverage when trading with Russia. So even if Russia tries to get around the cap with buyers outside our coalition, their revenues will continue to fall, as we are already seeing.

We are lucid that Russia can find service providers outside the G7 and other members of our coalition to replace the maritime services blocked by the EU ban. But these alternative services will be expensive and less reliable than the services provided by G7 companies. There’s a reason the world relies on EU and G7 companies for the vast majority of these services. Building a service ecosystem outside of the coalition will cost Russia more, which will further reduce Kremlin revenue.

Let me conclude by stepping back from the details. We are moving forward with this extraordinary proposal because it is essential that the global community take action to deprive the Kremlin of the revenue it uses to support its economy and wage its unjustifiable war in Ukraine. The price cap aims to create incentives that reduce Russia’s revenue as its oil continues to sink. In the end, everyone wins except the Kremlin.

This is not an academic conversation. We face the biggest ground invasion in Europe since the end of World War II, an invasion by a regime that will not be easily deterred. It is critical that we take this action to deprive Russia of the revenue it uses to continue this brutal invasion while continuing our efforts to disrupt their critical supply chains and degrade their military-industrial complex. We look forward to your guidance on implementation as we move forward with this policy. Thanks again for being there. I’m going to turn it over to David to present a panel where you hear more about this from my colleague Ben Harris.

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