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Why the Russian Oil Price Cap Won't Work

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Summary

This article examines the Russian Oil Price Cap, a self-destructive idea proposed by the US Treasury Secretary, Janet Yellen, to restrict Putin’s primary source of revenue for his illegal war in Ukraine. The article argues that the cap won't work as it is in US dollars, while Russia uses Roubles. Furthermore, taxes are paid in Roubles, and the Russian economy does not have an interest in exporting anything to the West due to the current sanctions. The article suggests that the price cap will not have an effect on Putin’s war efforts, but on the contrary, it will raise energy prices in the West and give Asia an energy bounty.

Q&As

What is the Russian Oil Price Cap?
The Russian Oil Price Cap is a plan to impose a price cap of $60 on Russian Federation oil and refuse insurance to any ship carrying Russian oil above that price cap, denying Russia the revenue it needs to prosecute its action in Ukraine.

How does the Russian government use taxes?
The Russian government uses taxes to commandeer the resources of the nation via votes in the legislature. Money is just a way of shifting the burden of that confiscation around the nation.

What is the impact of the price cap in the West?
The impact of the price cap in the West will be increased uncertainty and risk which will raise energy prices across the board.

How does the Russian banking system ensure that oil companies get enough Roubles to pay their staff, suppliers and taxes?
The Russian banking system ensures that the oil companies get enough Roubles to pay their staff, their suppliers and the government’s tax by discounting FX settlement balances into roubles as required.

How can the balancing item on the balance sheet be made visible?
The balancing item on the balance sheet can be made visible by splitting the balance sheet into two departments: one containing all financial items actually denominated in the reporting currency, and one containing everything else.

AI Comments

👍 This article provides a comprehensive overview of the potential impacts of the Russian Oil Price Cap and the underlying mechanisms of national economies and their currencies.

👎 This article fails to provide an adequate solution to the problem of the Russian Oil Price Cap and its potential impacts on the global economy.

AI Discussion

Me: It's about the Russian Oil Price Cap that the US Treasury Secretary proposed. It argues that the plan won't work because Russia doesn't use dollars and taxes are paid in roubles. It also goes into how governments settle payments and the impact the price cap will have on the West.

Friend: That's interesting. So basically, the US is trying to use the price cap to restrict Putin's primary source of revenue for his illegal war in Ukraine. But this article is saying that it won't work because Russia doesn't use dollars and the exchange rate between dollars and roubles is already being propped up by the Russian banking system.

Me: Exactly. It also explains how governments settle payments and how the price cap will have an impact on the West. It's likely that energy prices will go up and the Western economy may suffer due to the increased uncertainty and risk caused by the price cap.

Action items

Research the concept of Beardsley Ruml and the Federal Reserve to gain a better understanding of how national economies and their currencies work.
Explore the concept of Keynes' How to Pay for the War and the implications of governments commandeering resources from the private sector.
Join the New Wayland community on Discord to discuss the article and other topics related to Modern Monetary Theory.

Technical terms

Price Cap: A price cap is a regulatory measure that limits the maximum price that can be charged for a product or service.
Neoliberal Hubris: Neoliberal hubris is the belief that free-market policies are the best way to solve economic and social problems.
Category Mistake: A category mistake is an error in logic in which an object or concept is incorrectly classified as belonging to a different category than it actually does.
Roubles: The rouble is the currency of the Russian Federation.
Beardsley Ruml: Beardsley Ruml was an American economist and the chairman of the Federal Reserve from 1941 to 1946.
Taxes for Revenue: Taxes for revenue is the idea that taxes are necessary to fund government spending.
Reichsmarks: The Reichsmark was the currency of Germany from 1924 to 1948.
Exchange Rate: The exchange rate is the rate at which one currency can be exchanged for another.
FX Settlement Balances: FX settlement balances are the balances of foreign exchange transactions that must be settled.
Asset Purchase Indemnity: An asset purchase indemnity is a type of insurance that protects the buyer of an asset from any losses that may arise from the purchase.