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The West is scrambling to curb Russia’s oil revenue as Putin’s war in Ukraine continues to rage.
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The EU, U.S. and G7 partners are looking to find a solution to the complex undertaking and reduce the money flowing into Russia without sending oil prices even higher.
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Until the West comes up with a mechanism to curb Russian oil revenues Russia will continue to benefit from the rallying oil prices and market turmoil.
The United States, the EU, and G7 are already shunning and banning Russia’s oil in the wake of the Russian invasion of Ukraine. But the West has failed to limit the most significant contribution to Vladimir Putin’s war chest—oil revenues.
The U.S. and the EU, plus the G7 partners the UK, Canada, and Japan, are scrambling for solutions to their complex undertaking to reduce the amount of money flowing to Russia without sending international oil prices soaring to records.
Various mechanisms are being studied and reviewed, including a price cap or some sort of an import tariff on Russian oil. None has been agreed upon yet, as the Western nations are apprehensive of driving oil prices up too much, which would not only batter their economies but also give Putin more revenue even if Russia curbs more of its exports.
The Western leaders are looking for ways to keep the oil flowing while reducing Putin’s revenues. This is a complex and very difficult task, analysts say.
“So, the world will have to come to grips with ways of sanctioning the money flows to Russia if that is their desire without stopping the oil flows,” Mike Muller, head of Asia at the world’s largest independent oil trader, Vitol, said on the Gulf Intelligence podcast on Sunday.
“How it is to be done is awfully, awfully difficult,” he added.
According to the Vitol executive, “The world is facing a political desire to implement measures to restrict the supply of Russian oil, but the total supply of Russian oil is too large for the world to do without.”
“The world cannot do without 7 to 8 percent of its total fossil fuel supply,” Muller said.
Russia earned $98 billion (93 billion euros) in revenue from fossil fuel exports in the first 100 days of the war in Ukraine, with the EU paying 61% of this for imports, according to data compiled by the Centre for Research on Energy and Clean Air (CREA). Russia spends an estimated $900 million per day on the invasion of Ukraine, and the revenue from fossil fuel exports exceeded this sum during the first 100 days, CREA said.
As the EU aims to reduce Russia’s oil revenues by imposing an embargo on seaborne oil imports from Russia, Moscow is redirecting more volumes to Asia. China and India, and other smaller importers in Asia, are buying growing volumes of discounted Russian oil. Even at a $30 a barrel discount to Brent, the $110 Brent oil price means that Russian oil is fetching much more money than it did last year. This is essentially blunting the embargoes in the West as an instrument of cutting Russian oil revenues, which make up a very large part of total government revenues and budget income.
After their summit in Germany last week, the leaders of the G7 group of the world’s leading industrial nations invited all importing countries to consider a cap on the price of Russian oil.
It’s not certain how this could be achieved without additional market disruption that could send oil prices higher still.
Record oil prices are the least the G7, including the United States, want right now. Higher crude prices add fuel to the runaway inflation, and talk about recession intensified after the Fed and other central banks hiked aggressively key interest rates to combat the steepest rise in consumer prices in decades.
Until the West comes up with a mechanism to curb Russian oil revenues—if it ever manages to do this—Russia will continue to benefit from the rallying oil prices and market turmoil. Unfortunately for the Western oil importers, Russia’s exports of oil and gas are too big to ban completely, even if, in theory, G7 and the EU manage to convince India and China to reduce imports of Russian oil under the threat of secondary sanctions. Policymakers will need a lot of creativity in their approach that could leave most of the Russian oil flowing but cut the oil money flowing to Putin.
NB: Tsvetana Paraskova wrote this article for Oilprice.com
