Sunday September 04, 2022

G-7’s convoluted logic on capping Russian oil price

G-7’s convoluted logic on capping Russian oil price

Russia has successfully buckled the sanctions on its oil exports.

The statement issued by the group of seven industrially advanced countries – the United States, Canada, Japan, the United Kingdom, France, Germany and Italy – that there would be a cap on the price of Russian oil carries the strange logic of keeping the Russian oil supplies flowing but at restricted prices. The G-7 leaders seem to believe that Russia is making huge profits on oil exports and that it is financing its war against Ukraine from these profits. The G-7 finance ministers have not yet worked out the figure for the price cap, and they seem to realise that it is going to be a complicated exercise. They want the price cap fixed at a little above the cost price and cut off the margin of profit. They want the international insurance and companies to adhere to the price fixed by G-7. The finance ministers also seem to believe that by fixing a price cap on Russian oil, the inflation in the global markets can be contained too.

This would help the Western countries to continue to import Russian oil while paying the Russians the minimum price. However, European Union (EU) is preparing to impose stricter range of sanctions, including ban on Russian oil imports, in December. So, there is a split in the West in their stance towards Russia over the war in Ukraine. Meanwhile, most of the Russian oil exports are now redirected to China, India and other Asian countries. According to reports, there have been price discounts for importers like India, and they are not paying in dollars. So, Russia has successfully buckled the sanctions on its oil exports.


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The global oil markets tell a different story. The demand for oil is less than anticipated because of the slow global economic growth, especially in China where Covid-19 outbreaks have led the Chinese authorities to impose total lockdowns in large cities like Chengdu. A disruption in economic activity in China affects global supply chains, and this has its consequences. India is the only country that is growing at a faster pace but that many help alter the global economic scenario. Ahead of the Organisation of the Petroleum Exporting Countries (OPEC) meeting on September 5, there are concerns about the fall in demand for oil and in prices. The demand for oil is estimated to reduce to 300 million barrels per day in 2023 from the existing 400 million barrels per day. The OPEC will have to decide on the output levels to be maintained. If the Iran nuclear deal works out, then Iranian oil exports will flood the market, further affecting the price, and even creating an oil glut if the global economy does not recover sufficiently.

It is in this situation that the finance ministers of G-7 are planning to regulate the price of oil from Russia. They seem to be quite blinkered in their views. Also, they have not considered the Russian response. The G-7 leaders are assuming that Russia will sell oil to the West at the prices fixed by the West. It may not be the case. Russia’s Deputy Prime Minister Alexander Novak said on Thursday, “We will simply not supply oil and petroleum products to such companies or states that impose restrictions, as we will not work non-competitively.” Russia has found a ready alternative market in China, India and other Asian countries. Unless the price offered by the West is attractive enough, Russia would not be tempted to supply oil to the West.

The Russia-Ukraine war has entered a phase of attrition, and clearly the economic sanctions against Russia did not work well enough to deter Moscow from continuing to wage the war. But the world at large is facing a different challenge: global economic slowdown. And there do not seem to be any readymade solutions.

 

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