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The Impact of the 2022 Oil Embargo and Price Cap on Russian Oil Prices

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How did the 2022 oil embargo and price cap impact Russian oil exports and pricing, particularly in terms of discounts on Urals crude and shifts in bargaining power with India and China?

The views in this interview and paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Image courtesy of interviewee. November 6, 2024

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This video discusses the use of sanctions by Western countries, particularly in response to Russia's invasion of Ukraine. The focus is on the effectiveness and challenges of sanctions, especially those targeting the Russian oil market. Sanctions are described as an attempt to punish "bad actors" and reduce their industrial capabilities and revenue from commodities like oil and gas.

This video mentions several academic studies analyzing the impact of these sanctions on Russian oil exports, detailing how sanctions led to a shift in the market dynamics, redirecting oil shipments primarily from Europe to new buyers in India and China. This video shift, while keeping export quantities relatively stable, resulted in Russia having to sell oil at significant discounts due to increased transportation costs and limited buyers who had significant bargaining power.

A specific emphasis is placed on a price cap policy that was introduced as a compromise to mitigate potential spikes in global oil prices, allowing some oil to continue flowing to the market. Despite these measures, evidence suggests that the price cap did not significantly constrain Russian oil revenues, as they frequently sold their oil below the cap price.

The discussion also highlights the challenge of enforcing sanctions effectively, noting the emergence of a "shadow fleet" of ships to transport Russian oil outside the reach of Western sanctions. This video concludes by underscoring the difficulty in implementing sanctions while maintaining global oil supply, as various non-Western actors are willing to engage with Russian oil markets despite sanctions. Overall, the sanctions' success appears mixed, highlighting complex geopolitical and economic interdependencies.

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Here are five key points from the video regarding sanctions on Russia, particularly in the convideo of its invasion of Ukraine:

1. **Objective of Sanctions**: The primary aim of the sanctions imposed by Western countries, including the U.S., Japan, and South Korea, is to punish Russia for its aggressive actions, specifically the invasion of Ukraine, by reducing its revenue from key exports like oil and gas and limiting its industrial activity.

2. **Challenges of Imposing Sanctions**: Implementing sanctions on a large economy like Russia is complex due to the global interdependence on Russian energy resources. There is a balance that needs to be maintained between punishing Russia and avoiding excessive self-harm to Western economies reliant on Russian commodities.

3. **Oil Market Dynamics**: The sanctions led to a reallocation of Russian oil exports from Europe to countries like India and China. While quantities of oil exported did not drastically change, Russia had to sell its oil at discounts due to longer shipping distances and decreased demand from Western countries, effectively impacting its revenue.

4. **Efficacy of Sanctions**: The analysis presented in the paper suggests that, while the embargo on Russian oil was effective in terms of Western nations controlling their purchases, the price cap on oil did not significantly depress the prices Russia was able to fetch, particularly as global oil markets adjusted.

5. **Circumvention of Sanctions**: The video highlights the difficulties in enforcing sanctions, with evidence that Russia has found ways to evade them, including the use of a "shadow fleet" for oil transport. Countries outside the Western coalition are less affected by sanctions and can facilitate the transportation and sale of Russian oil, thus undermining the intended impact of the sanctions.

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Here are some key quotes extracted from the video regarding the sanctions on Russia and the impact on global oil markets:

1. **Purpose of Sanctions**:
- "We in the West... attempt to solve these, or at least mitigate them through the use of sanctions, which broadly speaking, are an attempt to punish the bad actors."

2. **Focus of Research**:
- "I mostly study the energy transition... this has been really interesting."

3. **Challenges of Imposing Sanctions**:
- "It’s actually quite difficult to impose sanctions on a large country like Russia, from whom we buy many critical inputs to the global economy."

4. **Effectiveness of the Embargo**:
- "The embargo was very effective in the sense that European countries and others in the Western Coalition have agency over whether they buy Russian oil."

5. **Impacts on Oil Revenue**:
- "We first document that quantities didn’t change... Russia did... receive a much lower price on its oil."

6. **Global Oil Market Dynamics**:
- "You should think of oil markets as global... the prices are gonna be set based on Global market supply and demand forces."

7. **Price Cap Impact**:
- "The price cap was instrumental in securing the relaxation of the maritime services ban... but it’s really hard to estimate what would’ve happened had the Maritime services ban gone into effect."

