The Honorable Janet L. Yellen

U.S. Department of Treasury

1500 Pennsylvania Ave., NW

Washington, D.C. 20220

                                                                                                        October 11, 2022

Dear Secretary Yellen:

We are a group of economists with expertise in oil markets, international trade, and political economy, writing to express our support for the proposed price cap on Russian seaborne oil exports.

As envisaged by the G7, the price cap would set a maximum price that Russian oil could be traded in conjunction with G7 services. This price, set in dollars, would be substantially below the world price, yet above the marginal cost of production in Russia. To use US, UK, EU, and allied financial services (such as insurance, credit, and payments), market participants will need to attest that all qualifying purchases are at or below this threshold.

Given the importance of participating countries for global finance and for shipping, compliance with this cap will create pressure for a lower price on Russian oil moved by tanker. While we do not expect all trades will be performed under the price cap, its existence should materially increase the bargaining power of private and public sector entities that buy Russian oil.

The price cap maintains economic incentives for Russia to produce current volumes. In April 2020, when the price of the Brent benchmark was close to $20, Russia continued to supply oil to world markets, because that price was above the cost of production in many or most existing Russian oil fields. Russian has little or no available onshore storage, and since shutting down and restarting oil fields is expensive and risky, it was more profitable for Russia to continue producing in the presence of low prices. The price of Brent now is around $96 per barrel, but Russia receives significantly less due to the “Urals discount”. This discount is caused by the perceived stigma of buying Russian products for some customers; they decline to bid for Russian oil, which reduces effective demand and lowers the price that the remaining customers need to pay.

The oil price cap proposal would effectively institutionalize the Urals discount and consequently further lower the dollar value of the Russian government’s primary revenue stream.

Under its Sixth Package of Sanctions, the European Union has already adopted a complete ban on using European financial services to transport Russian crude and petroleum products to any destination, along with a complete embargo on EU imports of Russian oil. These measures are due to go into effect on December 5^th.

If the EU implements these measures without a price cap, we would expect the supply of oil to the world market to decline – and benchmark oil prices (e.g., Brent) to rise.

The US and its allies are likely better off with a price cap on Russian oil, and we are encouraged that the EU is making progress on including the price cap in its next round of sanctions. If the world price of oil rises and the cap is effective, Russia will not receive any windfall. And the cap stands a good chance of lowering Russian revenue even if formal participation is limited – by strengthening the negotiating position for anyone willing to buy Russian oil.

According to the IEA, Russian oil exports were 7.6 million barrels per day in August, down only slightly (390 kb/d) from pre-war levels. With revenue from coal and natural gas exports likely to decline and not rebound soon, the Russian government needs substantial oil revenue (in dollars) to pay its bills and keep the ruble from collapsing. The price cap as proposed gives the Russian government the incentive to continue to supply the world market but reduces the revenue available to fund their brutal war in Ukraine.

For these reasons, we support the implementation of the price cap and are hopeful that you and your international colleagues will make progress implementing it soon.

Yours sincerely,

Simon Johnson, Sloan School of Management, MIT

Daniel Berkowitz, Department of Economics, University of Pittsburgh

Severin Borenstein, Haas School of Business, University of California, Berkeley

Steve Cicala, Department of Economics, Tufts University

Kimberly Clausing, UCLA School of Law

Anastassia Fedyk, Haas School of Business, University of California, Berkeley

Jason Furman, Department of Economics and John F. Kennedy School of Government, Harvard University

Luis Garicano, Visiting Professor of Economics, Columbia Business School

Yuriy Gorodnichenko, Department of Economics, University of California, Berkeley

Ryan Kellogg, Harris School of Public Policy, University of Chicago

Christopher Knittel, Sloan School of Management, MIT

Lukasz Rachel, Department of Economics, University College London

Kenneth Rogoff, Department of Economics, Harvard University

Carl Shapiro, Haas School of Business, University of California, Berkeley

Robert S. Pindyck, Sloan School of Management, MIT

Rick Van der Ploeg, Department of Economics, University of Oxford

By Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management

The plan is based on sound economic and fiscal assumptions and allows for the implementation of policy initiatives without tax increases.

This note provides my assessment of the financial viability of Stacey Abrams’ budget plan for the state of Georgia through fiscal 2028. This assessment was carried out at the request of the Stacey Abrams campaign for Georgia’s governor.

Stacey Abrams’ budget plan is fiscally prudent. The plan is based on sound economic and fiscal assumptions and allows for the implementation of Abrams’ proposed policy initiatives without the need for tax increases.

The most important assumption underlying the budget plan is the projected growth in tax revenues, which in turn depends on the state’s economic outlook. Between fiscal 2023 and fiscal 2028, Abrams expects state tax revenues to grow by 4.6% per annum, in nominal terms. This projection incorporates changes in the state’s tax code resulting from the implementation of House Bill 1437 during the budget horizon. Following its initial implementation in 2024, the tax cuts by House Bill 1437 are triggered only after specified budget benchmarks are achieved, which is not expected until fiscal 2028.

