A price restriction on Russian oil under a G7 proposal recently took effect. The idea, which took months to materialise, aims to strike a delicate balance between preventing supply disruptions on the world oil market, which would drive up prices, and starving the Russian government of oil profits in order to financially cripple its war against Ukraine. However, the action runs the danger of disrupting the world crude oil market.
Price cap on Russian oil
- The $60 per barrel cap and denial of infrastructure services to Russian oil are designed to reduce Russia’s oil revenues while keeping Russian crude on the market by forbidding Western allies from providing insurance, maritime services, and financial support for tanker cargoes priced above a set dollar-per-barrel cap.
- Try to reduce Russia’s oil income and put pressure on it: The US’s proposed cap is intended to harm Moscow’s finances while preventing a significant increase in oil prices in the event that Russia’s oil is abruptly removed from the world market.
- Impact on shipping: Tanker owners may be hesitant to accept Russian oil and may encounter difficulties delivering it if they lack insurance.
Russian response to the price cap
- Russia has declared that it will not adhere to the restriction and that it will stop supplying nations that do.
- Retaliate by stopping the shipments: In an effort to benefit from an abruptly higher global oil price on whatever it can sell in spite of the sanctions, it could retaliate by stopping the shipments.
- Price caps won’t prevent the war’s financing, according to Russia. The cap, according to recent statements from Russia, won’t have an impact on the funding of its “special military operation” in Ukraine.
- Other buyers might circumvent the limitations by prioritising national interests: Chinese and Indian consumers would object to the cap, and Russia or China might try to establish their own insurance companies to replace those that the US, UK, and Europe have blocked. It’s also conceivable that these nations will devise inventive ways to get beyond the limitations set by the G7.
Impacts on the world’s oil supply chain
- Russian oil can now only be transported using the infrastructure of the G7 countries if it is sold for $60 per barrel or less. In general, this means that Russian oil cannot be transported anywhere in the world using the infrastructure of the G7 countries’ tankers, insurance, etc.
- Higher cost of purchasing oil from Russia: Given that the majority of businesses that provide shipping and insurance services are based in these G7 countries, purchasing oil from Russia at a higher cost is challenging. In the week before this announcement, Urals crude was trading in the mid-$60s range.
- Purchasing nations are at a disadvantage but remain below Brent crude oil prices Even while Russia has failed to comply with this regulation and the cap will disfavour nations that choose to purchase oil from Russia at a price greater than $60 per barrel, the price will still be significantly lower than Brent crude oil, which is presently selling at over $81 per barrel.
- Nations that carried on commerce despite opposition: So far, nations like India and China have kept up their commerce with Russia in spite of opposition from the west.
Response from India and bilateral commerce with Russia
- India and Russia now have more bilateral trade than ever before: In reality, as this newspaper has noted, India and Russia’s bilateral commerce has risen to a record high in the first five months of the year (April-August).
- India prioritising its own interests and benefiting from the sale price: India increased its oil imports from Russia by taking advantage of the discounts being offered, putting its interests first. Previously importing less than 1% of its import needs from Russia, India now buys around a fifth of its oil from that nation.
- Given that India imports oil, the transaction at a reduced price will help to reduce the current account deficit and promote economic stability. After all, lower crude oil prices will ease price pressures in the economy and relieve the current account deficit, reducing risks to macroeconomic stability for an oil importer like India, which fulfils the vast majority of its needs through imports.
- India rejected the alleged moral obligation: India denied any “moral” obligation to join the coalition for a price cap.
Conclusion
Any attempts to use commerce as a weapon will merely skew the world market and harm energy-poor customers who are not to blame for the conflict. India has been governed by its sovereign interests in its response to the West’s reprisal against Russia for the war in Ukraine thus far. This must remain the underlying principle.