Hey, Janet, Here’s a Deal! Buy a Russian Toaster for $5 Mil, and Igor Will Throw in 100K Barrels of Oil for an Additional $5 Mil
The Biden Better Than Yous’ most recent brain flash is to impose a price cap on Russian oil. We’re told (by an anonymous senior Treasury official–maybe the ex-economist Janet Yellen herself?) that if we don’t the price of oil could reach $140/bbl.
Oh thank you for thinking of how to save us!!!
Not so fast. That is based on a particular counterfactual: namely, a complete cutoff of Russian oil exports. That counterfactual is totally unrealistic.
Let’s compare to a more realistic alternative–current reality. Russia currently has to sell its barrels at a discount. But even the discounted price is well above the price cap being bruited about. So, if the plan works–which it won’t, for reasons I’ll get into momentarily–Russia would receive a lower price for its oil. Russia’s supply curve slopes up. Yes, it’s pretty steep, but it will export less if the proposed price cap were indeed binding. And if it exports less, world prices will rise. And since the demand curve is pretty steep too, the price rise will be appreciable.
In other words, compared to the current situation, this plan will raise prices if it works.
This is not complicated.
One could rationalize this as a way of reducing Russian oil revenues while having a relatively modest impact on prices. If Russian output was completely price inelastic, the cap would not reduce its output, and world prices would not rise, but Russia would receive less money to blow up Ukraine with.
Brilliant!
Again . . . if the plan works.
This rosy scenario would mean that the plan is oil price neutral. But it would create a huge windfall for any entity that secures barrels at the capped price. That “windfall” is an economic rent, and there will be massive rent seeking to attempt to secure it. And rent seeking will undermine the operation of the plan.
It’s not as if this is a theoretical possibility. Remember why Marc Rich fled the US? Well, one reason was that he sought rents created by Jimmy Carter’s idiotic oil pricing scheme which created different categories of oil with different price caps. “Old” oil was subject to a price cap. “New” oil wasn’t. So enterprising rent seekers like M. Rich found ways to buy old oil and magically transform it into new oil, thereby making bank.
Substitute “Russian” for “Old” and you have Janet Yellen’s current plan. It creates tremendous incentives to evade, and will require tremendous resources to enforce. Uncle Sam no likey, and indicted Rich. But remember Marc died a free man in Switzerland.
Moreover, there are myriad ways to circumvent price controls.
If you are old enough, you’ll remember banks giving away toasters and other small appliances to depositors. Why? Because interest rates on deposits were capped at below market levels. But there was no rule against giving away toasters! So, in essence, interest was paid in toasters.
Think of the possibilities now! Buy a limited edition autographed portrait of Igor Sechin (the old Igor, with a mullet) for $5 million, and Rosneft will throw in 100,000 bbl of oil for $5 million more–a 50 percent discount off the current price, and compliant with the cap! It’s a bargain!

Or maybe buy a Russian toaster for $5 million, and get the 100kbbl for another $5 mil.
Warning: Do NOT accept sausages from Igor.
The bundling possibilities are endless. Side deals run through a labyrinth of shell companies are another way around this.
And don’t forget, one of the main ways that Russian oligarchs got rich in the 1990s was buying commodities at official Russian prices (well below world prices), illegally exporting them and selling at world prices, and then stashing the money overseas.
Meaning that they just have to dust off their old playbooks–they are pros at this. Only this time they will be circumventing foreign price caps instead of domestic ones. And they will have numerous eager accomplices in China, India, South America, and Africa.
And the Russians aren’t the only pros. Do you have any idea about all the invoicing scams in China to circumvent capital controls?
What’s the US going to do in response? Sanction everybody?
In sum, this is a plan that looks great on a whiteboard in economics class, but will not survive contact with the enemy. The enemy being reality.
Um, what Econ class would this look good in? Yolo some $200 dec calls for s&gs
Comment by Phil — July 13, 2022 @ 6:31 pm
Bravissimo – well written.
