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IF Insights: An honest take on the ‘success’ of G7 price cap on Russian energy trade

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The price cap, imposed by the 2022 end, was seen as an effort intended to reduce Russia's ability to finance its Ukraine adventure

A recent ‘Politico’ report, commenting on the impact of the G7 price cap on Russian energy trade, remarked, “Western efforts to undermine the Kremlin’s war in Ukraine through a price cap on Russia’s all-important oil income are falling short. Hopes that Moscow could run out of cash for weapons and soldiers’ salaries are fading, as Russia sells its oil exports well above a USD 60-per-barrel price cap imposed by the G7+ nations, boosted by strong Chinese and Indian demand.”

The price cap, imposed by the 2022 end, was seen as an effort intended to reduce Russia’s ability to finance its Ukraine adventure. However, in September 2023, Russia’s oil and gas revenues rose by around 15% from August to 739.9 billion roubles (USD 7.44 billion), as the growth ratio went up by 7.5% compared to the same month in 2022.

This figure now puts a question mark on the ‘success’ that the United States-led Western Bloc had by May 2023, in terms of achieving oil supply stability and reducing Russian tax revenue.

The Ground Situation

Russia’s main crude blend, Urals, broke through the G7 price cap on the open market in June 2023, and has since pushed above USD 80 per barrel till September 2023. As of October first week, it is currently trading at around USD 75 a barrel.

This has ensured that Moscow can financially sustain its Ukraine campaign for a longer duration.

The price cap of USD 60 per barrel came into effect on 5 December 2022, despite many countries expressing unwillingness to come to an agreement on a lower price cap.

The Western Bloc in September 2023, shelved plans of revising the price ceiling further. India and China, Moscow’s key allies and two crucial energy markets in the world, have been protesting the price cap from the very beginning and the OPEC (Organization of the Petroleum Exporting Countries) countered the G7 move by cutting the daily oil production ratio since 2023 beginning.

In fact, Russia’s seaborne crude exports rose by 10% in September 2023 to 3.37 million barrels a day, well above the pre-Ukraine war average of 3.1 million, according to the commodities giant S&P.

Has The Move Failed?

“The price cap has absolutely failed. Across the market we expect that all of the cargoes of Russian barrels are now trading above the price cap,” told Fotios Katsoulas, lead analyst for tanker shipping at S&P, while interacting with Politico.

As of October 2023, China, India and Turkey have reportedly become the largest destinations for Russian seaborne crude.

In September 2023, five European diplomats accepted that despite the growing awareness about the futility of the energy price cap, the Western Bloc is hardly showing any appetite to course correct.

Ukraine has been urging the West to tighten the price cap to just USD 30, apart from restraining Moscow’s allies from exporting refined Russian fuel to the global market. However, all these appeals have fallen on deaf ears.

How Russia Is Sidestepping The Sanctions?

In April 2023, the Centre for Research on Energy and Clean Air noted about five nations expanding their Russian oil imports and selling refined energy products to other countries. This move has directly negated the impacts of the G7 price cap on Moscow’s coffers.

These allies also increased exports of refined products to the ‘price-cap countries’ that sanctioned Russian oil, including the European Union, Australia, Japan, the United Kingdom, Canada and the United States.

“The EU, G7 and Australia continue to import Russian fossil fuels as refined oil products from third countries and allow transportation on their vessels and insurance,” the report stated further.

While the EU has been the largest importer of these refined products, countries like China, India, the United Arab Emirates, Turkey and Singapore increased seaborne imports of Russian crude oil by 140% since 2022, according to CREA. These nations, as of April 2023, were absorbing 70% of Russia’s crude oil exports.

These nations increased exports of Russian oil products by 26% to price-cap coalition countries. Their exports to non-price-cap countries rose only 2%, showing that the price-cap coalition countries drove the increase in oil-product exports from countries importing Russian crude.

The European Union, which has been vocal against Putin’s military campaign, spent some USD 19.3 billion on products from the countries sourcing the most Russian crude oil in the 12 months after the war’s beginning, CREA disclosed.

Let’s discuss Russia’s ‘Dark Fleet’, which has emerged as Moscow’s other key weapon to neutralise the adverse effects of the West’s energy price cap.

In July 2023, Michelle Wiese Bockmann, a senior analyst at Lloyd’s List Intelligence, spotted a cluster of 43 oil tankers jostling in international waters off the coast of Malaysia in November 2022. These vessels, which were 20 years old on average, had unknown owners and insurance statuses. What Michelle was referring to as a ‘Tanker Traffic Jam’, was basically part of the Russian ‘Dark Fleet’.

In December 2022, Europe stopped importing Russian oil and petroleum products, apart from capping crude prices at USD 60 a barrel as part of its economic sanctions. By March 2023, G-7 imposed another price cap. Meanwhile, Russian oil ditched Europe and entered the Asian market.

The means to achieve this feat was indulging in ‘Deceptive Shipping Practices’ like hiding their location, frequently changing flags, or obscuring their ownership structure. Singapore has reportedly emerged among the top three ports of origin for ‘Dark Fleet Ships’.

US Treasury Secretary Janet Yellen has now admitted that the recent market prices for Russian oil showed that the price cap was no longer working as the West hoped.

Although Moscow’s March 2023 energy income dropped by 43%, immediately after the price cap kicked in, the latest September figures suggest that this ‘Revenue Drop’ has become a thing of the past.

The Road Ahead

In August 2023, Ural oil (the Russian benchmark) averaged at USD 74 a barrel, already well above the G7 price ceiling of USD 60. The price difference between European Brent and Ural crude has also narrowed down rapidly.

In December 2022, when the original price cap came into force, the European Union, as a bloc, reportedly promised to review it every two months, as per the market situation. The United States, Canada, Japan, the United Kingdom and Australia have instead decided not to set any regular review.

While there were reports about a ‘Review Meeting’ being held in June/July 2023, it was never done. As per Reuters, there is a difference of opinion among the EU members on whether to lower the price cap threshold. Even the G7 is not showing intention to economically punish Russia further.

Has the ‘Energy Price Cap’ served its goal of putting pressure on Russia’s exchequer? The answer is no. Blame the lax enforcement and difference of opinion here.

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