Russia continues to find ways to sell its oil and fund the war in Ukraine despite the West’s best efforts to throttle the Kremlin’s most important source of revenue while the West continues to come up with new and unconventional efforts to try to cut that flow of oil and revenue off.
At the three-day G7 summit that began in the Bavarian Alps at the weekend, leaders discussed mechanisms for capping the price of Russian oil exports as part of a new push to tighten the ever-expanding range of financial sanctions imposed in response to Russia’s invasion of Ukraine.
Vladimir Putin has managed to keep Russia’s revenues ticking over but a new plan is being developed to turn the tap off.Credit:AP
The summit is also considering proposals to ban imports of Russian gold, Russia’s second-largest source of revenue.
The West’s previous efforts to squeeze Russia’s oil revenues have been circumvented by the Russians, who have found more-than-willing buyers – at heavily discounted prices – in China and India. Attracted by discounts of up to $US35 a barrel from international market prices, they have been buying up to half Russia’s exports. Brazil and South Africa are other markets Vladimir Putin has identified as having increased their purchases.
Even at the lower prices, the big surge in the international price of oil has compensated Russia for both its lower export volumes and the discounts.
The most recent attempt by the US and Europeans to sever Russia’s economic lifeline came earlier this month, with a European Union ban on seaborne imports and an EU and UK agreement to ban insurance for ships carrying Russian oil. With the UK, Europe and US dominating the insurance and reinsurance markets for shipping that’s a potent threat to Russia’s ability to get its oil to customers.
That ban, which the International Energy Agency has said could shut down more than a quarter of Russia’s pre-invasion exports, will phase in over the second half of this year. In the meantime, Russia has been scrambling to put in place a government-backed insurance scheme of its own.
The proposal to cap the price of Russia oil is an interesting one, albeit that there are major question marks over its effectiveness unless the West can convince China and India to observe the price ceiling, which presumably would be well below even the discounted prices they are paying today.
The additional discount might be alluring, although compliance with the gap would jeopardise the “no limits” friendship China and Russia unveiled just ahead of the invasion and see China joining a sanctions effort that it sees as a threat to its own longer term interests and security.
The ambition of the proposal is also to put pressure on OPEC, which sells the bulk of its oil to western economies. By slashing the price but allowing Russia to continue to export (which might mean some changes to the insurance ban) capping the price could encourage OPEC to sell its oil at lower prices to maintain its share of the market.
Russia’s incursion into the key Asian markets that the Saudis, in particular, have seen as their own might already be generating friction between OPEC and Russia. If Russia were to respond to the threat of price caps with a shutdown of its oil and gas exports (which it has been hinting it might do and which would cause Europe, in particular, real economic damage), the West might also need OPEC to step into the breach and increase production.
If the G7 can put a stopper in Russia’s oil lifeline, the pressure on Putin to devise a face-saving way to resolve the conflict would mount.
If it could be imposed effectively, a price cap could have a particularly beneficial impact on the (ex-Russian) global economy. Soaring oil prices since the invasion have played a significant role in the surge in global inflation rates.
Capping the price through what would essentially be the creation of a buyer’s cartel could dampen the energy shocks now reverberating throughout the global economy and help bring inflation under control.
Russia is exacerbating the impact of the energy crisis in Europe by throttling the flow of gas through its Nord 1 pipeline. It could respond to any price cap on oil by cutting off that supply entirely even as the European are trying to build their gas reserves ahead of the European winter.
Mothballed coal mines are reopening, nuclear plants which were to be shut down may keep operating, there’s talk of increasing production from the controversial Groningen gas field in the Netherlands (said to be responsible for damaging earthquakes in its region but capable of replacing the supply of Russian gas to Europe) and there are LNG terminals and associated infrastructure being built all over Europe.
There is, clearly, a heavy price to be paid by the rest of the world – particularly, but not exclusively, by Europe – as oil and gas prices have soared since the sanctions were imposed on Russia and agricultural and fertiliser exports from Ukraine have been severely disrupted by the war.
So far, that hasn’t weakened the West’s resolve or prevented it from coming up with new ways to try to add to the economic pressure on Russia.
Apart from the price caps for Russian oil, the G7 countries are also looking at a ban on newly-minted Russian gold. Russia’s is the world’s second biggest gold miner, producing about 340 tonnes a year. There is about 2000 tonnes of gold held within Russia and there has been a scramble ever since the West’s financial sanctions were imposed by uber-wealthy Russians to convert their liquid assets into gold.
Russia’s is the world’s second biggest gold miner, producing about 340 tonnes a year.Credit:Bloomberg
The proposal being considered at the summit would be aimed at cutting off yet another sanctions-evading avenue to financial markets for Russians, exploiting London’s central role in the gold market and London and New York’s dominance of gold trading to try to close the conventional commodity markets to Russian gold.
Russia’s central bank has been buying gold at discounts to international prices to support its gold miners and the producers have also reportedly been trying to increase direct sales to the Middle East and China. They might also sell through non-traditional channels. There is a black market for gold, although it probably wouldn’t be deep enough to absorb a meaningful amount of Russia’s production.
Whether or not the latest sanctions being contemplated are implemented and whether or not they are successful if implemented, the fact that they are being discussed seriously at the G7 meeting is a strong indication of western economies’ resolve in the face of the quite significant economic pain their sanctions are imposing on their own economies and people.
So far, with oil playing a pivotal role, the Russians have been able to keep their economy functioning even as it shrinks and western capital, technology and expertise has fled. If the G7 can put a stopper in Russia’s oil lifeline, the pressure on Putin to devise a face-saving way to resolve the conflict would mount.
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