8. **Discounts on Russian Oil**:
- "They had to take a large discount on that crude because they’re shipping it a longer distance."

9. **Shadow Fleet Operations**:
- "There’s been a large shadow fleet... primarily by China, Russia, the UAE... able to transport Russian crude outside of the concern of penalties."

10. **Complexity of Sanctions Enforcement**:
- "It’s very difficult to enforce this policy... the vast majority of the tanker fleet is operating without apparent concern for... being caught violating any sanctions."

These quotes encapsulate the challenges and dynamics surrounding the sanctions imposed on Russia in response to its invasion of Ukraine, highlighting the complexities of the global oil market and the implications for both Russian revenue and Western economic policy.

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As global conflicts arise.

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Uh, we in the West, in particular, attempt to,

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attempt to solve these,

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or at least mitigate them through the use of sanctions,

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which broadly speaking, are an attempt to

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punish the bad actors.

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In, in, in the case of our paper,

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that would be Russia based in its invasion of Ukraine,

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by implementing sanctions that reduce their ability

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to engage in industrial activity at home.

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Um, cause the flight of capital.

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And in the case of our paper, aspire

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to reduce the revenue

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that they get from selling commodities, such

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as oil and gas.

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There's actually a growing literature on sanctions,

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which has been interesting to, to keep an eye on.

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This is actually a new space for me.

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I mostly study the energy transition.

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So this is, this has been really interesting.

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Uh, there are a couple papers that look at,

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at the sanctions on Russian oil.

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Um, there's a paper in particular by Higins stock

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and many co-authors that document

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using really rich micro data on the

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shipments of Russian oil.

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Uh, document many of the stylized facts that we present

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and attempt to,

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pick apart a little bit in our, in our paper.

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Um, there's also a, a very interesting piece by,

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Johnson, Rachel

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and Wolfram that, that actually looks at the precise,

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a new e an evolution in the sanctions

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that we've seen in the current regime, which is a price cap.

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I'll talk a little bit about this later in the interview,

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but there are different components of sanctions,

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and at, you know, it's, it's actually quite difficult

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to impose sanctions on a large country like Russia,

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from whom we buy many critical inputs to the global economy.

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So it's, it's not just that we, want to punish them,

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we don't want to punish ourselves,

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excessively in the process of doing that.

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And there's a balance there that actually leads

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to the policies, that we've seen.

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So there are these two papers that I just mentioned on the,

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the sanctions on Russian oil.

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Um, and there's a really nice review actually

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that came out just a couple months ago, by Oleg Skokie

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and Alina, Kova summarizing the economics of sanctions.

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So anyone who's interested in this is a Brookings paper,

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and anyone who's interested in diving into the economics

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of sanctions a little bit more deeply, I recommend that as,

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as a very nice starting point.

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One aspiration was to allow Russian oil

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and products to continue to flow into the global market.

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You should think of oil markets as global.

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So every everyone who's selling

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and everyone who's buying, it's all gonna clear in a,

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in a relatively centralized fashion.

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Uh, it's not so much centralized,

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but it's the prices are gonna be set based on

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Global market supply and demand forces.

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And so, one of the aspirations was to avoid a situation

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where Russian oil was locked in domestically

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and wasn't able to make it to the market,

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which would've risked causing a spike, in

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global oil prices and,

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and potentially even a global recession.

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And so there were really two main components

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of this, actually, really three,

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although one of them ended up not happening,

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but there was, an embargo that was at first voluntary,

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and then subsequently it was formalized whereby

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European countries and some others in the Western coalition,

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Japan, South Korea, the United States, decided not

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to buy from Russia.

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So this embargo was the first pillar.

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Then there was a proposal for a maritime services ban.

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Most maritime oil shipments are going,

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on western ships using western insurance.

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And a maritime services ban would've caused it to be illegal

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to ship Russian oil using those services.

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There was a concern, particularly in treasury,

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that this would eliminate

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or, dramatically reduce the supply of Russian oil,

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from the global market and cause prices to spike.

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So there was concern about that.

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And subsequently there was sort of a trade, I would say,

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between, diplomats in the US and,

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and in the EU where ins, instead

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of implementing the maritime services ban,

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there was a price cap that was imposed,

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which essentially said, okay,

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you can use those maritime services,

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but only if you sell oil at a price, below the cap.

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Russian oil production

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and supply to the global market

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didn't change much over this period.

