WHO IS WINNING THE ENERGY WAR? Opinion divided over efficacy of sanctions and price cap on Russian oil

Arshad Shaikh studies the changing dynamics of the energy war declared on Russia by the West in response to its invasion of Ukraine. Russian oil is facing both sanctions and a price cap. However, Russia is trying to dent their effects through deft oil cuts, smart diplomacy and engaging a flotilla of sanction-avoiding ships. The…

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Arshad Shaikh

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Arshad Shaikh studies the changing dynamics of the energy war declared on Russia by the West in response to its invasion of Ukraine. Russian oil is facing both sanctions and a price cap. However, Russia is trying to dent their effects through deft oil cuts, smart diplomacy and engaging a flotilla of sanction-avoiding ships. The nature of sanctions against Russia appears to be quite benign when compared with those imposed on Iraq and other countries that were accused of open aggression. Experts vary in their assessment of the effectiveness of the sanctions. The undercurrents in the global economy keep changing the energy geopolitics of the area. With the United Nations becoming a toothless tiger, the Ukrainian crisis has shown how difficult it is to police a strong predator.

 

In February 2022, Russia launched a full-scale invasion of Ukraine. Russia is the largest country in the world, extends across 11 time zones, shares land boundaries with 14 countries and is the world’s ninth most populous country with a population of over 147 million. However, most importantly, Russia is the world’s sixth-largest economy (by PPP) and an “energy superpower”. It has the world’s largest proven gas reserves, the second-largest coal reserves, the eighth-largest oil reserves, and the largest oil shale reserves in Europe. Russia is also the world’s leading natural gas exporter, the second-largest natural gas producer, and the second-largest oil producer and exporter. Consequently, Russia is heavily dependent on oil revenues for running its economy.

With the reluctance of the West (US and Europe) to commit “boots on the ground” for liberating Ukraine from the clutches of Russia, the only option available was to impose sanctions on Russian exports (mainly oil and gas). However, it was easier said than done, as Europe was completely dependent on Russian oil and gas to fire up its economy. In 2021, more than 50% of all Russian crude oil exports went to European countries and 40% of all natural gas in Europe was fed by Russia.

Things are changing with the sanctions slowly gaining potency and the weapon of a price cap on the purchase of Russian oil showing its prowess. Russia is trying its best to circumvent the bite of sanctions through production cuts, price manipulation, and clever diplomacy. The deployment of backdoor sanction-avoiding ships is also helping other than the changing contours of the global economy.

 

SANCTIONS AND PRICE CAP

Currently, the EU has ended all imports of Russian oil by sea. A ban on refined oil products has also set off since 5 February this year. The USA and the UK have completely stopped importing oil from Russia. The finance ministers of the G7 countries agreed to a price cap on Russian oil and petroleum products.

The West felt that Russia successfully evaded the impact of sanctions by colluding with the OPEC plus countries who agreed to unprecedented production cuts for keeping the price of oil high. It is therefore trying to throttle Russia’s oil income by introducing a price cap of $ 60 per barrel. Since the US, UK and the EU have almost blocked the import of Russian oil, the price cap would mostly affect other countries like India, China, Africa, etc. Any buyer exceeding the price ceiling would be stopped from accessing Western finance and insurance services.

Russia accounts for 10% of all global oil supplies and a total ban would choke the international markets sending oil prices into a tailspin. This tempering of the sale of Russian oil would achieve the twin objectives of avoiding market disruption as well as squeezing Russian oil revenues. The average cost of production for Russian oil is $20 to $40 per barrel. Hence, this price cap incentivises Russia to continue its production and sale.

A point missed by many is the glaring disparity in the manner in which sanctions were built over Russia compared to those imposed on Iraq, and other countries accused of open aggression. The Russian sanctions appear to be reasonable and possess a humane touch while countries like Iraq, Iran, Gaza (Palestine), etc. were confronted with sanctions that were merciless and meant to cause direct pain and suffering.

 

THE ENERGY WAR

In response to the price cap strategy, Russia is implementing oil cuts to blunt its impact. It announced a cut of half a million barrels a day (about 5% of Russia’s production and half a percent of world supply). However, these oil cuts may not go down well with India and China (two big importers of Russian oil) who are very price-sensitive.

As an extension of the price cap strategy on crude oil, the EU and G7 are also considering a $100 per barrel price ceiling on Russian diesel and a $45 cap on fuel oil and industrial lubricant oil. It is reported that the oil loadings from Russia’s Baltic ports are up 50% in January 2023 compared to December 2022. Thus, Russia appears to have won round one of the energy war.

However, in a conversation on mishtalk.com, author Agathe Demarais felt: “The point of sanctions was twofold. The first was to send a diplomatic message of solidarity and unity with Ukraine and also a message of trans-Atlantic collaboration to the Kremlin. And from that perspective, as I wrote in Foreign Policy, mission accomplished. The second objective, which I think will be a slow, gradual, cumulative objective, is about making it more difficult for Russia to wage war in Ukraine economically, financially, and technologically.”

 

THE NEED FOR GLOBAL UNITY

The Russian invasion of Ukraine revealed the impotent nature of the United Nations. The top global body dedicated to international peace remains a toothless tiger that is unable to deter and punish predators that devour countries with open aggression. The reluctance and refusal of the United States to engage militarily with belligerent nations after its debacle in Iraq and Afghanistan has deprived the world of a global policeman, a role that the erstwhile superpower had exploited to the hilt to build its political hegemony under the guise of a “Pax-Americana”.

There is an urgent need for global unity over the resolution of international conflicts and reversing acts of open aggression. As Alex Bellamy writes in “World Peace (And How We Can Achieve It) – “Territorial conquest and empire-building among the principal causes of war throughout our history – have been outlawed. States may physically invade and occupy land belonging to other states, as Russia did in Crimea in 2014, but they can no longer translate these gains into lawful, and thus profitable, ownership. Conquest pays well only if others recognise it as legitimate. If they do not, conquest can become very expensive very quickly. The greatest leaps in human progress have come in peacetime, not war.”

The first step would be to reform the United Nations and make the necessary changes in its structure and operations. The UN must become a potent force that deters aggression and ensures global peace.