G7 sanctions slip through the cracks

The reports of the US Treasury Department imposing sanctions on two ship owners in October 2023 for allegedly transporting Russian oil at $75 and $80 per barrel, while relying on US-connected service providers, demonstrate a feeble attempt to achieve the lofty goal set by the G7 in mid-2022. The group, consisting of the United States, Germany, France, Britain, Italy, Canada, and Japan, aimed to punish Russia for its military actions against Ukraine by exploring measures to bar imports of Russian oil at prices above a specified level. In September 2022, their finance ministers confirmed their joint political intention to prohibit services that enable the maritime transportation of Russian-origin crude oil and petroleum. Those services would only be allowed if products were purchased at or below the price cap. On December 5, 2022, they set the price ceiling at $60 per barrel.

. Russia is the third-largest producer of crude oil, with over 12 per cent of global crude production, and the second-largest exporter after Saudi Arabia. The EU countries depend on Russia for 25 per cent of their requirements, and the EU sanctions led to a steep rise in oil prices. That led to a surge in payments by the EU countries and a corresponding boost to Russia’s revenues.

. According to the Centre for Research on Energy and Clean Air, Russia received about 158 billion euros in revenue for the sale of oil, NG, and coal from February to August 2022, more than half of which was from the EU. Russia’s revenue increased even as overall export volumes dropped by 18 per cent compared with the corresponding period before the invasion of Ukraine.

. After the December 5 cap on prices, between December 2022 and June 2023, most of Russia’s crude was selling at less than the cap of $60 per barrel. So, the existence of the cap during this period was symbolic. Russia’s low production costs meant it still generated substantial surpluses, even at this capped price or even a little less, to keep its war machinery well-oiled.

. Since July 2023, the prices have exceeded the cap due to reduced global availability. Saudi Arabia and Russia cut production by one million barrels per day (mbd) and 0.3 mbpd, respectively, over and above the cut agreed to in the meeting of OPEC+ in April 2023. But the G7 hasn’t been able to prevent Russia from benefiting from this as well. For instance, according to S&P Global Platts, its key export-grade crude sold at around $75 per barrel, enabling it to garner oil income of $211 million a day during September 2023.

. Clearly, the cap hasn’t worked.

. The G7 wanted to enforce it by requiring buyers of Russian petroleum to make “attestations” to providers of services including insurance, finance, brokering, and navigation to oil cargoes, saying ‘they bought at or below the cap’. What if the buyer gives a fudged document mentioning a price less than the cap? Still, the G7 countries can’t take any action as per their agreement: ‘services’ providers can’t be held liable for false pricing information provided by buyers and sellers’.

. It is also possible to circumvent the cap by setting the price as oil leaves a Russian port, not what’s paid by a refinery in, say, India. While the former can stay well within the $60 per barrel level, transportation costs and margins of trading companies (albeit Russian-affiliated) in countries not participating in sanctions are inflated to yield the desired net back in Russian hands.

. It is then no surprise that there are numerous instances of ‘loading Russian oil at all ports within Russia’ by vessels owned or insured by Western nations, with little sign of enforcement action initiated by the G7 authorities.

. Apart from this, there are umpteen parallel fleets and insurance companies—under non-Western ownership—that are being used for handling, shipping, and insuring Russian oil.

. At the root of G7 countries woes is their intent to use economic means to achieve military goals. Far from hurting, their acts have ended up bolstering Russian coffers. It happened on a mammoth scale through most of 2022, when there was no cap, and continued to swell during the first half of 2023, when the cap was symbolic. Since July 2023, the swelling of coffers has accelerated despite the cap.

. The G7/EU should shun the chosen path. They need to recognise that in a globally interdependent world, actions that severely restrict the flow of a crucial commodity such as oil across national boundaries are bound to be counterproductive.

. (The writer is a policy analyst)

G7 sanctions slip through the cracks

Follow us on :

Follow Us