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So one of the, aspirations again, of the,

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of these sanctions was that, Russian oil will continue

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to flow to the market in that indeed was the case.

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And so any punishment

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that Russia would experience from these sanctions would have

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to then operate through, mainly the price

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that they would receive for that oil.

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We first document that that quantities didn't change.

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We also have a rich data set on prices that show

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that actually Russia did, was forced

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to receive a much lower price on its oil,

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particularly the oil that it sold, from the Baltic

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and Black Port Black Sea ports, which

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previously had been shipped to Europe.

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Um, but after the sanctions, when Europe

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wasn't buying Russian oil, was then rerouted,

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primarily to India and a little bit to China.

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There was also a discount on the oil

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that was coming from the Pacific, port in Kino,

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which was going, to China, which is a,

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a much shorter distance.

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And the, the discount that they received on

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that was, was smaller.

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But you can see, if you just look at Russian oil revenues

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over 2022, at first, their, their revenues were,

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were flat through most of the year, which was really a,

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a sign of countervailing forces.

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The global oil price at

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that point had gone up dramatically out of fear that

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that Russian oil would, would become scarce

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and the prices would, would rise in the future.

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There would be scarcity in the future.

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Um, but that was offset by a discount that they had

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to take on their, on their crude.

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Um, and then over the course of, of the year

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as global macroeconomic conditions deteriorated, the,

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the global price of oil declined

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and Russia started, selling its price, well

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below the price cap of $60.

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So it was in, in the forties for several months.

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There, it seems clear to us from, from our analysis

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that the embargo was very effective in the sense

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that European countries

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and others in the Western Coalition

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have agency over whether they buy Russian oil.

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This is something that they can control.

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And when those, previous buyers decided not to continue

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to buy from Russia, Russia needed to find other buyers.

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And so that caused this reshuffling

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of oil supply and demand in the world,

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and particularly the, the, the redirecting

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of Russian Euros crude away from Europe

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and towards India and China.

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And this caused them to, this caused them to have

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to take a large discount on that crude

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because they're shipping it a longer distance.

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And India, the buyer, they could buy it from Russia

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and pay for the, you know, the shipping of this,

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or they could buy it from, say, the Gulf from the UAE

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or other sellers, other sellers in the Middle East,

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which is much closer to them

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where they wouldn't have to pay so much.

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So Russia was forced

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because of those competitive, forces to,

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to take a discount.

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Now there's another, the other policy at play here

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is the price cap.

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And there is a debate that's going on about the effect

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of the price cap, on Russian oil revenues.

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Now, it's quite clear that the price cap was instrumental

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in securing the, relaxation

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of the maritime services ban about which many,

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Western economists were concerned.

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Um, and so, the, this treasury proposal of the price cap

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was what allowed the Europeans to feel, okay, we're going

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to, we're gonna relax this maritime services ban, but only

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because we have this other policy,

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this price cap policy from the US that is going

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to still put downward pressure on,

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on Russian oil revenues.

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Well, as it turns out from our analysis,

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the other than securing that political victory, which

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by the way could be very economically meaningful,

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it's really hard to, to estimate

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what would've happened had the Maritime

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services ban gone into effect.

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Um, but what we also see is a series of prices,

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for Russian crude that makes it unlikely

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that the price cap was having much

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of an effect on Russian oil revenues.

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So they were, for a long period of time,

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selling their Euros crude for well below the price cap,

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which is to say, those shipments could have been,

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could have occurred using the maritime fleet,

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the western maritime fleet and maritime services.

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Um, there was no concern that those shipments would be,

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would be punished by Western authorities,

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because they were in compliance with, with the cap.

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But then as global oil markets tightened in 2023,

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you saw that, the same, the same crude from, from,

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from the Euros, from the Black Sea

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and Baltic Sea were selling well above the cap.

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And so it, there's just not a lot of evidence that the cap

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was containing the price of oil,

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that Russia was able to receive at all.

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And instead, we can point directly to

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the increase in transportation costs being very meaningful.

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Um, and as well, because there were really only a couple

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buyers that were large enough to absorb this amount

208
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of crude, namely China and India.

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Uh, they had an enormous amount of, of bargaining power

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that caused them to also, get lower prices from Russia.

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There's a second premium you might be getting at, which is,

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which is the insurance risk premium.

