Janet Yellen embarks on Asia tour to win support for cap on Russian oil price

The novel proposal has picked up steam in recent weeks, with President Biden and other leaders of the Group of Seven wealthy countries most recently endorsing its idea. Ms. Yellen will focus on her first visit to Asia as Treasury Secretary to help fill in the key details to put the plan into action. During a visit to Japan this week, as well as upcoming meetings of the Group of 20 major economies in Indonesia and a halt in South Korea, finance ministers are expected to discuss the price cap with their counterparts.

There are several outstanding issues to settle on the price-cap idea. They include accurate detection how to apply it, persuading other countries to subscribe to it and setting a sale price at which Western countries would allow the purchase of Russian oil. Hovering over the proposal, there is also speculation that Russia will continue to sell oil at a price mandated by the US and its allies.

But Russia is making billions from its oil sales and with high fuel prices Contributing to highest inflation in decadesBiden administration and Western officials are looking for new economic tools To slow down Russia’s peace offensive of Ukraine.

Ms Yellen acknowledged the difficulty of enforcing the price cap when she visited Europe in May.

“While I think a lot of people, including myself, find it attractive from a general economic point of view, it’s challenging to actually turn it around and all of those issues have not been worked out yet,” she said in Germany.

The current price-limit proposal stems from the EU sanctions package which Includes sanctions on Russian oil imports and sanctions on EU firms insuring sea shipments of Russian oil. Those moves are due to begin by the end of the year. Because many shipments of Russian oil to countries around the world are insured in the European Union and the UK, Ms Yellen has repeatedly said she is concerned that the EU plan could remove Russian oil from the global market.

A sharp drop in global supply could drive up prices so much that Russia can achieve similar revenue Lower sales, while possibly tipping the global economy into recession, said Ms Yellen. Some analysts expect oil, which is trading at around $105 a barrel, to rise to $200 a barrel if Russian production declines significantly.

A Treasury official who traveled with Ms Yellen said the department’s projections suggest oil prices could rise to around $140 a barrel with major losses in production, though the official said estimates are uncertain.

Now, Ms Yellen and Western officials are calling for an exit from the insurance ban. The changes would allow shipments of Russian oil to be insured and financed in the EU, UK and elsewhere if the sale price falls within the range. The plan seeks to preserve the ability of many developing countries, as well as China and India, to purchase oil from Russia. The country’s oil is already selling at a discount to the global benchmark, while the US and European Union have gone to ban it,

A central question in the design is figuring out how to verify that tankers carrying Russian oil will comply with the price cap, as insurers have indicated it would be difficult for them to enforce.

According to a senior Treasury official, letters of credit for oil trades — which typically involve the sale price of oil — and customs checks are ways officials are considering enforcing the price cap.

The official said that even though countries did not subscribe to the cap, Russian oil shipped without Western insurance and financial backing would still be sold only for additional discounts. The official said such sales would reduce Russia’s revenue.

Some question whether Russia will follow the economic logic at the heart of the plan. This would require a Russian president

Vladimir Putin

To sell oil at a steep discount to avoid shutting down oil wells and permanently reducing the country’s production capacity. A top Russian official recently indicated that the country would not sell oil under the cap, Reuters reported.

“Even though it’s being sold as this very pragmatic policy, I think it’s more on paper than behavior, it basically assumes Russia will say ‘oh well I can’t get that price’ I think I’ll take half that price now,'” said Adam Posen, president of the Peterson Institute for International Economics.

Japanese Prime Minister Fumio Kishida said during a recent stump speech that the cap would be set at about half the current price of Russian oil, Japanese media reported.

Ms Yellen’s efforts on the price cap began when she discussed it with G-7 finance ministers during a dinner held at the Treasury Department during the spring meetings of the International Monetary Fund and the World Bank in April, according to a senior Treasury official.

Although the oil price cap has gained traction since then, the political and practical barriers to implementing it may ultimately prove too great. One of Ms Yellen’s past international achievements, global tax deal agreed in principle by more than 100 countries, not installed yet Because it is mired in complex political dynamics in the European Union and the US Congress.

For the oil price cap to work, the US would have to re-marshal a large international coalition to comply. This would require convincing the 27-member EU to adjust to elements of its recent sanctions package, which was the subject of weeks of difficult negotiations. And while India and China may benefit from lower Russian oil prices, some analysts expect them to be hesitant to subscribe to the US-led effort against Russia. Another senior Treasury official said that the US is reaching out to many countries, including India.

write to andrew duhran andrew.duhrn@wsj.com