Abstract
We study a novel instrument of economic warfare – a price cap on a country's exports – and apply it quantitatively to the price cap on Russian oil. Using parsimonious modeling and field-by-field data on Russian oil, we analyze: who the winners and the losers from a cap are, what the optimal cap level is and whether threats of retaliation through export restrictions are credible. 1) We show that a cap implies producer losses and consumer benefits for the sanctionee. Quantitatively Russian net losses are substantial, equivalent to several percent of its GDP. India and China are the main beneficiaries among oil importers. 2) We show that sanctioning countries' (oil-importers’) benefits are non-monotonic as a function of the price-cap level and derive analytical conditions for when they are net beneficial to them. Quantitatively, a price cap of 50 USD/bbl maximizes oil-importers’ benefits, but every reduction of 5 USD adds Russian losses of 54 MUSD/day (1% of GDP, 30% of pre-Ukraine-invasion military spending). The existence of a price cap leads to gains for oil importers at any cap level above 30 USD/bbl. 3) We show that retaliation through export restrictions is more likely under a tighter cap. Quantitatively we find that the credibility of such threats hinges on Russia prioritizing importers’ harm more than their own profits.
Local Organizer: Niko Jaakkola