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Yeah. And this is actually, we,

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we look into this in the paper,

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and what we find is that this is likely

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to have only played a very small role

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and likely a temporary role early in,

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in the sanctions, regime.

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There, there's many instances over the last, you know,

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decade where there have been tankers

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that have been attacked,

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and, you know, the risk premium have increased.

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And typically what we see is that

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that still leads the insurance risk premium to be less than,

225
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say, a dollar a barrel.

226
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It looks like maybe it got a little bit higher than a dollar

227
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a barrel of oil, during the early stages of, of, of,

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this sanctions regime, but likely not for too long,

229
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because I think people realized

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after, not too long a time

231
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that these sanctions were pretty easy to evade.

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The, the, the price cap was pretty easy to evade either

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through the use of, maritime,

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western maritime services when the price is below the cap,

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which was the case for early 2023,

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or when the price went above the cap,

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it just was not being enforced.

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The, it's very difficult to enforce, this policy.

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And while a few ships in 2024 have been,

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sanctioned by Western authorities, really the vast majority

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of the tanker fleet is operating without cons apparent

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concern, for, for, you know,

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being caught violating any sanctions.

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Moreover, there's, there's a, another thing

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that's happened throughout this entire period is that

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because of the potential concern of using Western maritime

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ships, there's been a large shadow fleet

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that has been assembled, that is not Western owned.

249
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It's operated mainly by China, Russia, the UAE.

250
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And they, of course, are able to, to

251
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transport Russian crude outside of the concern of,

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of penalties, through the price cap,

253
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because that really only applies to shipments

254
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that are made using Western services.

255
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So there's some complexity there,

256
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but really the insurance risk premium,

257
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we think is very small relative

258
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to the transportation cost premium, that Russia needed

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to pay essentially by shipping its oil much farther.

260
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And by the way, this had an extra effect

261
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because it was shipping its oil much farther.

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It also was taxing the maritime shipping fleet itself,

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which only has a finite number of ships.

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And so the cost of chartering one of these tankers,

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went up as well.

266
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So it was a longer distance at a higher cost

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that was a large component of the discount

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that they were forced to take.

269
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These sanctions are really, really hard

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to implement successfully.

271
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If you want to maintain the supply of Russian oil

272
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into the global market, then it's very difficult

273
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to say, okay, we're gonna close down this one channel

274
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of getting this oil to market,

275
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without causing other channels to arise.

276
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There are members outside of the Western Coalition, China,

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the UAE, that are, you know, perfectly happy

278
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to profitably ship west, ship Russian oil,

279
00:14:24.905 --> 00:14:26.325
you know, from point A to point B.

280
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They're also massive commodities trading, trading firms

281
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that operate with this.

282
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They're, they're constantly scanning the landscape

283
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of opportunities to take some,

284
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buy something from one country at low price

285
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and sell it to another country that needs it at,

286
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you know, at another price.

287
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Uh, they're not so concerned with,

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with the Western sanctions.

289
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So I think these are really difficult to implement.

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And one of the reasons why the embargo

291
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Aspect of the sanctions was so successful is

292
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because you can decide as a country whether

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or not you are going to buy crude from another country,

294
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in this case, from Russia that is under the control

295
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of the eu of the US of Japan

296
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and, and South Korea.

297
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Um, it's, it's very difficult to, to dictate the,

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actions of other players in, in this,

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in this very complex, global geo geopolitical,

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landscape.

Analyzing Sanctions: Impact on Russia's Oil Revenues

00:00:00 - As global conflicts arise. we in the West, in particular, attempt to, attempt to solve these, or at least mitigate them through the use of sanctions, which broadly speaking, are an attempt to punish the bad actors. In, in, in the case of our paper, that would be Russia based in its invasion of Ukraine, by implementing sanctions that reduce their ability to engage in industrial activity at home.

00:00:33 - And in the case of our paper, aspire to reduce the revenue that they get from selling commodities, such as oil and gas. There's actually a growing literature on sanctions, which has been interesting to, to keep an eye on. This is actually a new space for me. I mostly study the energy transition. So this is, this has been really interesting. there are a couple papers that look at, at the sanctions on Russian oil.

