The United States, the EU, and G7 are already shunning and banning Russia’s oil in the wake of the Russian invasion of Ukraine. But the West has failed to limit the most significant contribution to Vladimir Putin’s war chest—oil revenues.
The U.S. and the EU, plus the G7 partners the UK, Canada, and Japan, are scrambling for solutions to their complex undertaking to reduce the amount of money flowing to Russia without sending international oil prices soaring to records.
Various mechanisms are being studied and reviewed, including a price cap or some sort of an import tariff on Russian oil. None has been agreed upon yet, as the Western nations are apprehensive of driving oil prices up too much, which would not only batter their economies but also give Putin more revenue even if Russia curbs more of its exports.
The Western leaders are looking for ways to keep the oil flowing while reducing Putin’s revenues. This is a complex and very difficult task, analysts say.
“So, the world will have to come to grips with ways of sanctioning the money flows to Russia if that is their desire without stopping the oil flows,” Mike Muller, head of Asia at the world’s largest independent oil trader, Vitol, said on the Gulf Intelligence podcast on Sunday.
“How it is to be done is awfully, awfully difficult,” he added.
According to the Vitol executive, “The world is facing a political desire to implement measures to restrict the supply of Russian oil, but the total supply of Russian oil is too large for the world to do without.”
“The world cannot do without 7 to 8 percent of its total fossil fuel supply,” Muller said.
Russia earned $98 billion (93 billion euros) in revenue from fossil fuel exports in the first 100 days of the war in Ukraine, with the EU paying 61% of this for imports, according to data compiled by the Centre for Research on Energy and Clean Air (CREA). Russia spends an estimated $900 million per day on the invasion of Ukraine, and the revenue from fossil fuel exports exceeded this sum during the first 100 days, CREA said.
Related: A More Realistic Approach To The Energy Transition
As the EU aims to reduce Russia’s oil revenues by imposing an embargo on seaborne oil imports from Russia, Moscow is redirecting more volumes to Asia. China and India, and other smaller importers in Asia, are buying growing volumes of discounted Russian oil. Even at a $30 a barrel discount to Brent, the $110 Brent oil price means that Russian oil is fetching much more money than it did last year. This is essentially blunting the embargoes in the West as an instrument of cutting Russian oil revenues, which make up a very large part of total government revenues and budget income.
After their summit in Germany last week, the leaders of the G7 group of the world’s leading industrial nations invited all importing countries to consider a cap on the price of Russian oil.
It’s not certain how this could be achieved without additional market disruption that could send oil prices higher still.
Record oil prices are the least the G7, including the United States, want right now. Higher crude prices add fuel to the runaway inflation, and talk about recession intensified after the Fed and other central banks hiked aggressively key interest rates to combat the steepest rise in consumer prices in decades.
Until the West comes up with a mechanism to curb Russian oil revenues—if it ever manages to do this—Russia will continue to benefit from the rallying oil prices and market turmoil. Unfortunately for the Western oil importers, Russia’s exports of oil and gas are too big to ban completely, even if, in theory, G7 and the EU manage to convince India and China to reduce imports of Russian oil under the threat of secondary sanctions. Policymakers will need a lot of creativity in their approach that could leave most of the Russian oil flowing but cut the oil money flowing to Putin.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- Sustainable Agriculture Could Be Key In Addressing Global Food Security
- Will Saudi Arabia Pump More Oil For Biden?
- Is Saudi Arabia Exaggerating Its Oil Production Potential?
Of course with Putin having backed himself into his own corner nuking London might be very much a real threat after all. Or Warsaw or Tel Aviv or Rome, Italy for that matter. Might as well be All of the Above at this point in point of fact. Not sure what if any nuclear doctrine exists over yonder in euro-tardia in point of fact. *"Tennis Balls"* would appear.
He told me to take a hike, or he will call police.
This is in a nutshell, what the G7 geniuses want to do with Russia. They want to pay Russia $50-$60, when the market price is $100. Really???
Putin will tell them the same - take a hike boys. He will wait till winter comes. They will pay him $150 instead.
This is really crazy. Instead of solving the real problem, by trying to broker peaceful resolution of the war in Ukraine, they double down on their crazy ideas by increasing arms and free money shipments to Ukraine, and trying to invent some tricks to put a price cup on Russian oil and gas. They still don't know exactly how to do this, but they will try by trial and error and hopefully something sticks by the time winter comes. This is a total INSANITY.
Western leaders don’t realize how robust Russia’s fiscal position is and how resilient its economy is also. Every time Western nations talk about banning Russian oil or capping it, oil prices surge further forcing Western customers to pay steeper energy bills and earning President Putin more revenues. Moreover, Russia can afford to slash crude oil exports by more than 3.0 mbd without affecting Russia’s revenues and economy.
However, the idea of recapping is a non-starter. What Russia could in effect do is to halt supplies of its crude oil and petroleum products to Western nations while continuing to sell vast volumes of its oil exports to China and India. This will cause oil prices to surge further probably to $120-$130 a barrel thus inflicting considerable damage on the nations suggesting a cap on prices.
Moreover, Russia isn’t short of buyers. China and India are competing with each other for Russian oil. They alone currently account for 37.5% of Russian oil exports. Small importers in Asia are buying growing volumes of discounted Russian oil. This is essentially blunting the embargoes in the West as an instrument of cutting Russian oil revenues.
Even Saudi Arabia is importing Russian fuels via Egypt in increasing volumes. Russian fuel oil is the cheapest barrel available to fuel Saudi summer power generation demand and this makes economic sense.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London