The European Union and other western countries still believe that sanctions could be substitute for military strength despite paying heavy economic costs
Faced with steep increases in the price of oil and natural gas or NG, the leaders of the Group of Seven industrial powers or G-7 viz., the United States, Germany, France, Britain, Italy, Canada and Japan have pledged to put in place a system designed to cap the income of Russia from sale of these products.
The move has come in the back of the price of NG on September 4, 2022 being 400 per cent more than last year, while on the following day there was a further 30 per cent hike, courtesy the ‘Nord Stream’ shock – a 1200 km gas pipeline under the Baltic sea that carries gas from Russia to Germany now closed for an indefinite period – even as crude oil is hovering around $100 barrel for over six months.
In June, 2022, the G-7 had agreed to explore the feasibility of measures to bar imports of Russian oil above a certain level. Now, they have given a concrete idea of how they want to do it.
In a statement issued by Germany, which chairs the G-7 this year, the finance ministers (FMs) of the group said, “They confirm our joint political intention to finalize 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.
The statement did not give any figure for a price cap and also did not specify when the G-7 aims to finalize the plan. The Group is keen to involve as many importing countries as possible, in particular India, and sought their inputs on the price cap’s design.
The idea of a price cap is bizarre. To get a sense, let us look at the positioning of Russia in the global energy landscape.
Russia is the world’s second-largest producer of natural gas (NG) with a share of 10 per cent. In total world export of gas, its contribution is even higher at 25 per cent. As regards crude oil, Russia is the third-largest producer worldwide, accounting for over 12 per cent of global crude production. It is the second largest crude oil exporter just behind Saudi Arabia.
Most of Russian gas goes to the European Union (EU) countries with the latter drawing 40 per cent of their total NG supplies from the former. The EU countries draw close to 25 per cent of their crude oil requirement from Russia. While, these are percentage shares for the entire group, for some individual countries viz. Germany, the Netherlands and Poland, this is much higher. In the case of the US, however, the oil dependence on Russia is miniscule at two per cent.
Juxtapose the heavy dependence of EU countries on Russia for their oil and gas requirements with huge disruption in supplies from the latter due to a deadly cocktail of economic and financial sanctions imposed by the former (besides USA); physical incapacitation in the supply chain and clogging of sea transportation routes. We get the inevitable outcome i.e. short supply and that too at substantially higher price.
The EU bloc has ambitious plans to reduce its dependence on Russian energy. It has put a ban on 90 per cent of Russian oil that comes by sea to be made effective by the end of 2022. The bloc has also announced plans to cut purchase of NG from Russia by 2/3rd and substitute it with LNG supplies from other sources by this year’s end.
These moves aim at building alternative and sustainable sources of supply, thereby reducing their vulnerability to imports from Russia. But, this could bear fruit only in the medium to long-run. For now, almost all countries of the bloc are forced to live with skyrocketing energy prices and its devastating effect on industries, businesses, cost of electricity generation, unabated inflation and so on. They are being forced to give relief packages worth billions of dollars to rein in energy bills. It is also having a contagion effect on the rest of the world.
For instance, the EU countries decision to replace 2/3rd of their needs hitherto supplied by Russia with supplies from other sources means that they will be competing with Asian countries, including India for about 100 billion cubic meter or 70 million tons of LNG (it accounts for 18 per cent of global LNG trade) for supplies from middle–East and the US.
This means that India has to pay a very high price – not just for purchase from the spot market; it will have ramifications for supplies from the long-term contracts as well.
Caught in a quagmire of their own creation (read: indiscriminate imposition of sanctions on Russia), the EU countries are now keen on securing supplies at lower cost by specifying a price cap below which they won’t buy oil or NG from Russia. 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 (namely, Russia) to supply at a price of their choice. This is laughable.
What makes it even more absurd is that the EU bloc intends to achieve the stated objective by leveraging the ‘service providers’ involved in maritime transportation. Being owned and controlled by corporations located in the EU or the U.K., hence amenable to the diktats of the respective governments, the group’s logic is: the service providers will be told to provide those services only if oil/NG is supplied at a price below the cap; otherwise not.
The logic is predicated on a fallacious assumption that the role of a service provider is more crucial than the entity which owns the product. What makes EU strategists feel that the latter will be cowed down by the threat of denying maritime transportation services? The group has resorted to invocation of such sanctions in the past. Yet, its members were forced to pay for supplies from Russia, a price of the latter’s choice.
The proof of pudding is in eating. 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 – some 85 billion euros worth – was from the EU. Russia’s revenue increased even as overall export volumes dropped by 18 per cent compared with the corresponding period prior to invasion of Ukraine.
Against this backdrop, it is a practical impossibility to expect any relief in price merely by invoking the price cap. The problem has to do with the mindset of the EU (and USA). To lessen the pain, the EU bloc should shed this mindset. They must withdraw from economic sanctions, which can never achieve military goals.
(The author is a policy analyst)
https://www.dailypioneer.com/2022/columnists/oil-price-cap-to-tame-russia-will-not-work.html
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