00:01:03 - and many co-authors that document using really rich micro data on the shipments of Russian oil. document many of the stylized facts that we present and attempt to, pick apart a little bit in our, in our paper. there's also a, a very interesting piece by, Johnson, Rachel and Wolfram that, that actually looks at the precise, a new e an evolution in the sanctions

Challenges and Strategies in Imposing Sanctions

00:01:36 - I'll talk a little bit about this later in the interview, but there are different components of sanctions, and at, you know, it's, it's actually quite difficult to impose sanctions on a large country like Russia, from whom we buy many critical inputs to the global economy. So it's, it's not just that we, want to punish them, we don't want to punish ourselves, excessively in the process of doing that.

00:02:05 - to the policies, that we've seen. So there are these two papers that I just mentioned on the, the sanctions on Russian oil. and there's a really nice review actually that came out just a couple months ago, by Oleg Skokie and Alina, Kova summarizing the economics of sanctions. So anyone who's interested in this is a Brookings paper, and anyone who's interested in diving into the economics of sanctions a little bit more deeply, I recommend that as, as a very nice starting point.

00:02:38 - and products to continue to flow into the global market. You should think of oil markets as global. So every everyone who's selling and everyone who's buying, it's all gonna clear in a, in a relatively centralized fashion. it's not so much centralized, but it's the prices are gonna be set based on Global market supply and demand forces. And so, one of the aspirations was to avoid a situation

Global Oil Market Dynamics: Embargo and Maritime Service Considerations

00:03:11 - and wasn't able to make it to the market, which would've risked causing a spike, in global oil prices and, and potentially even a global recession. And so there were really two main components of this, actually, really three, although one of them ended up not happening, but there was, an embargo that was at first voluntary, and then subsequently it was formalized whereby

00:03:41 - Japan, South Korea, the United States, decided not to buy from Russia. So this embargo was the first pillar. Then there was a proposal for a maritime services ban. Most maritime oil shipments are going, on western ships using western insurance. And a maritime services ban would've caused it to be illegal

00:04:13 - There was a concern, particularly in treasury, that this would eliminate or, dramatically reduce the supply of Russian oil, from the global market and cause prices to spike. So there was concern about that. And subsequently there was sort of a trade, I would say, between, diplomats in the US and, and in the EU where ins, instead of implementing the maritime services ban,

Impact of Sanctions on Russian Oil Revenue Dynamics

00:04:43 - which essentially said, okay, you can use those maritime services, but only if you sell oil at a price, below the cap. Russian oil production and supply to the global market didn't change much over this period. So one of the, aspirations again, of the, of these sanctions was that, Russian oil will continue to flow to the market in that indeed was the case. And so any punishment that Russia would experience from these sanctions would have

00:05:17 - that they would receive for that oil. We first document that that quantities didn't change. We also have a rich data set on prices that show that actually Russia did, was forced to receive a much lower price on its oil, particularly the oil that it sold, from the Baltic and Black Port Black Sea ports, which previously had been shipped to Europe. but after the sanctions, when Europe

00:05:51 - primarily to India and a little bit to China. There was also a discount on the oil that was coming from the Pacific, port in Kino, which was going, to China, which is a, a much shorter distance. And the, the discount that they received on that was, was smaller. But you can see, if you just look at Russian oil revenues over 2022, at first, their, their revenues were, were flat through most of the year, which was really a,

Impact of Sanctions on Russian Oil Pricing and Global Supply Dynamics

00:06:22 - The global oil price at that point had gone up dramatically out of fear that that Russian oil would, would become scarce and the prices would, would rise in the future. There would be scarcity in the future. but that was offset by a discount that they had to take on their, on their crude. and then over the course of, of the year as global macroeconomic conditions deteriorated, the, the global price of oil declined

00:06:54 - below the price cap of $60. So it was in, in the forties for several months. There, it seems clear to us from, from our analysis that the embargo was very effective in the sense that European countries and others in the Western Coalition have agency over whether they buy Russian oil. This is something that they can control. And when those, previous buyers decided not to continue

00:07:27 - And so that caused this reshuffling of oil supply and demand in the world, and particularly the, the, the redirecting of Russian Euros crude away from Europe and towards India and China. And this caused them to, this caused them to have to take a large discount on that crude because they're shipping it a longer distance.

