Remarks by Deputy Secretary of the Treasury Wally Adeyemo at the Center for a New American Security (CNAS)

As Prepared for Delivery

Thank you to the Center for a New American Security for hosting me and to Richard for his thought leadership on how best to secure America’s future.

Today, the brave men and women of Ukraine continue their heroic fight against Russia’s illegal invasion. The United States and our allies and partners are steadfast in our support of the Ukrainian people, providing Ukraine’s armed forces what they need to defend their country.

While my colleagues at the Defense Department are focused on ensuring that Ukraine has the weapons to defend itself from Russia’s aggression, we at the Treasury Department are working to deny Russia the weapons and material they need to fight their war of choice. Already, our sanctions and export controls have made it challenging for Russia to replace the more than 10,000 pieces of equipment they’ve lost.

We have a simple two-part strategy to frustrate Russia’s military industrial complex. First, to deny the Kremlin’s ability to use the funds they have to buy the weapons they need. And second, to reduce those funds and force Putin to make hard choices between funding his war or propping up Russia’s economy.

Today, I want to highlight one aspect of that second prong—the way the price cap policy is cutting Russia’s revenue and constraining their war machine. In just six months, the price cap has contributed to a significant decline in Russian revenue at a key juncture in the war. Now, Russia is considering a desperate series of changes to its tax policy that would institutionalize the deepening discount on Russian oil.

In December the price cap coalition—the G7, EU, and Australia—set a limit on the price Russia can charge for its crude oil if it is traded using services from a coalition country—that is, if a shipment of Russian crude is sold with insurance or shipping from a coalition country, it cannot be sold for more than $60. Because 90% of global shipping insurance and a majority of financing and payments services for the oil trade are provided by these countries, this creates a powerful incentive to comply with the cap.

This policy is designed to accomplish two objectives that might otherwise be in tension: to lower the revenue Russia receive from its oil exports while keeping Russia’s oil on the market.
At the outset, the price cap was met with doubt that it would be workable. Today, there is clear evidence of its success, a testament to President Biden and Secretary Yellen’s leadership and success in building a global coalition and our ability to work hand-in-hand with the private sector.

Russian government oil revenues in the first five months of 2023 are down nearly 50 percent from a year prior. This decline in oil revenue has occurred despite the fact that Russia is exporting more crude oil today than it did at the onset of the war. Despite higher exports, Russia is making less money because its oil now trades at a discount of 25 percent relative to other global oil.

The success of this policy benefited consumers globally. In addition to promoting energy market stability, it has provided leverage to buyers of Russia oil—who are predominantly emerging markets—by setting a ceiling on what Russia can get elsewhere.

Russia’s Response

Beyond the data, there are clear signs of progress. Russia’s Finance Minister has cited the price cap as a driver of reduced tax revenues and a ballooning budget deficit. Analysts from Russia’s central bank have said the price cap and EU sanctions present “new economic shocks” that could “significantly reduce” Russia’s economic activity.

In addition, Russia is reportedly pursuing changes to the way it taxes oil to respond to the divergence between Russian oil and the global market price. This change will constrain Russia’s oil companies going forward, leaving them with fewer funds to invest in exploration and production and over time diminishing the productive capacity of Russia’s oil sector.

Let me provide some important details about the steps the Kremlin is contemplating to put a floor on the revenue losses caused by the price cap. Instead of continuing to tax Russian oil sales based on the market price of Russia’s dominant blend of oil—Urals—the changes the Kremlin has proposed would calculate taxes by assuming a price that is a fixed significant discount to Brent, the global benchmark. Under this approach, Russian oil firms would see their taxes go up, even as the price cap continues to drive their actual revenues down.

Let me be clear, the Russian government is prepared to implement a tax regime for its most valuable commodity that locks in a massive discount because of the impact of the price cap and the collective actions of our Coalition.

This illustrates well the very difficult choices our sanctions and export controls have forced the Kremlin to contemplate. When it comes to the price cap, either Russia continues to accept the steep discount that our actions have imposed on their energy exports, or they institutionalize it themselves with these changes to their tax regime. No matter which choice they make, they will have significantly less revenue to fund their war than they did before the cap was put in place.

The Kremlin is also investing in building its own seaborn oil ecosystem in order to ship oil without using western services. For example, the Russian central bank has guaranteed about $9 billion in a reinsurance scheme intended to replace western reinsurance. This is money the Kremlin cannot invest in tanks and other weapons to fight its war illegitimate war in Ukraine.

Countering Evasion

While we do not see widespread signs of evasion, we know Russia is seeking ways to evade the price cap, as well as our other sanctions and export controls. We are laser-focused on preventing evasion in collaboration with our coalition partners and the private sector. For example, in response to suspected evasion, insurers and flagging registries have stopped serving shipping companies whose activities present an unacceptable risk. And even in spite of their evasion efforts, the data is clear that Russia is making less money from its oil.

While we will continue to take actions to reduce Russia’s revenues, we are also focused on making sure Russia cannot use the money it has to buy the weapons the Kremlin needs to fight its illegitimate war. Against the modern equipment Ukraine is using on the battlefield, Russia is in some cases fielding tanks designed and built in the 1940’s and 1950’s, among other obsolete technology. The historic sanctions and export controls our coalition have put in place are disrupting Russia’s access to ammunition, electronics, and other goods necessary to power Moscow’s war machine. I want to be clear to companies, individuals, and countries that we and our coalition will hold accountable those who provide material support for Russia’s war effort.

Our work is not over. We will continue working with our coalition partners to take the steps needed to support the people of Ukraine against this illegitimate invasion. Thank you all again for having me here today, I’m looking forward to my discussion with Richard and to your questions.

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