New CEPR Policy Insight - How to implement an EU embargo on Russian oil
While sanctions have intensified against Russia since the invasion of Ukraine, purchases of Russian oil by many countries continue unabated, essentially financially fuelling the war effort. A new CEPR Policy Insight by Anette E. Hosoi and Simon Johnson proposes a strategy to constrict Russia’s global oil export network, by implementing a blanket provision that prohibits all Russian oil and oil product imports, and would make it illegal to carry such cargo in EU-owned tankers. This system of sanctions would provide the legal basis to break existing contracts along the supply chain, and severely restrict Russia’s ability to finance its military operations in Ukraine.
Anette E. Hosoi (MIT, School of Engineering) and Simon Johnson (Sloan School of Management and CEPR)
Figure: Countries importing Russian oil
Crucially, the strategy is designed to avoid a situation in which the EU imposes an embargo on the import of Russian oil, which results only in greater exports to other markets. As the market share of EU-owned tanker fleets is considerable, a prohibition on vessels carrying Russian oil and oil products should be effective at disrupting supply chains.
The strategy will additionally trigger force majeure clauses in most contracts for vessel owners, oil traders, insurance companies, and other providers of financial services – allowing them to break existing contracts without penalty.
The authors suggest the additional implementation of a tightly controlled and centralised system of waivers to underlie the blanket ban, which would allow limited purchases of Russian oil by designated countries and in specified tankers, at a fixed price of $50 per barrel – roughly the average oil price over the past five years. Any country that receives a permit to buy Russian oil should also publicly commit to reduce its consumption of fossil fuels over time.
These international permits would be permissible only under certain conditions: all proceeds from these transactions would go into escrow accounts; funds in these accounts should be used to buy food and medicine only; and supplies purchased under license are shipped to Russia only through a few tightly controlled border crossings. Ukrainian refugees would be hired and trained as cargo inspectors under the proposed structure, with their salaries paid out of the escrow accounts.
In effect, the Policy Insight suggests creating an inverse OPEC, comprised of countries that are committed to limiting Russia’s ability to accumulate hard currency revenue. At the same time, all countries need to work towards long-term solutions to reduce their dependence on oil.
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