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TOKYO — Treasury Secretary Janet L. Yellen was honored by Japan’s leaders after arriving here on Sunday, lunching with the country’s top economists, meeting top executives from Sony and Panasonic and lighting incense in honor of former Prime Minister Shinzo Abe.
But behind the public good humor, Yellen’s hosts have quietly expressed concern about the potential ramifications of her push to create a new global ceiling on Russian oil prices. Japanese officials said they were worried that Russia could retaliate against the price cap by curbing natural gas exports to Japan, a senior finance ministry official said, hurting the country’s economy at an already uncertain time.
Yellen tried to reassure the Japanese that the United States would help meet their energy needs. But she still needs to convince many international colleagues that her plan to cut Russia’s huge revenue from energy sales will not destabilize the global economy. After visiting Japan, Yellen flew to Indonesia on Wednesday for meetings of finance ministers from the Group of 20 industrialized nations, where she will try to get a much wider range of countries to pledge to buy Russian oil only at discounted prices. prices.
If successful, her campaign could deal a major blow to Russia’s military effort and help prevent the US and the rest of the world from sinking into economic recession. If not, the West could continue to send billions to Russia or face a sharp rise in energy prices that would trigger a global recession. Rising energy prices this year have already hit economies in the United States and elsewhere, contributing significantly to the new 40-year high that U.S. inflation hit in June.
Yellen thinks she has a solution. “We had two motivations: to deprive Russia of revenue to the maximum extent possible to disrupt their ability to wage war against Ukraine, and to protect the world economy from the adverse effects of the war,” Yellen told The Washington Post on Wednesday in an interview while traveling between Japan and Indonesia.
Russia’s tax revenue ‘will increase significantly to over $180 billion’
This story is based on interviews with more than a dozen people, several of whom spoke on condition of anonymity to discuss details of private diplomatic talks. They include U.S. and European government officials and other domestic and international experts briefed on the Treasury Department’s price cap lobbying attack.
The campaign kicked off with a private dinner in April attended by the world’s most powerful economic leaders, overcame initial trepidation from other parts of the Biden administration and is now focusing on international leaders outside of America’s closest allies.
Yellen’s high-stakes standoff with Moscow could have huge implications — for the military effort, for the U.S. and global economies and, potentially, for the personal legacy of America’s first female Treasury secretary.
Putin has already raised concerns that he may respond to the price cap by cutting energy exports. International competitors such as India and China could step in and buy Russian oil above the price ceiling, depleting the West’s energy supplies even as Russia continues to make money. And at least for now, major questions remain unresolved about how the price cap will be implemented.
Untangling these diplomatic knots will fall to Yellen. Hampered on many of her top priorities both domestically and internationally, the finance minister is consumed with rallying the world behind her proposal. That made the bookish former Federal Reserve chairman an unlikely commander in the West’s economic war — a macroeconomist directing forces on the financial battlefield.
“If it succeeds, if it succeeds even partially and you get to eat into Russia’s revenue — that’s a huge deal,” Daniel said Fried, who served on the National Security Council under previous administrations and is now on the Atlantic Council, a D.C.-based think tank. “There are huge, huge risks. But you can earn a lot if you can manage it.
Yellen’s performance began in April
On the night of April 21, as the West weighed its next move to counter Russia’s war in Ukraine, Yellen brought some of the world’s most powerful financial leaders together for a private dinner in Washington.
All the obvious potential moves seemed to carry huge risks. Russia has continued to earn billions of dollars in energy sales despite efforts by the US and Europe to impose an unparalleled sanctions regime on the Kremlin. Before the war, Russia supplied about 3 million barrels per day of crude oil. But energy demand jumped as the world recovered from covid, and that number approached 4 million barrels a day, according to Simon Johnson, a professor at the Massachusetts Institute of Technology who was chief economist at the International Monetary Fund. In an effort to rein in prices, the West freed energy from sanctions, and continued purchases of Russian oil undermined its pledges to stand in solidarity with Ukraine. Ukrainian President Volodymyr Zelenskyy has pleaded with allies to immediately stop buying oil from Putin.
As they began work on a sixth package of sanctions this spring, European officials discussed targeting the insurance firms that insure tankers carrying Russian oil – the vast majority of which are British or in the European Union. Removing insurance from ships carrying Russian oil would prevent them from accessing some international waterways while undermining the financing needed to transport the oil.
But internal analysis by Treasury officials found that such a move could send oil prices above $150 a barrel and keep rising, two people familiar with the matter said. (It recently peaked around $120 a barrel, but has since fallen close to $100.) Worst-case scenarios suggest the price shocks could be even higher. A senior Treasury official said estimates suggest that about 3 to 5 million barrels per day of Russian oil could be shut out of global energy markets. The United States may be facing a 1970s-style oil shock, and what began as a limited energy crisis could drag down the global economy. By this point, Yellen was publicly confident that the war would not lead the US into recession. But if Europe enforces the ban on insurance companies, that calculation could change.
Treasury officials had already begun discussing the idea of a price cap when the Europeans began enforcing their ban on insurance. Treasury officials understood that the insurance ban could be an ideal mechanism to implement the price cap proposal, giving them a vital airlock in the Russian oil supply chain. “The question has always been, ‘How do you implement the price ceiling?'” Yellen told The Post. “It was a great enforcement mechanism.”
Yellen made her first major presentation to the economic leaders of the Group of Seven allies as they gathered in the Treasury Department’s second-floor dining room, which overlooks the White House. Simply cutting off Russian oil exports to the West could backfire, Yellen warned. Rather than depriving the Russian war machine of revenue, the move could raise the price of oil — meaning Moscow would make even more money than before. Sanctions also risk ravaging Western economies by starving them for energy, Yellen warned, creating a domestic political backlash that could erode support for the war.
When Yellen instead set the price ceiling, some finance ministers immediately raised questions about how it might work. But Yellen argued that the plan could allow the West to solve a nasty financial and diplomatic puzzle, allowing the flow of Russian oil while reducing the Kremlin’s single biggest source of revenue. The ministers began to speak.
Yellen sent top aides to global campaign
Yellen’s plan has met with skepticism both at home and abroad. State Department and Energy Department officials were initially cool with him, according to two people briefed on internal administration discussions. Energy aides are concerned about the possibility of Russian oil leaking outside official channels, which would make it difficult to trace, the people said. (An energy official said in a statement that the department “carefully reviews any policy that we create or that we are asked to analyze by other parts of the government,” but that it “fully supports” the effort. State Department officials have also now joined the diplomatic push for the cap.)
Some European officials also initially bristled at the idea. Germany was already struggling to convince EU allies to support a phased-in oil embargo. The price cap was first seen as a potential distraction from that effort. (Treasury officials have defended the cap as a way to augment, not replace, the oil ban, trying not to dictate Europeans’ decisions.)
Three of Yellen’s top aides — Wally Adeyemo, the deputy treasury secretary; Elizabeth Rosenberg, Assistant Secretary for Terrorist Financing and Financial Crimes; and Ben Harris, assistant director for economic policy—were sent to lead the effort internationally. They flew to Brussels and met with senior European officials, answering questions and concerns raised by the Germans, French, British and others at the G7. The European Commission played a key role in winning allies.
Sometimes Treasury negotiators found that different branches of government in the same country would have different views on the plan. When Rosenberg and Harris reached an impasse, or if any government seemed uneasy about the idea, Yellen would call a senior official to continue negotiations. After months of back and forth, the G7 approved the idea in principle in June. While it remains unclear how committed European powers are to actually carrying out the plan,…
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