Phase Two of the Price Cap on Russian Oil: Two Years After Putin’s Invasion

The price cap remains a novel policy—an effort to limit the price a single global supplier can receive for its most important export, underpinned by a multilateral sanctions regime. Consequently, we must remain nimble and analytical as we assess its progress. Three months into the second phase of the price cap, we offer three key observations on its progress.

1. The price at which Russia sells its oil has declined markedly since the second phase began. The shift reflects the effects of reduced oil prices globally over this period, but also a significant widening in the discount Russia earns relative to other global oil suppliers. That discount rose from a low of $12 to $13 per barrel of crude oil in October to about $19 per barrel over the past month.
2. Energy market participants, analysts, and even Putin’s own oil czar have linked the rising discount on Russian oil to the Coalition’s increased enforcement activities reflected in the second phase of the price cap—clear evidence that this second phase is working.
3. Russian oil export volumes have remained stable in recent months. The price cap is helping maintain a steady supply of energy to global consumers and businesses. At the same time, the price cap, along with key sanctions enforcement measures, is reducing Putin’s profits from selling that oil.

The Coalition remains focused on further reducing Kremlin profits while maintaining market stability and energy supply. Our approach leaves Putin with no good options: he can either sell his oil under the price cap for much less than other global suppliers or face high costs to export it through non-Coalition avenues.

History of the Discount on Russian Crude Oil

Figure 1 plots the price of Urals oil—the principal reference blend for Russian crude oil, sold at ports on the Baltic and Black Seas—alongside Brent, the leading global benchmark for crude oil prices. Before the 2022 invasion, Urals and Brent traded very close to one another. Because oil is priced on a global market, spreads between different crude blends from different suppliers usually tend to be small and stable. When Russia invaded Ukraine in February 2022, global oil prices spiked due to fears of supply disruptions. At the same time, a significant discount on Russian crude materialized as buyers—including in the United States and European Union—shunned Russian oil. As 2022 progressed, global oil prices cooled and the assessed discount on Russian crude narrowed. G7 Finance Ministers committed to imposing a price cap in September 2022, and the discount returned to historically high levels in December when the crude oil cap and EU import embargo were implemented.

Figure 1

Through summer 2023, Russian revenue remained heavily restricted by the large discount, even as Russian oil supply remained largely steady. At that point, the discount narrowed as Russia shifted significant volumes of its oil exports into a shadow fleet that operated without G7 service providers. While this strategy was costly to Russia, the ability to sell oil without Coalition service providers or by providing false attestations to Coalition service providers allowed it to sell large amounts of oil above the price cap.

In October, the Coalition launched the second phase of the price cap, designed to enhance compliance for trades occurring at or under the price cap and increase the costs to Russia of using the shadow fleet. When Russia faces new barriers to using the shadow fleet while market participants grow increasingly wary of violating the price cap, Russia again has no good options. It has been forced to heavily discount its oil—either to sell under the price cap or to offer non-Coalition buyers steeper discounts.

Since October, the United States has rolled out successive rounds of price cap enforcement actions that designated vessel owners, shipping companies, and an oil trader that used Coalition services to trade above the cap, as well as identified vessels as blocked property of these companies. These actions also included designations of obscure and opaque supply chain intermediaries supporting Russia’s oil trade (increasing costs of exporting oil outside the cap).

Since October, the discount on Russian oil has increased meaningfully: from that low of $12-13 to a peak of $20 in January, and stabilizing around $19 as of late February. The market dynamics that drive that discount are complex and identifying specific causal drivers must be done with care. But the outcome here is consistent with the goals of the price cap’s second phase: to force Russia to discount its oil further (whether under the cap with Coalition services or without them).

Market Commentary on Price Cap Contributions to Rising Discount on Russian Oil

Importantly, a range of commentators—most notably Putin’s own oil czar—have linked the rising discount to the price cap’s second phase. A few examples:

• The Kremlin’s own oil czar acknowledged that the sanctions issued to enforce the price cap were forcing Russia to sell at lower prices. Bloomberg:^[2] “Deputy Prime Minister Alexander Novak told reporters in Moscow that Russian prices have seen bigger reductions relative to global prices since the most recent sanctions packages were brought into effect at the end of last year, the Tass news agency reported … ‘The current spike [in the discount on Russian oil] is associated with the sanctions package that came out at the end of last year,’ Novak said.”
• The International Energy Agency linked the increased discount on Russian oil to enforcement of the price cap in its January 2024 Oil Market Report.^[3] “Russian oil export revenues lowest since June 2023: Crude price discounts to benchmarks for Urals have deepened under pressure from the expanded US Treasury investigation into ships, their owners and related traders that have transported Russian oil purchased above the G7 price cap.”
• ClearView Energy Partners:^{[4]“Notwithstanding our usual caveats regarding small sample sizes and energy data quality limitations, OFAC’s [Treasury’s sanctions administration and enforcement arm] ramp-up of enforcement actions appears to be achieving its stated goals: preserving Russian export flows while diminishing proceeds to the Kremlin. Per Bloomberg ship-tracking data on a four-week moving average basis, seaborne crude volumes have risen back towards mid-October levels[.] Meanwhile, Urals – Brent differentials appear to have widened—either a little, or materially, depending on the data source used[.]”}

Russian Revenues and Exports

The price cap has two goals: to reduce Russia’s ability to finance its war and to maintain energy market supply. The price cap’s ideal outcome is a market in which Russia supplies as much energy as possible to emerging market consumers and businesses who need it most, but at the most heavily discounted price, to limit Putin’s profits: maintaining the volume of energy supplied, while minimizing the profit earned from it.

Figure 2 plots a time series of the volume of Russia’s seaborne crude and refined product exports, along with Kremlin revenues from the major taxes on oil. Of course, revenues are only part of the story on profits, and the Coalition’s efforts to raise the Kremlin’s costs are an important element of reducing profits. But costs are much less transparent, so we focus here on revenues. When the price cap went into effect, Russian oil tax revenues fell meaningfully (by more than 40 percent comparing the first nine months of 2023 to the same period of 2022) while the volume of seaborne exports was stable and even ticked up a bit (from about 6 to 6.2 million barrels per day, partially offsetting the decline in pipeline exports to the EU). Russia was selling at a meaningful discount but was still supplying oil to the market. In summer 2023, we saw this effect partially unwind as the discount on Russian oil narrowed. But in recent months, the volume of exports has largely remained steady and oil tax revenues are nearly back down to late-summer 2023 levels.

Figure 2

Conclusion

To be sure, uncertainty and opacity in these markets run high, and the Coalition will continue to closely monitor energy market dynamics to better understand the relationship of the price cap and our sanctions enforcement to Russia’s fiscal situation and global energy markets. Like we saw in the summer and fall, Russia will continue to invest money to avoid our sanctions, requiring us to continue to adapt and innovate in our strategy. But as we reach the two-year mark of this full-scale invasion, it is important to recognize that the Coalition’s unity and willingness to deploy creative policy solutions is making a difference: keeping oil on the market while restricting Putin’s profits.

_{[1] Remarks by Eric Van Nostrand, Acting Assistant Secretary for Economic Policy, on the Second Phase of the Price Cap on Russian Oil. October 16, 2023.}

_{[2] Bloomberg News. “Oil Sanctions Are Deepening Russian Crude Discounts, Novak Says.” January 31, 2024.}

_{[3] International Energy Agency. January 2024 Oil Market Report. January 18, 2024.}

_{[4] ClearView Energy Partners. “Of Sanctions Strictures and Smooth Sailing.” January 18, 2024.}