The anticipated growth in tax revenues between fiscal 2023 and fiscal 2028 is consistent with the 4.9% per annum growth in Georgia’s tax revenues over the past quarter century and 7.4% per annum growth over the past decade (see Table 1 below; all figures are in current dollars). This is consistent with reasonable expectations for the continued robust growth of Georgia’s economy. For example, in a recent economic forecast, Dr. Rajeev Dhawan, Director of the Georgia State University Economic Forecasting Center, expects personal income growth of close to 6% per annum through calendar year 2024, and gross state product growth of about the same during the period.

It is important to note that the national and Georgia economies are not expected to suffer a severe recession during the budget horizon, although the economy’s growth is expected to materially weaken through calendar year 2023. However, the impact of the weaker economy on nominal tax revenue growth is mitigated in part by the expected high inflation during the next two years. Inflation is projected to steadily moderate, but it is unlikely to be quickly fall back in line with the Federal Reserve’s inflation target of 2% (measured by the national core consumer expenditure deflator).

Abrams’ policy initiatives would be incorporated into the budget by fiscal 2027. The costliest proposal is to increase salaries for teachers and law enforcement. For teachers, the cost is spread over four years, with the first $2,750 increase in annual pay occurring in fiscal 2024. By fiscal 2027, the entire proposed $11,000 annual salary increase would be in place. The budget cost for these higher salaries increases from just over $400 million in fiscal 2024 to $1.6 billion when fully implemented in fiscal 2027. Law enforcement salaries increase by $6,000 in fiscal 2024 and again in fiscal 2025 at a budget cost of $155 million by fiscal 2025. The cost of Abrams’ proposed expansion of Medicaid coverage is also significant, estimated at $297 million in FY 2024 and growing between $16 million and $18 million yearly after that.

Given the expected tax revenue growth in Abrams’ budget plan and the amount of the state’s current undesignated reserves, the costs of Abrams’ policy initiatives are adequately funded through the budget horizon. In other words, the state will have enough revenue to cover her policy initiatives while also maintaining an adequate reserve with no tax increases.

In addition, there is a substantial cushion provided by currently available reserves. According to the State Accounting Office FY 2022 Report on Revenues and Reserves, the state ended Fiscal Year 2022 with a General Fund balance of $11.82 billion, of which $5.24 billion constitutes the revenue shortfall reserve, which is constitutionally capped at 15% of prior year revenues. This leaves $6.58 billion in undesignated reserves, which are available for appropriation. The Abrams budget plan assumes that the undesignated reserve will fund the gas tax suspension through December 2022 (costing $1.6 billion), that the Abrams proposed tax rebate is implemented ($1 billion), and that the Abrams FY 2024 budget initiatives are funded ($1 billion).

The undesignated reserve will then total roughly $3 billion, allowing for $900 million to fully fund Abram’s budget initiatives in FY 2025 through FY 2027. In FY 2028 the budget will no longer be supplemented with undesignated reserve revenues.

While there is significant uncertainty in any economic and budget projection, the Abrams budget plan for Georgia is appropriately prudent and does not rest on overly optimistic revenue assumptions. The Abrams budget plan strikes a reasonable balance between fiscal prudence and expanding the state’s support for a range of initiatives, without raising taxes.

March 3, 2022: By Oleg Ustenko, economic advisor to the president of Ukraine, and Simon Johnson, MIT. Contact: sjohnson@mit.edu. This post is taken from a one page memo, currently circulating.

Sanctions imposed in response to Russia’s invasion of Ukraine are not degrading Russian energy production capacity or putting enough pressure on Russian financial markets.

On the contrary, the price of Brent crude has risen from $80 at the end of 2021 to $90 pre-invasion and reached $113 per barrel today.

The discount on Urals crude relative to Brent has widened since the invasion, but the net price to Russian exporters has still increased by $5-10 per barrel.

IEA reports daily Russian oil export volume is steady at 5 million barrels per day, so oil revenues are up $50-100 million PER DAY since February 24^th.

Russian gas exports to Europe have not been impacted: “the export value of Russian piped gas to the EU alone amounts to USD 400 million per day”.

Total Russian energy exports are generating $1.1 billion per day according to the IEA. This has increased, not decreased, since the invasion began.

The Russian current account surplus in January 2022 was $19 billion, about 50% higher than usual for that month.

The latest sanctions created a positive terms of trade shock for Russia, with a rise in the price of its exports relative to its imports. The only way to put real pressure on Russian public finances is to buy a lot less oil and gas from Russia. Even better: stop all purchases from and payments to Russia.

Recommendations

1. The US should impose full sanctions, including secondary sanctions, on all Russian oil and gas exports. As a major exporter of refined products made from Russian oil, Belarus also needs to be sanctioned fully.
2. IEA estimates that oil production around the world can be boosted quickly. Additional world supply can add at least 3 million barrels a day if other producers are persuaded to support the US lead. To the extent Russia can sell on grey markets, this will be at a steep discount. World oil supply will remain about the same, but with significantly less revenue for the Russian government to use in destroying Ukraine and threatening the world.
3. These measures will encourage the EU to significantly reduce its use of Russian gas, both immediately and through 2022. Energy conservation and development of alternative supplies should also be pursued as a top priority, as suggested by the IEA and Bruegel (two papers). Reducing gas purchases from Russia is essential for global security and any resumption of regional stability.