Trying to choke off Putin's war machine


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Sep 07, 2023

Trying to choke off Putin's war machine

By KATE DAVIDSON and AUBREE ELIZA WEAVER 06/28/2022 08:00 AM EDT Presented by


06/28/2022 08:00 AM EDT

Presented by

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A Russian missile strike on a shopping center in central Ukraine Monday provided a stark reminder for G-7 leaders gathered in Germany: Vladimir Putin's war machine has not been deterred.

Four months after Russia's invasion began, soaring energy prices have softened the blow from Western sanctions and provided essential revenue the Kremlin needs to keep the war going. Now, global leaders are nearing an agreement on another novel tool to crimp Putin's profits — a cap on the price of Russian oil exports.

Treasury Secretary Janet Yellen has been a key proponent of the idea, which is seen as an important alternative to an outright ban on Russian oil sales that would curtail global supply and send prices sharply higher. By allowing Russia to continue selling, but capping the price buyers will pay, the proposal would significantly undercut Kremlin revenue and preserve global oil flows, the thinking goes.

"If you merely try to reduce flows and not reduce price, you have certain impacts on the energy market that are averse, whereas if you reduce price -- if you focus on price more than flows, you might be able to actually maximize your overall objectives of both depriving revenues to Putin and keeping [the] energy market stable," White House National Security Adviser Jake Sullivan told reporters in Germany.

How would it work? Shipping oil out of Russia requires a tanker, financing and insurance — services that are largely controlled by the U.S. and its European allies. (The U.K. maritime shipping insurance industry, for example, controls roughly 85 to 90 percent of the global insurance market.)

Under the proposal, which is still being negotiated, importers that abide by the price cap would receive an exception from sanctions to keep buying oil, while companies that don't would face restrictions on shipping-related services such as trade financing and insurance.

In theory, even China and India — which have both ramped up oil imports from Russia — would go along, given the threat of cutting off the tankers and the benefit they’ll get from cheaper oil.

"It is, in economic speak, ‘incentive compatible,’" said Adam Posen, president of the Peterson Institute for International Economics, describing the idea. "And this will put financial pressure on Russia, and it won't be a huge shock to the world energy markets when we don't need another one."

But how will it work in practice? Posen and other economists were quick to raise some skepticism.

If the plan generates excess demand for cheap Russian oil, Putin will be able to decide how to allocate those supplies. There's nothing to stop him from selling it all to China, India or other Kremlin-friendly importers — who may be inclined to offer some side payment to secure the deal — and sticking it to Europe, Posen suggested. That could prompt OPEC to eventually charge higher prices, as well, he said.

The upshot: China and India could end up getting massively cheaper oil than what the Europeans are paying, Posen said.

"And this policy is going to be politically sustainable heading into winter in Europe? I don't think so," he said.

But one person familiar with the negotiations said officials don't see China and India taking on all of the Russian oil coming out of Europe. Doing so would make China more beholden to Putin, and India has energy diversification targets it must meet, the person added.

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Ukrainian President Volodymyr Zelensky gives a speech via video to G-7 leaders on the second day of the G-7 summit in Germany. | Christinan Bruna/Getty Images

Some optimism — Robin Brooks, chief economist at the Institute of International Finance, said the plan could be highly effective, but "the biggest issue is speed."

"A price cap as part of sanctions on maritime insurance works best if done quickly," he said on Twitter. "So the EU needs to stop its terrible habit of preannouncing sanctions by 6 months. That only gives Russia and others in the oil market time to prepare and circumvent."

What if Russia refuses to supply oil at the lower price?

German Galuschenko and Oleg Ustenko, advisers to Ukrainian President Volodymyr Zelensky, said it's worth remembering that Russia was keen to sell as much oil as it could during the pandemic, even when prices fell as low as $20 per barrel.

"Moreover, if Russia ‘shuts in’ its production, it will damage its oil wells and effectively resign its membership in OPEC+," they wrote in an op-ed for Project Syndicate last week. "The loss to the Russian economy would be immediate, and the pressure on the ruble would become immense."

Untested — Sullivan acknowledged Monday the idea "is not something that can be pulled off the shelf." G-7 leaders are working through the broad outlines this week, but energy and finance ministers will have to design the plan before it can be implemented.

Once markets see that a credible solution is put in place, however, officials expect price pressures would begin to ease almost immediately, said the person familiar with the negotiations.

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And send us your tips, story ideas and feedback: [email protected], [email protected], or on Twitter @katedavidson or @aubreeeweaver.

A message from the American Bankers Association:

Richmond Fed President Tom Barkin speaks at 8 a.m. … Economic Policy Institute virtual discussion on the "The Economics of Abortion" at 11 a.m. … House Financial Services oversight subcommittee hearing on the housing market and private equity at 12 p.m. … San Francisco Fed President Mary Daly speaks at 12:30 p.m. … Politico Women Rule virtual discussion on what's ahead for women and the U.S. economy at 1 p.m.

U.S. BUSINESSES WOULD RUE DEATH OF GLOBAL TAX DEAL: TREASURY OFFICIAL— Our Brian Faler: "A top Treasury official said Monday that critics of a plan to overhaul the global tax system will like the alternative even less. Itai Grinberg cast the plan, now threatened by objections by Hungary and divisions in the U.S., as a way to stabilize and rationalize the taxation of big companies operating across borders.

