As the war in Ukraine nears its eighth month with no resolution in sight, Western countries are stepping up efforts to strip Russia of its largest source of income: oil.
The West suspects the Kremlin is bankrolling the invasion with its profits from the continued sale of fossil fuels, which make up over 40% of its budget.
This is why the world’s largest economies making up the Group of Seven (G7) have pledged to put a cap on the price of Russian oil sold around the world.
This cap would prevent Russian cargoes from selling oil that exceeds the still-undefined G7 limit. As a result, Russia would be deprived of a significant portion of the oil revenues that it would otherwise earn without the cap.
According to Russia’s central bank, exports of crude oil accounted for €113 billion in 2021, on top of the €70 billion earned from refined products, such as gasoline and diesel.
This year’s numbers are on a similar trajectory: in the first six months of the war, Russia made €158 billion from fossil fuel commerce, two-thirds of which (€102 billion) came from the oil industry, according to CREA, a research centre that tracks Russia’s exports. The European Union was the largest buyer.
But the situation will soon change as 5 December marks the final deadline for EU countries to ban all imports of Russian seaborne crude. Two months later, on 5 February, they will be compelled to do away with all refined petroleum products.
Out of all sanctions imposed by the bloc, this gradual ban on Russian oil is arguably the most radical decision owing to its potentially disruptive impact on the economies of both Russia and Europe. It was also subject to fraught negotiations between EU countries.
The West now plans to go beyond national embargoes.
An international price cap “will help deliver a major blow for Russian finances and will both hinder Russia’s ability to fight its unprovoked war in Ukraine and hasten the deterioration of the Russian economy,” said US Treasury Secretary Janet Yellen.
But analysts warn the G7 initiative is untested and ridden with risks and unknowns, many of which escape Western control. A botched implementation, they say, could reverberate on a global scale.
A looming clash of cartels
Although interlinked, the EU embargo and the G7 cap are very different.
For the EU, the decision was relatively straightforward, even if controversial: the 27 countries, acting as a single market, resolved to stop buying supplies of Russia’s seaborne oil. (Pipeline flows were exempted at the request of landlocked countries.)
The EU ban was a consumer choice for a domestic market while the G7 price cap is something else entirely.
Countries intend to prohibit their banking, insurance and shipping firms from providing services to Russian companies that sell oil at a price that exceeds the limit set by the G7.
For example: if Russia is selling its Urals crude oil at $75 a barrel and the G7 cap is set at $50 a barrel, Western companies will only be allowed to service Russian tankers that carry oil with a price tag of $50 or below. Anything above that level would activate the prohibition.
In this example, Russia would lose $25 per barrel sold.
But here’s the first catch: Moscow is already selling its Urals crude at a discounted price compared to the Brent benchmark. The Urals-Brent difference, which was less than $2 in January, now hovers around $23 per barrel.
China and India have taken advantage of the discount, ramping up purchases of Russian crude and undermining the West’s united front.
A modest G7 price cap would therefore leave the status quo mostly intact.
If the G7 chooses instead to apply a more stringent and stifling cap, Russia could stop selling barrels altogether, a market disruption that would directly hit developing countries.
“There’s a way to adapt the price cap depending on market trends,” said a senior EU official, who was not allowed to speak on the record. “The G7 cap has to be set at a level in which Russia is still willing to sell.”
Source: Euronews