This week, G7 member states (Canada, France, Germany, Italy, Japan, the UK, and US), plus Australia and the whole EU (without Hungary, which got a special exemption), agreed to set a cap price on $60 for Russian crude oil shipped to third-party countries using G7 and EU tankers, and/or insurance companies. Around 90% of the world's key shipping and insurance firms are based in G7 countries, so the cap could make it difficult for Russia to sell its oil for a higher price.
Russia will need to create its own fleet, possibly with very old vessels, to evade the price cap. Nevertheless, with a price cap set at $60 per barrel, just below the $67 market level of last week, the EU and G7 countries expect Russia will still have an incentive to continue selling oil at that price, while accepting smaller profits.
Meanwhile, Ukraine's president Zelensky called this price cap "very weak", demanding instead that all imports from Russia should be prohibited. Russia, in its turn, declared that it does not intend to supply oil under the price ceiling conditions, and that they are "preparing an answer".
Until 2021, the EU imported from Russia 50% of its coal, 40% of its gas and 25% of its oil. Energy exports fill 50% of the annual budget of Russia, the third-biggest oil supplier in the world after the US and Saudi Arabia. Also, Russia is the largest gas exporter worldwide, followed closely by the US and Qatar. Because of that, following the full-scale invasion of Ukraine, western countries have imposed energy-related sanctions:
• The European Union has stopped importing all Russian coal and the oil brought in by sea. Germany, Poland and the Baltic states decided to also ban oil imports that came through land pipelines. With this, around 90% of the total EU oil imports from Russia will be banned at this moment. Some EU countries (Bulgaria, Hungary and Slovakia), will continue to receive Russian oil delivered by land due to their geographical situation, which make it difficult to find alternatives to Russian resources.
• The EU will ban all imports of refined oil products from Russia in February 2023.
• The US has already banned all Russian oil and gas imports.
• The UK will phase out Russian oil by the end of 2022, and it no longer imports Russian gas.
• Germany has frozen plans for the opening of the Nordstream 2 gas pipeline coming from Russia.
In addition to the energy sector, sanctions on Russia, which are all legal according to international law, include:
• A ban by the UK, EU and US on the export of dual-use items with both a civilian and military purpose.
• A ban on all Russian flights from US, UK, EU and Canadian airspace.
• An import ban on Russian gold.
• A ban on the export of luxury goods to Russia.
• Disconnection of many Russian banks from the SWIFT international payment system.
• Western countries have sanctioned more than 1,000 Russian individuals and companies, including so-called oligarchs. Assets belonging to President Putin and Foreign Minister Sergei Lavrov have been frozen in the US, EU, UK and Canada. Superyachts and other assets linked to sanctioned Russians have also been seized.
As a response, and because of financial sanctions on Russian banks, the Kremlin has asked the EU countries that want to continue with their energy deliveries to pay in Russian rubles. Following this threat, Russia has now cut off gas supplies to Poland, Bulgaria, Finland, Denmark and the Netherlands, who refused to pay in Russian rubles. Then, in September of this year, a sabotage on the Nordstream pipeline cut off gas to Europe, so much of Russian gas deliveries into Europe has now stopped.
Surprisingly, these sanctions did not lead to a fall in revenue for Russia, quite the contrary. Overall, in the first 11 months of 2022, Russia's earnings from hydrocarbon production and exports increased 35% compared with 2021. Despite Russian oil prices falling from $95 in February 2022 to $67 this week, its exports to other countries, specially India and China, have compensated this loss. Moreover, gas prices have increased 400% in some regions of the world, so Russia will end this year with more revenues, a fiscal deficit of just 1% of GDP and an inflation of around 20%, despite that financing the war in Ukraine accounts now for 25% of its annual budget.
However, those extra exports and revenues for Russia have been steadily declining since April 2022, as world prices are slowly falling back again, Europe is constantly reducing its purchases, and countries in Asia are buying less from Russia at market price levels. Also, sanctions are weakening Russia by blocking its access to the hi-tech components that its military sector needs, and GDP will fall around 20% in 2022.
In the end, the efficiency of the sanctions have been mixed, because it is always possible to use other countries to buy products. Nevertheless, from a moral point of view, it is difficult to trade with a country that is invading as Russia is doing, and sanctions are indeed making difficult for the Russian army to fight in the battlefield of Ukraine.
Finally, the group of top oil-producing countries known as OPEC+, where Russia is included, said recently that it will continue to reduce its output in order to increase global prices. OPEC+ operates as an economic cartel and holds meetings regularly to decide how much crude oil to sell on the world market. Because of this, and the fact that the war in Ukraine is still escalating, with Ukrainian attacks this week into three air bases located very deep inside Russian territory, it is very likely that high uncertainty will continue to dominate the global agenda.