"Absent an agreement, said Grinberg, multinationals will face a host of threats around the world fed by rising economic nationalism: Not just the return of so-called digital service taxes, but increasing disputes over who gets to tax what and the risk of double and triple taxation."

SANCTIONS PUSH RUSSIA TO FOREIGN DEFAULT — WSJ's Caitlin Ostroff and Chelsey Dulaney: "Russia defaulted on its foreign debt for the first time since 1918, pushed into delinquency not for lack of money but because of punishing Western sanctions over its invasion of Ukraine. Russia missed payments on two foreign-currency bonds as of late Sunday, according to holders of the bonds."

— Also on Monday: President Joe Biden issued a proclamation to raise tariffs on approximately $2.3 billion worth of Russian goods to 35 percent, our Doug Palmer reported.

WALL STREET BANKS QUIETLY TEST CYBER DEFENSES — Bloomberg's Christopher Condon and Craig Torres: "With global tensions rising over Ukraine, the cutthroat competitiveness of the US financial sector is yielding to partnership over the conviction that a cyberattack against even a group of minor banks -- or a third-party service provider -- could imperil everyone in a highly connected system.

"Some of the nation's largest banks are now working with the Treasury Department, engaging in role play and sharing information they would have guarded closely in the past."

STRESS TESTS DRIVE HIGHER CAPITAL REQUIREMENTS AT THREE BIG US BANKS — FT's Joshua Franklin: "JPMorgan Chase, Bank of America and Citigroup have been hit with higher capital requirements by the Federal Reserve following stress tests from the central bank that tested their ability to weather a severe recession.

"The new requirements for the three largest US banks by assets are higher than analysts had expected ahead of last week's stress tests and may constrain the amount of capital the banks are able to use to buy back their own shares."

AS GAS PRICES SURGE, STATIONS HOLD MORE MONEY — WSJ's Ayse Kelce: "Pain at the gas pump goes beyond the high prices: Gas stations are also putting bigger holds of up to $175 on customers’ cards when they swipe.

"When drivers insert a credit or debit card at the pump, the gas station doesn't know how much fuel they will buy and it places a hold on the account for an amount set by the gas station. Merchants authorize the payment networks to lift the hold once the final total of the payment is determined, though the holds can take hours and sometimes longer to settle—raising risks of overdraft penalties for debit-card users and eating into credit limits during the holds."

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LARRY SUMMERS NAILED INFLATION, BUT IS HE RIGHT ON WHAT COMES NEXT? — "It's 60-40 that we’re going back to something that's kind of secular stagnation," former Treasury Secretary Larry Summers tells WSJ's James Mackintosh.

From James: "Just as in the aftermath of the 2008-2009 recession, interest rates will be held down by increased savings resulting from an aging population and the uncertainty that comes after a crisis. Rapid technological development will again keep the cost of capital goods down. More savings and less investment means lower after-inflation interest rates are required to balance the economy."

MORTGAGE LENDERS TURN ‘DESPERATE’ AS SOARING RATES ROIL INDUSTRY — Bloomberg's Natalie Wong and Reade Pickert: "Business has started to evaporate across home-lending firms in recent weeks, after the Federal Reserve boosted borrowing costs to tame decades-high inflation. US mortgage rates are at levels last seen more than a decade ago. That's hurting affordability for first-time buyers, slowing down sales of previously owned homes and making it unattractive for existing owners to refinance.

BITCOIN MINERS SELL HOLDINGS AMID CRYPTO WINTER’S CHILL — Reuters’ Lisa Pauline Mattackal and Medha Singh: "Bitcoin miners have been forced to tap into their cryptocurrency stashes as a plunge in prices, rising energy costs and increased competition bite into profitability. The number of coins miners are sending to crypto exchanges has been steadily climbing since June 7, researchers at MacroHive noted, in a sign that ‘miners have been increasingly liquidating their coins on exchanges.’ Several publicly listed bitcoin miners collectively sold more than 100 percent of their entire output in May as the value of bitcoin tumbled 45 percent, an analysis by Arcane Research found."

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Bola Olaniyan has been named executive director of the Sadie Collective. Olaniyan was most recently the Washington, D.C., site director for Arizona State University, and previously served as program director for the University of Wisconsin's academic program in D.C.

Kara (Wheeler) Adame is now head of the office of federal affairs at Protective Life. She most recently was head of the Washington office for Mutual of Omaha. (h/t Daniel Lippman)

A message from the American Bankers Association:

Farmers and ranchers are the backbone of America. In today's economy, they need greater access to sound credit. Congress can help sustain and grow rural communities by passing the Access to Credit for our Rural Economy, or ACRE, Act (H.R. 3139). The bipartisan legislation would lower the cost of making a loan backed by farmland, enhance competition between lenders for agricultural and rural housing loans, and expand access to low-cost credit in rural America. Learn more about the legislation.

Credit Suisse was convicted by Switzerland's Federal Criminal Court on Monday of failing to prevent money-laundering by a Bulgarian cocaine trafficking gang in the country's first criminal trial of one of its major banks. — Reuters’ Paul Carrel

Hafize Gaye Erkan, whose surprise departure from First Republic Bank disrupted the lender's succession plans earlier this year, will become chief executive officer of Greystone as the closely held commercial-property lender expands into wealth management and private banking. — Bloomberg's Scarlet Fu

About two-thirds of American consumers who live paycheck to paycheck said they experienced at least one sudden income disruption — from losing a job to a serious illness or the birth of a child — in the past three years, according to a survey. — Bloomberg's Alexandre Tanzi