STOCKHOLM:- The Western sanctions on Russia over its aggression against Ukraine are growing tighter. The biggest outstanding concern is how to cut Russia’s oil revenues, which may now account for over half of its export revenues. The best method is a price cap for oil, which is already being implemented – though not by Western countries.
The initial idea was that the West would stop importing Russian oil. But because Russia accounts for roughly 11% of global oil production, Western attempts to reduce oil imports from Russia led to sharp price hikes on the world market, allowing Russia to earn more from its oil exports, while delivering smaller volumes.
Some countries, notably India, China, and Turkey, have increased their oil imports from Russia. But they have not necessarily helped Russia much, because they have bought this oil at a large discount. At the beginning of 2022, Russia’s Urals crude was sold at a minor discount of $1-2 per barrel, relative to the European Brent standard. Since April, however, this discount has hovered between $31-36 per barrel. On August 3, the Urals crude oil price was $76 per barrel.
Thus, even though they have refused to participate in the Western sanctions against Russia, India, China, Turkey, and others have successfully imposed a de facto market-based price cap for Russian oil, as well as a global coalition to maintain this cap. Rather than criticizing countries for buying oil from Russia, the West should thank them.
And yet, the current world market price of oil, at $100 per barrel, is still too high, having risen by $24 per barrel since January because of Russia’s war, Western sanctions, and fears that Russia might stop exporting oil.
The Western sanctions against Russia’s oil industry are of two kinds. In July 2014, the West introduced substantial sanctions against the export of oil technology to Russia. These sanctions focused on deep-sea drilling, arctic drilling, and shale oil. This year, the oil technology sanctions have been expanded, compelling the three big Western oil services companies – Halliburton, Schlumberger, and Baker Hughes – to leave Russia. These sanctions make sense: They do not cause abrupt production cuts, but they limit Russia’s ability to maintain its oil production in the medium term.
The second category of Western sanctions aims at cutting Russia’s exports of oil, both crude and petroleum products. Together with sanctions against Russia’s gas exports, they have been the most controversial, because they have boosted the oil price, which harms the West and all other oil importers, while benefiting oil exporters.
The West has imposed sanctions against exports by smaller oil producers, notably Venezuela and Iran, without any major disruption of the global oil market. But these sanctions have certainly boosted the price of oil, which was not in the interest of the West or of other oil importers. To try to impose such sanctions on Russia seems foolhardy at best, and possibly counterproductive. Many poor, oil-importing countries, which tend to blame the West rather than Russia for high prices, would suffer.
Economists typically argue that undesired imports should be subdued with tariffs. Import tariffs drive down the price of the imported goods (as desired with Russian oil), reduce consumption (which in this case would benefit the climate), and represent a standard procedure (all countries have anti-dumping laws authorizing the swift imposition of substantial tariffs). But they also drive up inflation, and especially petroleum prices, risking a backlash from voters. For these reasons, import tariffs on Russian oil are widely perceived as unacceptable for the time being.
That is why US Secretary of the Treasury Janet Yellen is preaching the virtues of a price cap for Russian oil and gas. She is right, but many things can make this policy more effective. In particular, rather than telling non-Western countries not to import Russian oil, the West should ask them to maintain their price discounts.
The West has no interest in restricting Russia’s oil production in the short term, because that will only boost Russia’s oil export revenues. Instead, the West should make clear, as it did in 2014, that its focus is on keeping global oil prices down – a message that will be warmly welcomed in the oil-importing Global South. And the West need not worry that Russia will stop exporting oil, because it cannot afford to do so.
Natural gas is another matter altogether. Russia can afford to stop exporting its gas right now. Even in 2011-13, when prices were high, natural gas accounted for only 14% of Russia’s export revenues. More than four-fifths of Russia’s gas is exported to Europe, which has lost all confidence in Russia as a trustworthy supplier and wants to halt these imports as soon as possible.
The West can and should cap the price of Russia’s oil exports, and it can do so by praising the discounts extracted by many non-Western countries. To maintain the cap, they should also make clear that they will not block Russian oil exports.
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