BONN, Germany — Western allies are facing new tactical divisions over how to limit massive energy sales from Russia, with differences continuing to emerge between them over the most effective way to deprive the Kremlin of a key financial lifeline for its war in Ukraine.
As Europe Divides Over Russian Oil, Allies Push For ‘Buyers’ Cartel’
Russia continues to reap huge profits from its oil, even as the West seeks to punish the country with new sanctions
US Treasury Secretary Janet L. Yellen insisted the decision is up to Europeans – not Americans – because it will primarily affect their economies. But many European officials are expressing skepticism about the approach. German officials, for example, question the effectiveness of the price cap proposal, according to a European diplomat who spoke on condition of anonymity to reflect private conversations. Such a move would be difficult to make work, given the scale of international coordination required, the diplomat said.
The European Commission’s proposal to phase out oil imports from Russia has the backing of most European countries, and some diplomats say the bloc should focus on approving it. “We saw what Yellen came up with, indeed. But so far for the Europeans, we are not there yet, we need to finalize our talks on the oil embargo,” said a senior EU diplomat, who also spoke under cover of anonymity to discuss internal deliberations.
Yellen confirmed to reporters on Thursday that the United States was making “suggestions” to the Europeans on cutting Russian revenue, and said she favored price caps. But Yellen acknowledged that European allies face significant practical hurdles in implementing such a measure, including what to do with contracts with Russian suppliers that have already been concluded.
“I think a lot of people, myself included, find it attractive from a general economic standpoint…the bigger the cartel, the better,” Yellen said. But, she added, “nothing really crystallized as an obvious strategy.”
Despite a largely unified front on the war, tensions over energy proposals reflect the challenge facing Western allies here as they attempt to increase financial pressure on Russia without adding to immense financial strains – from inflation to the risk of recession – which weigh on their own country. savings. The Group of Seven, a coalition of the most powerful Western nations, is meeting this week in Germany to discuss sanctions against Russia and other economic measures.
Some experts call the idea supported by some allies a “buyer’s cartel”. Under this plan, the Europeans would act in concert to set a lower price than they currently pay for Russian energy. The calculation is that – if Europe moves in unison – Russia would be forced to accept lower prices or suffer a collapse in oil revenues. Some experts have suggested that “secondary” sanctions could be considered for other countries, such as India, that attempt to lower the price cap by paying higher prices. If successful, the idea would allow Europe to both reduce Russia’s war chest and continue to import the energy it needs to power its domestic and industrial needs.
Western officials have also discussed imposing a tariff on Russian oil sales, which would be driven by a similar intent to price caps. The tariff would require a portion of Russia’s oil sales to go into European government coffers. At least in theory, this would force Russia to sell oil at a steep discount or not at all. This mechanism is considered to be easier to implement because countries already have tariff policies in place, whereas a price cap would be a new measure.
Yellen, a former Federal Reserve chairman whose economic expertise is respected by Europeans, attempted what allies describe as a “soft sell,” working to answer questions from skeptics rather than publicly pressuring the recalcitrants to adopt the proposal. German finance officials have asked their US counterparts for more information on the plan and how it might be implemented in practice, according to three people familiar with the matter, who also spoke on condition of anonymity to discuss internal deliberations.
Critics say the West should act faster to help Ukraine. Even as the war in Ukraine nears its third month, Russia continues to receive billions of dollars in oil and gas sales, giving the Kremlin a vital financial lifeline. This source of financing is particularly lucrative for Russia now that energy prices are high internationally. While Russia’s economy as a whole has been severely weakened by the West’s sanctions campaign, some analysts believe the country’s energy export revenue may have increased this year. The European oil embargo would likely take until the end of the year or even longer to implement, fueling interest in solutions that would more immediately reduce Russian revenues.
“The Americans are pushing it – but carefully, and in a friendly, efficient way. No one feels like they’re being rough,” one of the people said.
But the Europeans were unwilling to impose an immediate embargo on Russian energy, fearing the potentially devastating consequences for their own economies. The European Commission has presented a plan to phase out Russian oil – but that effort has yet to be approved amid objections from some member countries, particularly Hungary, which relies heavily on Russian imports. The United States banned imports of Russian oil and natural gas in March, but Russian oil accounted for about 3% of US consumption. Europe, on the other hand, receives about a quarter of its oil via Moscow.
There is also no guarantee that Russia would agree to continue selling oil under a new price cap, which could plunge Europe into a recession with unforeseen consequences for the global economy. Putin said this week that Europe would commit “economic suicide” if it dumped Russian oil. Some experts point out that the same hurdles that slow the embargo could also slow the price cap proposal. An EU diplomat said the Ukrainians had not insisted on the price cap in their communications with European officials, instead stressing the need for an embargo and a sixth set of sanctions.
“Just as Europe struggles to get unanimity on an embargo, it would also struggle to agree to a tariff or a price cap,” said Bob McNally, president of Rapidan Energy Group, an energy consultancy. energy. McNally said Europe has also traditionally been wary of “secondary” sanctions on other nations that would likely be necessary to ensure the effectiveness of the price cap. McNally also pointed to the additional risk “that EU countries heavily dependent on Russian oil will be forced to pay the tariff instead of Moscow.”
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Ukraine’s Finance Minister Sergii Marchenko told The Washington Post in April that his country had expressed support for the idea in conversations with Western diplomats, although his preference was for an immediate full embargo. Canada, which imposed an oil embargo on Russia in February, also expressed support for the plan at April meetings of the International Monetary Fund in Washington, according to a Canadian government official. Canada banned all imports of Russian oil in February and has always been much less dependent on it than Europe. Italian Prime Minister Mario Draghi also told the Financial Times that he had introduced price caps to take advantage of Europe’s “market power” to “reduce the financial aid we give to Putin to continue the war”.
David Kleimann, international trade expert and visiting fellow at Bruegel, a Brussels-based think tank, disputed concerns that a European tariff on imports would lead Russia to raise oil prices. He pointed out that Russia is already selling oil below market price, as demand for non-Russian oil can be met by other suppliers with relative ease.
German government spokespeople did not immediately return a request for comment. US officials have insisted the matter is not their decision to make.
“Oil and gas revenues are a very important source of income for Russia. We would like to do what we can to decrease them,” Yellen said on Wednesday in Bonn. “It’s important for Europe to decide what it thinks is best. But we continue to have these discussions. There are lots of options. … We’re not trying to tell them what’s in their best interest.
Quentin Ariès and Emily Rauhala contributed reporting for this article from Brussels.