The price cap on Russian oil: did it work?

Has the price cap on Russian oil exports been effective?

In this paper, Kilian et al. explore the economic effects of the 2022 oil embargo and price cap on Russian oil exports following the Russian invasion of Ukraine. They present several key findings:

• Impact of the Oil Embargo and Price Cap: The paper documents that the oil embargo and price cap led to a significant discount on Russian Urals crude oil. Specifically, in March 2023, Russia had to accept a $32 per barrel discount compared to January 2022 prices. Nearly half of this discount ($15 per barrel) is attributed to the increased cost of shipping oil over longer distances as Russia redirected its oil exports primarily to India. The remaining $17 per barrel discount is explained by the increased bargaining power of India, which became a major buyer of Russian oil
• Economic and Political Objectives of the Price Cap: The price cap was politically significant as it allowed Western countries to maintain a flow of Russian oil to the global market, potentially avoiding a global oil price surge and economic recession. Economically, while it aimed to limit Russia’s war financing by capping oil revenues, its direct impact on reducing Russian oil revenues was limited
• Continued Russian Oil Exports: Despite the embargo and price cap, Russian oil exports did not significantly decline in volume. Instead, the primary effect was the redirection of these exports from traditional markets like Europe to new major buyers such as India and China

Overall, the paper concludes that while the embargo and price cap reshaped the flow and pricing of Russian oil exports, the direct economic impact of the price cap on reducing Russian oil revenues was less significant than its role in facilitating the logistical reorganization of oil trade routes to comply with Western sanctions.

The Impact of the 2022 Oil Embargo and Price Cap on Russian Oil Prices
Authors: Lutz Kilian, David Rapson, Burkhard Schipper
From: Federal Reserve Bank of Dallas, UC Davis

Lessons learned

In this paper, Johnson et al. provide an in-depth analysis of the price cap policy on Russian oil exports implemented. The paper outlines the rationale, structure, and initial outcomes of the policy, highlighting its distinctiveness from traditional price caps and its implications for global oil markets, Russian revenue, and geopolitical dynamics. The authors conclude that the price cap represents a novel approach to economic sanctions, reflecting a balance between penalizing Russia for its aggression and maintaining stability in global oil markets. It highlights the importance of continued monitoring and potential adjustments to the policy to ensure its effectiveness and minimize unintended consequences. The authors suggest that the price cap on Russian oil could serve as a model for future economic measures in response to geopolitical conflicts involving major commodity exporters.
Design and Implementation of the Price Cap on Russian Oil Exports
Authors: Simon Johnson, Lukasz Rachel, Catherine Wolfram
From: MIT, University College London, Harvard University Kennedy School of Government