How Russian Oil Still Fuels Putin's War
Before long it will have been a year since Putin’s Russia launched an invasion of Ukraine. One of the main tactics from Western powers has been sanctions on Russian goods; in particular their main export, oil. And yet the evidence shows that this has made very little difference.
Russian oil exports have held up and the profits allow Putin to persist in his unjust war without the crippling economic damage that the West had hoped for. In fact Russia’s current account surplus this year is second only to China’s.
Where did things go wrong?
The main problem is that oil meant for Europe has instead been imported by other large powers such as China and India. The issue with the Western response has been the ease with which such a change in global supply routes has taken place.
Only from today is the EU implementing a plan (originally devised in May) to ban seaborne imports of Russian oil. As part of this new legislation, European firms are also prohibited from insuring, shipping or trading Russian crude unless it is sold at a price capped by the Europeans. This builds on an insurance ban passed by the UK at the start of November.
In theory this should be a devastating blow. Between Lloyd’s of London and other firms across the continent, around 95% of insurance for oil tankers comes from the UK and EU. The problem is that this could easily backfire. If the supply of oil gets strangled then prices will go significantly up and it will be Western consumers who feel the pain.
The U.S. is worried about this as well so the compromise has been a cap on the price of oil that should still be attractive for Putin. In fact the $60 per barrel cap at the moment is pretty much market price.
In essence the new law will simply maintain the status quo.
If there is to be change then it will likely be realised as a gradual diversification of the market. According to the Financial Times, Russia has steadily been acquiring a fleet of 100 ageing tankers to circumvent the new law if the price cap proves to be a problem.
Russia has said that it will not deal with shipping firms that enforce the price cap but that might change for two main reasons. Firstly, the number of tankers needed is more than double the 100 that Russia has managed to procure. Estimates put the figure at 240. Secondly the penalty for European firms who ignore the price cap is relatively mild: a 90 day ban from Western maritime services as opposed to the lifetime ban that was originally proposed. That change is the difference between a genuine deterrent and something that can be factored in as merely a ‘cost of doing business’ if the price is right.
Meanwhile diversification is also likely in the insurance market as well. China and India have known for a long time that this sort of law could be enacted and that it will create a gap in the market. Non-European firms may struggle to compete in terms of capitalisation or expertise but that will not prevent them from being an attractive option if the price cap jumps or Putin does indeed refuse to co-operate with Western operators.
We may still see a small shock in prices once the new law comes into force today but Western powers are having to re-learn a tough, old lesson in this global economy: oil always finds a way.
No podcast this week because there are no new cases but catch up with old episodes here: http://uklawweekly.com/
Make a difference today,
Marcus