I do not know why people believe that a large CA surplus is essential for running the war – a much smaller one ie equally sufficient:
1. Russia is self sufficient in everything needed for war (diesel, crude, steel, food, etc.) – the only thing they lack (as does Ukraine) is manpower. Whatever I have forgotten to mention they likely can buy in China (with the Yuan they have on CB balance sheet) and they do have a (growing) surplus with China anyway.
2. a lower price means less export revenues and, ceteris paribus, a lower surplus – but a surplus nevetheless. Moreover, things are not ceteris paribus (see 3)
3. things are not cetris paribus, imports from the west are collapsing (due to sanctions) and less FX revenue is needed, hence the same surplus at a lower price. Moreover, those imports are not critical for the war effort an can be substituted (95%) in China anyway
4. Even if the state were to run a budget deficit – a collapse of oil and gas revenues, it still could be financed by local savings to some extent – given the low indebtness of state and the private sector (and the reduced consumption options of the private sector due to sanctions), this can go on for a long time…
I would not be surprised, if they reduce Oil flows intentionally before the mid-terms, as they are doing with natgas – they can easily afford it..
Comment by viennacapitalist — July 14, 2022 @ 2:45 am
Forgot to mention:
Prof., Sechin’s haircut on the picture would fit you too đ
Comment by viennacapitalist — July 14, 2022 @ 3:12 am
Oh dear Lord. This is where I came in. President Reagan took his first act as President on the very first day that I began working in the oil industry. He abolished oil price controls which, even to a 24-year old neophyte, were clearly inanely conceived and universally gamed. How can anybody be stupid enough to propose this again? Isn’t anyone in this administration a student of history? Wasn’t anyone alive and paying attention a mere 40 years ago? Doesn’t anyone in this administration know how to play games that require thinking, oh I don’t know, ONE MOVE AHEAD?
2,000 PhDs at the Fed and THIS is what they come up with?
Gundlach is right. Replace the Fed with the 2-year. These people are hopeless.
Comment by Michael Cosgrove — July 14, 2022 @ 3:54 am
re: Viennacapitalist point 1
Russia’s birth rate has been catastrophic for years and Putin is known to be very concerned about it. Curiously, war tends to increase the birth rate.
At the height of the Iran-Iraq war the Iranian birth rate was about seven (!). It’s now below replacement level.
Putin is off to Tehran shortly. Perhaps he’s going to ask for some tips.
He may be planning for a VERY long war.
Comment by philip — July 14, 2022 @ 5:24 am
I also did a facepalm when I saw this proposal. Didnât the Japanese big it up at the recent G20?
@Vienna: The crucial, nee critical, thing Russia is lacking in its war effort is access to western tech (electronics, machining kit etc). Not sure theyâd trust Chinese substitutes for this, unless push came to shove. Things are getting so tight that theyâve started using mid-range SAM systems to attack ground targets.
@Philip: yes but Putin is clearly using the war to âaddressâ the yawning gap in birthrates between different ethnicities within Russia. The vast majority of casualties have come from non-Slav regions.
Comment by David Mercer — July 14, 2022 @ 6:21 am
O dear God. Pass the eye bleach, and give us a ‘heads up’ next time would ya?
‘Letâs compare to a more realistic alternativeâcurrent reality. Russia currently has to sell its barrels at a discount. But even the discounted price is well above the price cap being bruited about. So, if the plan worksâwhich it wonât, for reasons Iâll get into momentarilyâRussia would receive a lower price for its oil. Russiaâs supply curve slopes up. Yes, itâs pretty steep, but it will export less if the proposed price cap were indeed binding. And if it exports less, world prices will rise. And since the demand curve is pretty steep too, the price rise will be appreciable.
‘In other words, compared to the current situation, this plan will raise prices if it works.
