U.S. Push for Exceptions in Europe’s Sanctions on Russian Oil Gains Traction

After weeks of infighting, the EU in early June approved a ban on insuring shipments of Russian oil alongside a ban on imports of Russian oil that is set to go into effect this later year. Because many shipments of Russian oil are insured in the EU and U.K., Treasury Secretary

Janet Yellen

has repeatedly said she is concerned that the EU’s plans could take Russian oil off the global market and further drive up prices.

While the U.S. and EU have moved to ban Russian imports, many developing countries as well as China and India continue to purchase oil from the country. Ms. Yellen said she was discussing creating a carve-out in the insurance ban to allow shipments to low-income and developing countries that fall under a price set by the West.

“You could think of it as an exception to that ban,” Ms. Yellen said during a press conference Monday in Toronto, confirming a Wall Street Journal report that the idea was under consideration. “We think a price exception is also an important way to prevent spillover effects for low-income and developing countries that are struggling with high costs of food and energy.”

Ms. Yellen’s push for a price cap has faced deep reluctance in Europe to take any step to unwind a hard-won sanctions package on Russia.

But arguments from Ms. Yellen and the U.S. that the oil sanctions are raising energy prices—which in turn could help Russia earn enough revenue from higher prices to offset lower sales volumes—have started to shift views in some European capitals, including London and Brussels, according to officials familiar with discussions. Still, skepticism persists about how to create an effective mechanism to enforce a price cap, according to the officials.

A group of Treasury officials traveled to Europe in the days after the EU approved the oil sanctions, as Ms. Yellen continued to publicly call for a price cap. She has sought to simultaneously limit Russia’s revenue from oil sales while avoiding global price increases.

A senior EU official said the U.S. proposal is “attractive when you see what the intention is” but “there are many questions that first need to be looked at” on how a price cap would function. European officials say that while a number of ideas have been floated in talks, there is plenty of work still to do to identify a mechanism that would work.

President Biden is set to travel this weekend to Europe to meet with the leaders of the Group of Seven wealthy nations, which includes the EU, U.K., U.S., and Canada. There is no expectation in Europe that Western nations will reach an agreement on the proposal during the summit.

Chrystia Freeland,

the deputy prime minister of Canada, who met with Ms. Yellen in Toronto, said that Canada supported creating a price cap for Russian oil. She said the Europeans would need to accept it for it to come into place.

“The path forward here is really to be talking with our European partners and to recognize, you know, how central they are in the decision making here,” she said.

One particular problem, officials say, is that insurers will have to decide in advance whether to insure a tanker without knowing whether the vessel will comply with Western price cap rules. Others have raised questions about what price to set as the cap and how to ensure it reduces Kremlin revenue without dissuading Russia from selling the oil, which would tighten supply concerns. U.S. officials have been studying break-even costs for Russian oil producers, as well as shipping methods, according to a Treasury official.

German officials have long argued that a price cap on energy appears to be impractical and unenforceable.

Any agreement would have to persuade all 27 EU member states to adjust their insurance-ban sanctions and would need to bring on board the U.K., which dominates the reinsurance industry. Norway, whose firms also hold a significant proportion of the protection and indemnity insurance market, implements EU sanctions, so any adjustment by Brussels should automatically bring it along.

Winning backing from all EU member states for a price cap proposal may not be straightforward. Greece, Cyprus and Malta successfully pushed for a longer phase-in period for the oil sanctions ban and scuttled a proposal to ban European tankers from carrying Russian oil. European diplomats aren’t eager to relitigate that fight.

Western officials have struggled with how to both cut off Russia’s ability to finance its invasion of Ukraine and still shield the global economy from a possible recession. Russia continues to receive significant revenue from its sales of oil and gas, while oil prices have soared this year, though have retreated somewhat in recent weeks, trading at around $100 a barrel on Wednesday. Inflation has become a problem across the world, and the Biden administration has recently labeled it as its top economic policy problem.

Officials in Ukraine support the idea of a price cap, and Oleg Ustenko, an economic adviser to President

Volodymyr Zelensky,

said Ukraine is also seeking to prevent further inflation.

U.S. consumers are facing inflation running above 8%, “but here in Ukraine we are talking about inflation of 20% plus, so it’s also in our interest,” Mr. Ustenko said. “We are mitigating possible hikes on energy markets because of this plan which is actually very important for everybody including the EU, including us as well,” he said.

“I am very much in favor of this plan. I think this is something that we have to do immediately,” Mr. Ustenko said.

—Daniel Michaels contributed to this article.

Write to Andrew Duehren at andrew.duehren@wsj.com and Laurence Norman at laurence.norman@wsj.com