G7 needs to recognise that actions that restrict flow of goods and services are bound to be counter-productive
In a bid to punish Russia for its military action against Ukraine, leaders of G7 viz., the United States, Germany, France, Britain, Italy, Canada and Japan in June this year vowed to explore the feasibility of measures to bar imports of Russian oil above a certain level. In September, 2022, their finance ministers (FMs) said: “They confirm our joint political intention to finalise and implement a comprehensive prohibition of services, which enable maritime transportation of Russian-origin crude oil and petroleum products globally. Providing those services would only be allowed if the oil and petroleum products are purchased at or below a price (the price cap) determined by the broad coalition of countries adhering to and implementing the price cap.”
With big brothers Germany and France ensuring that all members of the European Union (EU) are on board, the G7 coalition has also been working relentlessly to rope in China and India, the two major importers of oil. Even as those efforts haven’t paid off, they have gone ahead implementing their plan from December 5, 2022, fixing the price ceiling at $60 per barrel.
The plan requires the participating countries to deny Western-dominated services, including insurance, finance, brokering and navigation to oil cargoes priced above the cap. To secure those services, petroleum buyers would make “attestations” to service providers, saying they bought Russian petroleum at or below the cap. However, services providers will not be held liable for false pricing information provided by buyers and sellers of Russian petroleum.
The G7 action is driven by its intent to weaken Russia financially by undermining its ability to generate revenue from export of petroleum products, while ensuring that supplies to them (read: G7/EU) are not impacted. They want to achieve this goal by ‘forcing Russia to sell oil at less than or equal to the ceiling price without reducing the quantum of exports’. This is a fallacious premise. Russia is a dominant player on the global oil landscape.
It is the third-largest producer of crude oil with over 12 per cent share in global crude production and the second largest exporter. As regards, natural gas (NG), it is the world’s second-largest producer with a share of 10 per cent. In world export, its contribution is even higher at 25 per cent. The dependence of EU countries on Russia is even higher with the former drawing 40 per cent of their NG supplies and 25 per cent of crude from the latter.
Some countries in the bloc viz. Germany, the Netherlands and Poland, depend much more. Ignoring the fundamentals of global demand-supply which are strongly pitted against them, they expect the very country which is placed in a vantage position and has the capacity to deliver and supply (namely, Russia) at a price of their choice. This is anomalous.
The G7/EU intends to achieve the stated objective by ordering the ‘service providers’ involved in maritime transportation not to provide those services if any sale and purchase of Russian petroleum is happening at a price above the cap. Its confidence stems from the fact that most of these companies are headquartered in EU/UK jurisdictions and the London-based International Group of Protection & Indemnity Clubs provides marine liability cover for about 95 per cent of the global oil shipping fleet.
Things are not as simple as they are presumed to be. Seeing a big dent on their revenue due to avoiding Russian petroleum (that won’t be easy to make up by extra business from other sources), they will try every tactic to circumvent the diktat. That would involve joining hands with the sellers and buyers in adopting deceptive shipping practices, refusal to provide requested price information, falsifying documentation (to hide the true origin or price of Russian oil), etc.
This apart, there are umpteen parallel fleets and insurance companies – under non-Western ownership – which can be used for handling, shipping and insuring Russian oil. The G7 intent of securing the desired quantity of oil from Russia at the price of their choice (read: cap) will remain on paper. This is because the latter has buyers especially India and China as well as the means to deliver.
Already, Putin has threatened to withhold exports to countries that enforce the cap. So, G7/EU won’t even get the oil from this major supplier, forget the lower price.
Attempts to draw all their requirements (including supplies denied by Russia) from middle-east, Africa, etc., would lead to further spike in price as well as shortage. Russia has assets in other producing countries such as Libya, Iraq etc. In a hostile environment, the former can take action which could impact the latter’s ability to maintain supplies thereby exacerbating the price scenario.
Meanwhile, the much touted plan of the EU bloc to cut purchase of NG from Russia by 2/3rd and substitute it with LNG supplies from other sources (besides a ban on 90 per cent of Russian oil that comes by sea) is to take effect before this year’s end. These moves aim at building alternative and sustainable sources of supply, thereby reducing their vulnerability to imports from Russia. These efforts could bear fruit only in the medium to long-run but for now, they have to face the music.
The EU will be looking to source gas not taken from Russia (around 100 billion cubic meter or 70 million tons of LNG representing nearly 18 per cent of its global trade) from the middle – East and the USA. This will further escalate the gas price, perhaps touching $100 per million British thermal unit (mmBtu) – from the current high of above $50 per mmBtu that has already led to skyrocketing energy bills for EU countries.
The execution of a cap on NG price could make it happen much faster than the EU would have imagined. No wonder, members of the bloc haven’t yet announced a cap. Ever since the start of the war, the USA and EU countries have set on a dangerous course of imposing economic sanctions on Russia. Far from hurting, their acts have ended up bolstering its coffers. From February to August, 2022, Russia received about 158 billion euros in revenue for the sale of oil, NG and coal, more than half of which – some 85 billion euros worth – was from the EU bloc. Russia’s revenue increased even as overall export volumes dropped by 18 per cent compared with the corresponding period prior to invasion of Ukraine.
Now, their decision to impose a cap on Russian oil (and NG) is a major leap forward on this course. This is bound to bring more miseries to the people in these countries due to soaring energy bills, high inflation and economic slowdown.
The G7/EU should shun this path. They need to recognise that in a globally interdependent world, actions that severely restrict flow of goods and services across national boundaries are bound to be counter-productive. The damage will be much more when a crucial commodity such as oil and gas is the target and the quantum involved is huge (prior to February 2022, the EU bloc was getting 40 per cent of its NG requirement and 25 per cent of crude oil from Russia).
Let them not mix up security issues with economics.
(The author is a policy analyst)
https://www.dailypioneer.com/2022/columnists/sanctions-on-russia-can-be-suicidal-for-g7.html
https://www.dailypioneer.com/uploads/2022/epaper/december/delhi-english-edition-2022-12-23.pdf