The U.S. and E.U. need a new plan to cut Russian oil profits

The leaders of the Group of Seven nations, or G-7, will assemble Sunday in the Bavarian Alps. Dominating the discussions will be the biggest war in Europe since 1945 and its ramifications. With Russia still waging an offensive on Eastern Ukraine, increasing the effectiveness of economic sanctions on the Kremlin should be an urgent priority for the group, which includes President Biden and his counterparts from Germany, Japan, Italy, Britain, Canada and France, as well as representatives of the European Union. Specifically, they should acknowledge that Europe’s efforts to block oil imports from Russia are proving ineffective in the short run and must be modified.

Here’s the background: The United States and Canada have banned their already tiny imports of Russian crude, a relatively painless step for these two oil-rich nations. Such a ban is much more difficult for the 27 members of the European Union, which receive 29% of their collective crude oil imports from Russia; some E.U. countries are far more dependent than that. The E.U. members paid President Vladimir Putin’s state-owned oil company a combined $108 billion in 2021, according to the World Economic Forum. On June 3, the E.U. adopted a ban on Russian crude, but it won’t take effect for seaborne imports until Dec. 5, and for other petroleum products until Feb. 5, 2023.

Once that kicks in, Russia might find itself faced with a permanent reduction in demand for its oil, which, in combination with other sanctions, will erode its productive capacity, and earnings. In the meantime, Europe has no easy alternatives. It must import Russian oil, albeit in reduced volumes. E.U. nations have paid about $33 billion for Moscow’s oil since Mr. Putin started the war on Feb. 24, according to the Centre for Research on Energy and Clean Air, a Finland-based nongovernmental organization. And the International Energy Agency said in May that Russia’s oil revenue had actually grown 50% since Jan. 1 — to $20 billion a month. Russia has shipped crude to China and India at distress-sale prices but in larger volumes. Some of it is being refined and re-exported to Europe.

For now, therefore, oil money is helping the Russian economy weather the West’s sanctions — the ruble has actually appreciated relative to the dollar since the invasion. It’s urgent to dampen this flow of cash.

Treasury Secretary Janet L. Yellen is working on a plan whereby the United States and other backers of Ukraine would pay Russia no more than the cost of production for its oil, using Western control over insurance and finance for Russian oil shipments to force Moscow to go along. Russian oil would still flow into world markets, helping the global economy, but Russia would get less money for it.

The wisdom of this proposal is that it targets what matters most — which is not the flow of crude oil out of Russia but the flow of hard currency in the opposite direction. Persuading the G-7 to support it is one of the best ways Mr. Biden can help Ukraine now.