Impact of Price Cap on Russian Oil Sanctions

00:07:59 - and pay for the, you know, the shipping of this, or they could buy it from, say, the Gulf from the UAE or other sellers, other sellers in the Middle East, which is much closer to them where they wouldn't have to pay so much. So Russia was forced because of those competitive, forces to, to take a discount. Now there's another, the other policy at play here is the price cap. And there is a debate that's going on about the effect

00:08:30 - Now, it's quite clear that the price cap was instrumental in securing the, relaxation of the maritime services ban about which many, Western economists were concerned. and so, the, this treasury proposal of the price cap was what allowed the Europeans to feel, okay, we're going to, we're gonna relax this maritime services ban, but only

00:09:00 - this price cap policy from the US that is going to still put downward pressure on, on Russian oil revenues. Well, as it turns out from our analysis, the other than securing that political victory, which by the way could be very economically meaningful, it's really hard to, to estimate what would've happened had the Maritime services ban gone into effect. but what we also see is a series of prices,

Impact of Price Cap on Russian Oil Revenues

00:09:36 - that the price cap was having much of an effect on Russian oil revenues. So they were, for a long period of time, selling their Euros crude for well below the price cap, which is to say, those shipments could have been, could have occurred using the maritime fleet, the western maritime fleet and maritime services. there was no concern that those shipments would be, would be punished by Western authorities,

00:10:08 - But then as global oil markets tightened in 2023, you saw that, the same, the same crude from, from, from the Euros, from the Black Sea and Baltic Sea were selling well above the cap. And so it, there's just not a lot of evidence that the cap was containing the price of oil, that Russia was able to receive at all. And instead, we can point directly to

00:10:40 - and as well, because there were really only a couple buyers that were large enough to absorb this amount of crude, namely China and India. they had an enormous amount of, of bargaining power that caused them to also, get lower prices from Russia. There's a second premium you might be getting at, which is, which is the insurance risk premium. Yeah. And this is actually, we, we look into this in the paper, and what we find is that this is likely

Challenges in Enforcing Oil Sanctions

00:11:11 - and likely a temporary role early in, in the sanctions, regime. There, there's many instances over the last, you know, decade where there have been tankers that have been attacked, and, you know, the risk premium have increased. And typically what we see is that that still leads the insurance risk premium to be less than, say, a dollar a barrel. It looks like maybe it got a little bit higher than a dollar a barrel of oil, during the early stages of, of, of,

00:11:45 - because I think people realized after, not too long a time that these sanctions were pretty easy to evade. The, the, the price cap was pretty easy to evade either through the use of, maritime, western maritime services when the price is below the cap, which was the case for early 2023, or when the price went above the cap, it just was not being enforced. The, it's very difficult to enforce, this policy.

00:12:19 - sanctioned by Western authorities, really the vast majority of the tanker fleet is operating without cons apparent concern, for, for, you know, being caught violating any sanctions. Moreover, there's, there's a, another thing that's happened throughout this entire period is that because of the potential concern of using Western maritime ships, there's been a large shadow fleet

Challenges in Enforcing Oil Sanctions

00:12:51 - It's operated mainly by China, Russia, the UAE. And they, of course, are able to, to transport Russian crude outside of the concern of, of penalties, through the price cap, because that really only applies to shipments that are made using Western services. So there's some complexity there, but really the insurance risk premium, we think is very small relative

00:13:23 - to pay essentially by shipping its oil much farther. And by the way, this had an extra effect because it was shipping its oil much farther. It also was taxing the maritime shipping fleet itself, which only has a finite number of ships. And so the cost of chartering one of these tankers, went up as well. So it was a longer distance at a higher cost that was a large component of the discount that they were forced to take.

00:13:51 - to implement successfully. If you want to maintain the supply of Russian oil into the global market, then it's very difficult to say, okay, we're gonna close down this one channel of getting this oil to market, without causing other channels to arise. There are members outside of the Western Coalition, China, the UAE, that are, you know, perfectly happy

Challenges of Enforcing Sanctions in Global Trade

00:14:24 - you know, from point A to point B. They're also massive commodities trading, trading firms that operate with this. They're, they're constantly scanning the landscape of opportunities to take some, buy something from one country at low price and sell it to another country that needs it at, you know, at another price. they're not so concerned with, with the Western sanctions. So I think these are really difficult to implement. And one of the reasons why the embargo

00:14:54 - because you can decide as a country whether or not you are going to buy crude from another country, in this case, from Russia that is under the control of the eu of the US of Japan and, and South Korea. it's, it's very difficult to, to dictate the, actions of other players in, in this, in this very complex, global geo geopolitical,

00:15:23 -

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