The Woeful Inadequacy of the Russian Oil Price Cap

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Russian Oil

As the Russian invasion of Ukraine continues to evolve, members of the G7 Summit in Elmau agreed to place a price cap on Russian oil exports of $60 per barrel. This price cap contained a twofold goal of restricting Russia’s oil revenue while maintaining the global oil supply.

While the Treasury asserts the Russian oil price cap is effective, the recent U.S. Treasury press update on August 3rd, 2023, leaves reasonable doubt. The Treasury claims the price cap has seen significant success since its implementation. However, China and India continue to help Russia subvert sanctions and evade the so-called “successful” price gap.

What the Price Cap Entails

The price cap on Russian oil operates under the policy that coalition countries are allowed to continue to provide maritime services to transport Russian crude under the condition the oil has been sold at or below the price cap level.

According to the US Treasury statement in May of 2023, this price cap policy “Incentivizes the continued sale of oil and petroleum products on the market at a steep discount from Russia’s wartime premium.” Just before Russia’s illegal invasion of Ukraine, the average cost of oil was over $100 per barrel. This price cap policy significantly reduces potential wartime profiteering for Russia’s oil sales by implementing a maximum cost of $60 per barrel. Additionally, most coalition countries have all but prohibited the import of Russian oil, meaning the beneficiaries are the low and middle-income nations purchasing the discounted barrels.

Naturally, a policy such as this requires a massive collaborative effort to accomplish. After a monumental movement to reduce Russian oil revenue, it seems the economic impact has been successful. Between January and March of 2023, the Russian Minister of Finance reported oil revenues War over 40% lower than the year prior.

Europe’s Sixth Sanctions Package

The European Union adopting the sixth sanctions package was pivotal to disrupting Russian revenue from oil exports. In June 2022, the EU banned importing Russian oil and providing maritime services from the EU, which contributed to Russian trade. The action represented a significant deterrent for Russian exports as Europe has historically provided the majority of naval transportation services for Russian oil.

The significant actions taken by the European Union, the United Kingdom, and the United States all had a severe economic impact on Russian crude exportation. However, the brutal invasion of Ukraine continues, in spite of the severe detriment to Russian oil revenue. In fact, the strict sanctions and price cap may have resulted in some unforeseen economic turn of events.

18 Months of the Russian-Ukrainian War

Since Russia’s invasion in February of 2022, the Ukrainian people have shown undeniable resilience in spite of the brutal oppression they have faced. Although Russia has continued to double down on its efforts, Ukraine seems to have had several significant victories throughout the invasion. Ukrainian defenders have destroyed multiple Russian vehicles, sabotaged several Russian bases, and continue to show an overall tenacity in their fight.

However, the war continues and shows little signs of ending anytime soon. Despite coalition countries’ best efforts to hinder Russian revenue, Russian forces continue to push their severe invasion further, dragging the battle on. This persistence may be due to Putin’s lack of understanding of the challenges his military faces. Furthermore, Putin is far from alone regarding potential methods of undercutting the efforts against his invasion.

India Becomes Biggest Buyer of Russian Oil

Perhaps one of the most unexpected allies Putin found in evading the oil sanctions was India. The South Asian nation became one of the largest buyers of Russian oil following the bans on Russian oil. In fact, Indian procurement of Russian oil has exceeded that of the combined purchases of the United Arab Emirates, the United States, Saudi Arabia, and Iraq.

Data suggests India took 1.96 million barrels of Russian oil per day in the month of May, which constitutes the highest percentage of Russian-bought oil from a single country in years. The reason for India’s staunch support of the Russian oil industry? The answer is simple; Russian oil is cheap.

Thanks to the sanctions placed on Russian oil, India has taken full advantage of the low cost of Russian crude. The discounted oil is significantly less costly than that of Saudi Arabia or Iraq, meaning Indian refineries are more than thrilled to capitalize on the imposed sanctions.

However, India reportedly purchases Russian oil at an average cost of over $68 per barrel. Since the price cap on Russian oil is set at $60 per barrel, it begs the question, why are our Indian oil refineries ignoring the imposed price cap?

