“The G7 has decided to impose new sanctions against Russian oil. It’s about setting a ceiling price at which Russian fuel is allowed to be bought. But the main aim of the West is to force Asian countries to follow their plan. Russia has already warned how it will respond to the move. Who will end up the hardest hit?
The G7 finance ministers have announced a decision to cap prices of Russian oil. It is forbidden to transport by sea and insure companies that transport Russian oil at a price higher than the introduced ceiling. What the price ceiling will be is yet to be decided. But in general it could be revised if necessary, according to a statement by G7 ministers, which includes the United States, Britain, Germany, Italy, Canada, France and Japan (all of which have already decided to reject oil from Russia and have set a deadline for doing so).
The G7 finance ministers have called on all countries to join the cap and contribute to developing a price ceiling. They want to “build a broad coalition” in the world to ensure that Russian oil and oil products are sold “only at prices at or below the ceiling”, Interfax reports.
Curiously, these new sanctions, according to the FT, will be imposed at the same time as the EU’s own embargo on Russian oil imports (on 5 December 2022 for crude and 5 February 2023 for oil products).
“It’s a strange coincidence. Perhaps we will see a surprise in the form of replacing the oil embargo with a price ceiling. Such a scenario cannot be ruled out, especially if we remember how the idea of introducing a price ceiling came about,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund. He recalls that, in fact, it was US Treasury Secretary Janet Yellen who initiated it. She once said that sanctions against Russia lead to a reduction of Russian oil exports to the world market, which is harmful because it aggravates the shortage of oil and prices go up. We need to make sure that Russia can saturate the world market with oil and prices go down.
“After this statement, Yellen faced criticism that this would allow Russia to make money and that the purpose of sanctions was to destroy the Russian economy. So the ‘genius’ idea of a price ceiling was born. Let Russia export oil, but don’t have to pay for it. In this case everyone is happy – the world market is saturated, prices are low, and Russia earns little,” Igor Yushkov reasoned.
In this vein, it makes sense if the Europeans lift the oil embargo to be able to buy Russian oil at a certain low price.
The second option – when the EU does not lift the embargo – is also possible. In that case, the EU would, as expected, completely abandon the purchase of Russian oil by sea and allow all other G7 countries to buy it only at a certain price.
This is a stalemate because both options would have unfortunate consequences for the world market. Because Russia has made its position clear. It will divert oil to countries with market conditions if a price ceiling is introduced, Russian presidential spokesman Dmitry Peskov said. But Russia will not supply oil and fuel at a loss. “We will not work on non-market conditions,” Deputy Prime Minister Alexander Novak pointed out. According to him, “this will completely destroy the market”, consumers in the EU and the US will suffer even more from rising prices.
“Everyone is afraid that Russia will not have time to rebuild export flows to Asian markets by the time the EU sanctions are imposed, and it will have to cut exports like in March and April this year. This will exacerbate the deficit on the global market and lead to soaring prices,” Yushkov explains.
“In fact, about 2 million barrels a day of Russian oil are going to Europe now, and they will have to be attached to Asian markets by December 5. If Asian countries decide to buy at the price set by the West, Russia will stop supplying. If Asian countries do not obey the G7 and continue to buy our oil at normal prices, there will be problems with transportation of raw materials because of sanctions. No matter how you look at it, a ‘perfect storm’ is forming in the oil market,” the FNEB expert said.
“The G7 is starting to dictate terms to the whole world. It smells like colonialism”, Yushkov said. However, China and India are unlikely to be persuaded to dance to their tune.
China will not refuse to buy Russian oil by sea (new sanctions do not concern pipeline supplies); however, it is more likely that from now on smaller, “second-tier” Chinese companies will do this, rather than large companies (to save them from toxic stories), the expert reckons. At least, this is often the case now with export-import between Russia and China. “Because China, on the one hand, says that sanctions are illegitimate. But, on the other hand, it is very cautious about it,” the expert says.
As for India, the problem of insuring the transportation of Russian oil by sea was solved back in March-April, when the Indians started actively buying Russian oil at a discount. Russian companies began to insure the transportation of Russian oil under state guarantees, and India was happy with this. “Most likely, India will not join such initiatives and will continue to ignore them,” Yushkov believes.
This is partly because China and India understand how this will turn out for them in the end.
“Now they are able to buy Russian oil at $70-80 a barrel, when the market price is $110. By adopting the idea of a price ceiling, they will lose that opportunity. If Russia fails to accommodate oil in Asia, it will cut production sharply. The shortage of supply on the world market will also increase the price of oil from other suppliers – it will go up to $150-200 per barrel,” concludes Igor Yushkov.
This means that not only Europe will find itself in the epicentre of the energy crisis, but also Asian countries. And, of course, the advantage in this case will be on the side of rich countries and not poor ones.
Nobody needs an oil crisis in the world. Especially when Europe and the world are on the brink of an unprecedented gas crisis. Due to a technical fault in the remaining one working turbine, the supply of gas via Nord Stream 1 has been halted indefinitely. If Germany, the EU and Canada do not solve the problem of repairing the turbines and removing them from the sanctions without the possibility of return, the world will face a tough fight for LNG this autumn and winter, and the expected price of $ 4 thousand per thousand cubic meters may be far from being the limit. Against this background, the threat by Head of the European Commission Ursula von der Leyen to introduce a price ceiling mechanism also for Russian pipeline gas looks like a shot to the heart.
Olga Samofalova, Vzglyad
Due to censorship and blocking of all media and alternative views, stay tuned to our Telegram channel