How far might an improved, incrementally declining oil-price cap go in changing Putin’s position, for example forcing him to make concessions to Ukrainian demands in peace negotiations or even prompting the Russian president to withdraw troops from Ukraine? As this paper has argued, a watertight and comprehensively enforced oil-price cap – combined with sufficient military aid to Ukraine – has the potential to target a critical financial and institutional vulnerability in Putin’s regime and in the ‘vertical of power’ on which it depends.
But the paradox is that increased pressure on Russia’s economy in some respects provides an added motivation for Putin to justify to the Russian public the potential sacrifices involved in fighting the war. If these sacrifices were perceived to have been made in vain, the president’s position could become perilous. Imperial sentiments and resentments, which resonate with a large part of Russian society, serve as an alternative source of legitimacy when public well-being suffers. Putin leans on such narratives when he is unable to deliver economic gains. The same could happen in a sanctions-induced crisis, which the Russian leadership would promptly try to frame as ‘artificial’ and ‘created by enemies’. However, if Ukraine is sufficiently supplied with modern weapons and able to withstand military pressure, this propaganda is more likely to fuel frustration than truly mobilize the population – at least that is how it has worked so far, with the share of ardent supporters of the war declining amid the slow tempo of the Russian offensive.
The hope for Ukraine and its Western supporters is that Putin cannot ignore economic ‘laws of gravity’ indefinitely. There may be a limit to the extent that he can enfeeble the Russian economy without endangering his entourage and his own position. The measures proposed in this paper provide a means of pushing Russia towards that limit. At minimum, a revised oil-price cap might increase the pressure on the Russian economy and destabilize the regime’s patronal vertical of power, even if it did not initially force Putin to withdraw troops from Ukraine. At the other end of the spectrum of efficacy, it could have a sufficiently chilling effect on the country’s elites to prompt challenges to Putin’s rule. For so long as the regime is held together by oil rents, the threatened elimination of these rents potentially necessitates an adjustment within the regime to avert this, with or without Putin.
Timing is everything. Putin understands Russia’s vulnerability to an interruption in oil rents. He understands the fragility of the power vertical. The window of opportunity in which to exploit this fragility is narrowing: hydrocarbon-related revenues accounted for about half of the federal budget between 2011 and 2014, but the share has now decreased to 30 per cent and is set to decline further between 2025 and 2027. In this period, the regime also plans to change the composition of the elites, replacing them with ‘warriors and hard workers’. Unless Ukraine’s allies act quickly, this could give Putin enough time to accomplish the transition to a classical dictatorship which would make his regime more resilient to sanctions, akin to North Korea.
It is clear that Putin is not going to concede his maximal demands unless heavily pressured. Nonetheless, it is unclear what the Trump administration will do regarding sanctions on Russia. President Trump’s declared intention is to end the war immediately, while Russia wants sanctions to be lifted as part of any deal – in addition to other exorbitant demands such as permanently denying NATO membership for Ukraine and preventing the presence of European peacekeepers in Ukraine. Trump’s receptiveness – shocking to many policymakers in Europe – to many aspects of the Russian agenda makes it necessary to assess what can be done about Russia’s oil export revenues in the context of any US–Russia rapprochement.
Yet even if the US were to disengage from the coalition, Europeans have the means to enforce the oil-price cap by themselves, as all genuinely reliable P&I reinsurance – the main mechanism of such enforcement – is provided by European (principally British and Norwegian) firms.
The main fallibility of this strategy would be the difficulty, in the absence of US support, of maintaining secondary sanctions against countries or entities that might trade with Russia in violation of the price cap. The threat of secondary sanctions has discouraged some Chinese and Indian companies from buying the Russian oil at a price above the price cap or serving the ‘delisted’ tankers. As the closure of the Baltic straits through which 60 per cent Russian oil is exported could trigger the price cap’s self-enforcement by the buyers, this measure could compensate for a lack of secondary sanctions. Given the geographical position and the financial dominance of European companies in this area, European countries could conceivably enforce restrictions themselves. The recent actions against the shadow fleet by Finland and Germany show that this is possible.
Donald Trump’s second term is notable for his reluctance thus far to exert any real pressure on Russia. But this US administration is, in fact, identical to some of its predecessors and Western counterparts in believing, at the beginning, that the Kremlin can be dealt with diplomatically, only to find that it cannot. Russia is, in the end, too uncompromising. It remains unclear at this point whether President Trump would be willing to follow through on his earlier ultimatum and impose meaningful additional sanctions if negotiations break down. Even if Trump does attempt to do so, Graham–Blumenthal-type sanctions would likely fail for the reasons outlined above – leaving Trump with little choice but to return to the oil-price cap. In any case, the central idea in this paper will remain possible for as long as Putin is dependent on Russia extracting and exporting hydrocarbons.
It is often observed that sanctions hurt the side imposing them as well as the target. For some types of sanctions, it is certainly true that Western publics will need to make more of a sacrifice than they have done before if Ukraine is to prevail against Russia. However, a modified and ‘sealed’ price cap on Russia’s oil exports would arguably benefit many countries, including those currently buying oil and gas from Russia, by damaging the target economy without significantly reducing the global supply of oil or creating a corresponding price hike as in early 2022.
The longer the war goes on, the more important economics becomes. Russia’s war economy – sustained in large part by oil rents – has been resilient so far, but it is brittle. A tighter, more effective oil-price cap like that proposed in this paper would help considerably in raising the cost of Russia’s invasion of Ukraine and countering Putin’s aggressive ambitions.
