When the sanctions were unveiled, the Brent crude oil price was around $US66 a barrel, with that of Russia’s flagship product, Urals crude, trading at around $US57.5 a barrel. Last week, with the Brent price around $US65 a barrel, the Urals price sank as low as $US36.61 a barrel.
According to Reuters, Russia’s revenues from oil and gas this month may be 35 per cent lower than they were a year ago.
If sustained and effectively policed, the sanctions will undermine Russia’s ability to prosecute the war effectively – and potentially cause deeper economic pain and breed social unrest in the regions outside Moscow and other military centres, where the war efforts are centred.
Oil silos on the Russkoye heavy crude oil field, operated by Rosneft PJSC, in the Yamalo-Nenets region of East Siberia.Credit: Bloomberg via Getty Images
None of this will matter, of course, if the latest attempt to wrangle a peace deal – one that is likely to be tilted towards Vladimir Putin’s demands – is successful. It would be inevitable that all sanctions on Russia would be lifted as part of any deal.
Equally, an even more potent set of proposed bipartisan sanctions that have been sitting in the US Congress since April might never be enacted.
Those sanctions, which include tariffs on countries that knowingly engage in the exchange of Russian petroleum products and/or uranium of 500 per cent of the value of the transactions, have been held up in Congress while Trump has pursued his peace deal. Trump has said he will sign the bill if the latest peace talks fail.
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The US sanctions represented a significant change in the West’s response to the invasion, targeting end-customers rather than just the price of Russia’s oil.
Until then, the G-7 had imposed a $US60-a-barrel price cap on Russia’s oil exports, buttressed by sanctions targeting the financing and insurance of the transporting of Russia’s oil exports. Russia was able, to a large degree, to circumvent those sanctions by acquiring its own shadow fleet of tankers and providing its own insurance arrangements.
The G-7 targeted the price, rather than the flow, of Russia’s oil because the West was concerned that any interruption to Russian supply – nearly 10 per cent of global supply in 2022 – would create another oil shock, sending prices rocketing and causing economic distress at a moment when, emerging from the pandemic, economies around the world were still weak and suffering from the big spike in inflation generated by the pandemic’s impact on global supply chains.
The intent of those sanctions was to use the price cap to reduce the revenue Russia received from its oil and gas sales without choking off the flow – the cap was set at a level that left an incentive for Russia to keep producing and selling its oil.
At the time, indeed until relatively recently, the OPEC+ cartel had been keeping oil supplies tight, having withdrawn about 6 million barrels a day of production capacity from the market. In the months after the invasion, before the price cap was introduced, the oil price soared to more than $US120 a barrel.
Since then, China and India have absolutely gorged on Russia’s discounted oil. Before the sanctions, India, the world’s third-largest oil consumer, imported about 2.5 per cent of its oil from Russia. In the last financial year, that percentage was almost 36 per cent.
While there might be a stigma associated with any purchase of Russia’s oil – the “Blood Oil” series this masthead has been running says that there is – the intent of the original sanctions was to keep Russia’s oil flowing to the rest of the world, which they did.
It’s interesting that China, India and Turkey (all with strong relationships with Russia) were the major beneficiaries – but the sanctions’ deliberate focus on price rather than flow makes it difficult to be overly critical of them rather than of those who designed the sanctions regime that encouraged their purchases.
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That, of course, changes now that the new US sanctions are in place.
This year, OPEC abandoned its efforts to ration supply, returning more than 2 million barrels a day to the market.
Supply now exceeds demand, the price has trended down from more than $US80 a barrel early in the year to around $US63 a barrel, and there is now a glut of oil within the market that looks like continuing well into next year.
It’s that glut which enables the US to try to throttle Russia’s oil sales without a fear of massive price impacts.
There’s also still a lot of OPEC capacity – particularly Saudi capacity – on the sidelines that could be brought back if required to keep prices under control. Trump and his family are, of course, close to the Saudis.
Had the US been prepared to wield the big sticks in its sanctions’ armoury, targeted Russia’s customers earlier and backed the sanctions with enforcement, the West’s sanctions would have been far more effective and Russia’s capacity to fund the war could have been severely constrained.
If Trump gets his peace deal, we may never know if more decisive action earlier might have produced a different and, for Ukraine, better result.
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