…
‘This rosy scenario would mean that the plan is oil price neutral. But it would create a huge windfall for any entity that secures barrels at the capped price. That âwindfallâ is an economic rent, and there will be massive rent seeking to attempt to secure it. And rent seeking will undermine the operation of the plan.’
The current western approach to putting Russia in a box seems to be: Step 1 – open box; Step 2 – get inside box; Step 3 – ???
‘This is not complicated.’
Not to anyone with an IQ above room temperature. But this is Janet and Joe we’re talking about.
I’ve been beating my brains as to why we our policy ‘elites’ are plagued with such ineptitude and flat-out mind-melting idiocy. Could it be the result of a dastardly long-term Sino-Russian plan to poison the DC and Whitehall water supplies with ‘enstupidification’ toxins? What we are seeing is beyond retarded – ‘We’re seeing levels of retardation never before thought possible’, as the meme goes; this is ‘three standard deviations’ stuff. At least!
No wonder the third world is flocking to the side of the Sino-Russian ‘strong horse’. Who is there in DC or Whitehall with whom one can have an adult conversation, these days?
Comment by Ex-Global Super-Regulator on Lunch Break — July 14, 2022 @ 10:10 pm
While I hold the conch, and have you lot as a captive audience: What the hell level of carpet-chewing stupidity caused people both at the WEF and in Colombo to think that replacing normal fertiliser with organic fertiliser, en masse and in toto, would be a good idea?
The concept with experiments is that you do them on a small scale, to see if they work well or not, with zero or only minor consequences. You don’t do them on a nationwide scale, with a third-world country’s entire agricultural sector. Because as it turned out the organic fertilisers were about as effective as Brawndo in giving plants what they need, and as a direct result Sri Lanka’s entire economy has collapsed. Collapsed! As in, no longer functions!
I never thought I would see this. The world is – ostensibly, anyway – more educated and better nourished than it has ever been. More hours are spent on education, and
more books are published now, than ever before in history – and yet these sorts of entirely foreseeable and preventable disasters, which really should no longer happen, are happening with greater frequency and severity.
You really have to work hard, to create the conditions that would cause an entire nation’s economy to collapse. It took the German and Russian elites four years and three years respectively to rip the guts out of their economies in the 1910s, and they had to fight a total war to do it. These WEF-Sri Lankan genii accomplished the same feat within a year, in a country at peace.
I can’t process it. It’s as if all of those meme-characters meant to represent the basest level of pond-life brain-stem functioning – I can’t link to them here, I’ll try below – have taken over the decision-making centres of countries and institutions the world over. I quite literally can’t even …
Comment by Ex-Global Super-Regulator on Lunch Break — July 15, 2022 @ 2:02 am
@ Philip
Russia’s birthrate stood at 1.84 per woman in 2022, a little above the 1.78 recorded in the US, for reference. I probably would not call it catastrophic, but it surely does not lend itself for protracted military campains.
https://www.macrotrends.net/countries/RUS/russia/fertility-rate
However, Ukraine’s TFR of 1.23 (2019 figure) looks a lot worse and if you a assume that most fighting is done by western/central Ukrainian males (anecdotal evidence gathered talking to refugees on Viennese playgrounds) in combination with the high absolute casualty numbers in the last months, I see a looming demographic catastrophe which curiously nobody is taliing about (I am happy to be disproved by facts).
I do not think that war raises the birth rate (Vienna in 1930 holds the negative record with 0.7), but high birthrates lead to wars (youth bulghe theory) – in this sense this is an untypical war…
Comment by viennacapitalist — July 15, 2022 @ 2:03 am
Here: for those interested, type ‘meme wojak stupid’ into your search engine, and press the ‘images’ tab.
This is what I am thinking of, when I think of the people who must be making consequential decisions these days.
