Julien Daubanes, Technical University of Denmark - DTU

"The Dynamics of Evasion: The Price Cap on Russian Oil Exports and the Amassing of the Shadow Fleet"

Abstract

This paper examines the effectiveness of the price cap on Russian oil exports implemented in December 2022 by Western countries in response to Russia's invasion of Ukraine. We develop a dynamic model that accounts for Russia's incentives to build evasion capacity through a shadow fleet. Our analysis combines dynamic modeling, empirical calibration, and numerical simulation to assess various policies intended to reduce Russia's oil profits, which fund its invasion. While the initial proposal was to ban insurance and all other Western services used to transport Russian oil by sea, the sanction finally adopted by Western countries allows the use of Western services but only if Russia receives no more than $60 per barrel (the "price cap"). We find that both the price cap and the service ban significantly (by more than 23%) reduce the present value of Russia's profits compared to no policy. The $60 price cap reduces the present value of Russia's oil profits slightly more (by 2%) than a service ban while avoiding the spike in the world oil price that a service ban would have produced. These results remain robust under various assumptions about global demand elasticity and discount factors. More generally, a cap lower than $60 reduces the present value of Russia's profits slightly less than a $60 cap despite its greater immediate impact on profits. Our calibrated model also allows us to examine current policy debates about how increased enforcement of the cap and of sanctions eliminating a segment of the shadow fleet would affect Russian profits and the world price.

Contact person: Peter Birch Sørensen