India Pays in Chinese Yuan for Russian Oil

As part of the continued support of Russian oil, Indian refineries recently settled payments using the Chinese Yuan. Although India has long sought an alternate currency for settling oil purchases than USD, using the Chinese Yuan is significant in several ways. Because of the sanctions placed on Russia by the West, Moscow’s oil customers have had to turn to other means of settling purchasing debts.

At least two Indian refineries are paying for Russian oil in Chinese Yuan. Although it is not clear how much Russian oil Indian refineries have bought using Yuan, it has significantly benefited the Russian oil trade and sparked questions about Chinese and Indian alliances where energy resources are concerned.

Historically, the Chinese and Indian governments have been less than friendly concern- ing energy resources. So, why the sudden collaboration of currency between the two countries? Could it be that China and India are uniting under the opportunity created by Russia’s invasion of Ukraine and the sanctions placed on Moscow as a result?

China Aids Russia to Skirt Around Price Cap and Sanctions

Despite the event sanctions and price caps the West is placing on Russia, China has made critical efforts to support Russia’s illegal war on Ukraine. China has drastically increased its purchase of Russian oil, blatantly ignoring the price cap and importation restrictions. Beyond profiting from Russia’s oil industry, the Chinese government is rumored to have supplied Moscow with essential technology to aid their war efforts.

China’s actions severely undermine Western efforts to squelch the brutality shown by Moscow since February 2022. This vehement support of Russia by the Chinese government aligns with the Russian war effort in Ukraine. China has become a critical Financial partner and economic ally by “mitigating the impact of Western sanctions.”

“Russia’s war against Ukraine has been enabled in no small part by China’s willingness to support them, in direct and indirect ways. I hope this report makes clear to Beijing that the United States, and the world, will know if they take further actions to enable Putin’s brutal invasion,” said Rep. Jim Himes of the House Intelligence Committee.

Treasury Sugarcoats the Problem

Despite the alarming support from India and China, the Treasury Department still asserts the Russian sanctions are sufficient and successful. Of course, the sanctions have made some economic impact on Moscow. However, they have also given way to strengthen the economic partnership between Russia, India, and China.

Although the Chinese embassy in Washington upholds that all interactions with Russia have followed the imposed restrictions, there is clear evidence to instill significant doubt. Chinese officials also reiterate their objectivity in the Ukrainian issue. However, the actions and consistent economic support that China has shown to Russia tell a different story.

In early August, the Department of the Treasury released an update on the price cap of Russian oil, claiming it has been an evident success. While the sanctions have placed an economic strain on the Russian government, they only led to other avenues and potentially less-than-legal methods of procuring oil revenue.

A “New OPEC” on the Horizon?

With the trifecta of Russia, India, and China seemingly working in cohesion despite Western efforts, one has to question if this is a sign of a new energy powerhouse made in the image of OPEC. If these three nations were to align in other areas, it could spell disaster for the global market and significantly impact the outcome of the Ukrainian conflict.

If the three nations ally themselves beyond economic resources, it could spell disaster for the future of the energy sector. Furthermore, the aftershocks of a triad of powerful Asian countries could spark further conflict on a global scale. As the situation continues to unfold, it will be essential for oil investors and energy marketers to keep a close eye on Russian activity.

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About the author: Jess Henley began his career in client relations for a large manufacturer in Huntsville, Alabama. With several years of leadership under his belt, Jess made the leap to brand communications with Bizwrite, LLC. As a senior copywriter, Jess crafts compelling marketing and PR content with a particular emphasis on global energy markets and professional services.

 

Tyler Reed

About the author: Tyler Reed began his career in the world of finance managing
a portfolio of municipal bonds at the Bank of New York Mellon. Four years later, he led the Marketing and Business Development team at a high-profile civil engineering firm. He had a focus on energy development in federal, state, and local pursuits. He picked up an Executive MBA from the University of Florida along the way. Following an entrepreneurial spirit, he founded a content writing agency. There, they service marketing agencies, PR firms, and enterprise accounts on a global scale. A sought-after television personality and featured writer in too many leading publications to list, his penchant for research delivers crisp and intelligent prose his audience continually craves.

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