Comment by Ex-Global Super-Regulator on Lunch Break — July 15, 2022 @ 2:04 am
@ philip addendum:
there seem to be different TFR depending on the source: macrotrends has the Ukrainian TFR at 1.44…
Comment by viennacapitalist — July 15, 2022 @ 2:05 am
@ David
Not sure you have seen this ft article from last week:
https://www.ft.com/content/d413576c-c4d5-4ca6-9050-58f3f8dc3c00
If I understand correctly, it is much more likely that the west is going to run out of what has been discovered to be the most relevant type of weapon component: artillery shells. It looks as if the focus on high tech was a classic misallocation of ressources (I suspect high tech means high margins and more dough for the grifters in congress).
I also see no reason for them to trust the Chinese less than the west, why should that be the case?
Comment by viennacapitalist — July 15, 2022 @ 2:17 am
@ Vienna. I did see reference to the FT report. Not sure I necessarily believe this. Either way 155mil shells arenât that difficult to churn out in volume if the need arises – you can bet that the various defence companies are falling over themselves trying to fix this if they are in short supply (kerching!). On a related note, I read that the Germans unearthed a manufacturer of 30mil cannon shells for the Flakpanzers they promised Ukraine an aeon ago, after Oerlikon or whoever told them to p*ss off. Who knew these specialist companies existed?
The one thing Iâm wondering about is the barrels for all these artillery systems, which apparently are only designed to âhandleâ a thousand rounds or so. I doubt the Russians concern themselves with such mundane trivialities, any funds set aside for replacements having been converted into a superyacht or two.
Also, it wasnât a misallocation of resources. Whoever would have imagined that NATO would be using a rather capable proxy to fight Russia, and fight a war where air assets were barely used? Youâd have been laughed out of the room (or sectioned) if youâd speculated this at a planners meeting even a year ago.
Comment by David Mercer — July 15, 2022 @ 9:42 am
I would place the same degree of faith in any figures on Russiaâs birth-rate as I would in the performance of their athletes at the last few Olympics, both having been greatly enhanced by state-sponsored intervention. Putin is keenly aware of this problem and has been doing his level best to paint the rosiest picture possible. I wouldnât be at all surprised if one of his many motivations to attempt to annex the entirety of Ukraine was to add another c.44 million Slavs to Russiaâs gene pool to counter the countryâs growing imbalances.
Comment by David Mercer — July 15, 2022 @ 9:57 am
@Ex-Global Super-Regulator on Lunch Break: if you look on Gaia-worship as a religion the whole thing makes more sense. Some of the Cardinals may believe the stuff but probably many simply hope to exercise power and accumulate wealth.
Comment by dearieme — July 15, 2022 @ 10:09 am
Re my last, meant to add that the PutinBorg has already done quite well on this front, having assimilated a million+ Ukrainians already by some reports. That said, Iâm not sure transporting them to the promised lands of eastern Siberia and Kamchatka will do much for their sex drive. Quite the contrary.
Actually this could also explain Putinâs general disinterest in the other countriesâ territories heâs needled over the years (plus the likes of Kazakhstan which have provoked his ire of late) i.e. the wrong err âtypeâ of people, more trouble than theyâre worth.
Comment by David Mercer — July 15, 2022 @ 10:22 am
@vienna capitalist
H L Mencken’s prediction has come true
“As democracy is perfected, the office of the president represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day, the plain folks of the land will reach their heartâs desire at last, and the White House will be adorned by a downright moron.”
Comment by philip — July 15, 2022 @ 4:23 pm
A caveat to keep in mind when discussing Russian birth rates is that these are heavily skewed towards the internal Republics / ethnic minorities, and emerging evidence suggests that it is these groups who are doing most of the dying on the Russian side, unsurprisingly (since they are numerous, poor and Moscow might be happy to prune their numbers).
Comment by HibernoFrog — July 18, 2022 @ 3:47 am
Reading this again: if it could make russian oligarchs rich again, just using their old playbooks, it could mean it is a compensation scheme for the russian oligarch’s assets that were sacked by the west…given the same persons can profit from it that suffered the sacking…corvus oculum corvi non eruit…
Comment by Mike — September 10, 2022 @ 2:00 pm