The Group of Seven (G7) is all set to place a price cap on Russian oil supplies as the war tilts toward Russia in Donbas. While it is a bold move to sever windfall revenues to Russia, how exactly to implement a price cap remains in the air. Ultimately, it would either be a victory for the Western rhetoric or an upscaled decimation of Ukraine.
The options of financial containment are exhausting as Russia bristled through the last obstacle to its domination in the Luhansk province of Donbas. With the anticlimactic fall of the city of Lysychansk, Russian troops have turned to Kramatorsk and Slovyansk – the forefront cities in the neighboring Donetsk region. A heavy shower of artillery rocks both the cities as Russian forces (alongside the separatist fractions) are tilting toward drawn-out ground warfare to triumph over Ukraine’s southeast – cementing a formation extending down to Crimea, the former southern-Ukrainian territory annexed by Russia in 2014. The strategic victory over Donbas would compensate for the initial failure in central Ukraine and allow Russia to regroup to eventually pressure Kyiv into surrender. Intense missile strikes have resumed in Kyiv and Kharkiv as Ukrainian defensive forces struggle to maintain a strong front. The Western coalition is privy to this subtle shift in momentum – albeit reacting a little too late!
Russia on Focus at the G7 Summit
The G7 summit was a mockery of the supposed resolve the West wished to portray. Banning gold imports from Russia and debating on an oil price cap was the highlight of the meeting (looking past the crude retorts by soon to be the ex-prime minister of the UK). Admittedly, the embargo on gold exports would hurt the Russian economy. Russia holds approximately $100-140 billion in gold reserves – about 20% of the total holdings of its central bank. Budgetary estimates reveal that gold is Russia’s second-most profitable export commodity – secondary only to energy exports. The ban would significantly dent trade as almost 90% of the gold export revenue comes from the G7 economies. And while Russia would still be able to streamline gold to alternative economies in Asia, the embargo would effectively “[deny] access to about $19 billion of revenues a year,” said US Secretary of State Antony Blinken in his interview with CNN. Thus, the US is seemingly determined to tumble the Russian economy to cripple the Kremlin’s ambitions in Ukraine. The mantra is the same – cutoff maximum revenues to the point that Russia struggles to finance its war of attrition. Unfortunately, such strategies are not enough.
The Paradox of the Russian Oil Price Cap
Placing an oil price cap on Russian supplies is trickier than banning gold imports. For starters, gold is not essential for economic and social survival and, frankly, not the basis of upheaval in many developed economies struggling with skyrocketing inflation. While gold exports cannot flow easily to alternate markets, Russia has been sufficiently successful in replacing Europe as the prime market for its crude supplies. Five months since the invasion and revenues earned by Russia from oil exports are already up by 50%, according to a market report by the International Energy Agency (IEA). Since the invasion, Europe has relatively reduced its reliance on Russian oil while the US has absolutely banned crude imports from Russia. However, India has procured roughly one-fifth of total Russian exports since the invasion – up from less than 1% pre-war quota. China has been the core defiant force against Western pressure, terming sanctions against Russia as “illegal” and “Immoral”. Beijing has imported roughly 55% more Russian oil in May compared to the same period last year, prodding Russia to replace Saudi Arabia as its biggest oil supplier. In combination, China and India have counterbalanced the revenue shortfall by $24 billion in energy imports from Russia – more than $13 billion in revenue compared to 2021. The US should now question just once: how exactly can a price cap work in this scenario?
According to official sources, the G7 coalition is considering placing a cap at $40-60 per barrel of Russian oil. However, the mechanism of implementation is still hazy. The ambitious plan to cap Russian oil revenues is still very much an ambition, without any concrete structure or broader consensus. “The price cap policy would not put Russia under the immediate fiscal stress many expect,” said Mark Mozur, a market analyst at S&P Global Commodity Insights. Failure to bring India and China on board would automatically tune the futility of the plan before it even gets launched. European insurance services provided to Russian oil cargoes could be replaced by Asian counterparts, assuming that the European companies would comply instead of overriding the cap to avoid a retaliatory cut back on oil supply from Russia. The recent slash in gas supplies to Europe hints that Russia could also choke oil supply to Europe if the price cap is enacted. According to the Russian Ministry of Finance, fossil fuel revenues have already surpassed last year’s budget projections. Thus, Russia is not short on finance for the remainder of this year. Yet a winter without Russian oil or gas would be a nightmare for a Europe already grappling with hyperinflation. According to recent estimates by JP Morgan, if Russia resorts to retaliatory output cuts, the global oil prices could soar to around $380 per barrel. Thus, the superficial policy of a price cap could only spell doom – not just for Europe but for the entire global economy teetering on the verge of a recession.
No Reprieve for Ukraine
Mr. Richard Connolly – Director of the Eastern Advisory Group – sums up the reality perfectly: “For as long as the political will is there in the Kremlin and for as long as export prices remain high, I don’t see any immediate financial constraints confronting the Kremlin.” Hence, the desperate cartel-like strategies by the G7 economies highlight the West’s constrained toolkit. Russia has successfully projected force in eastern Ukraine while simultaneously pressing intensely for Kyiv. The West has focused on fortifying its own security instead of resolving the conflict in Ukraine. The NATO expansion might detain Putin from launching another invasion in Europe; it would not impede Russia from further dismantling Ukraine. Perhaps the Western coalition should pause and consider that the expansion of NATO was the very catalyst that sparked the invasion in the first place. I believe the US already realizes this reality yet continues to push forward – to save face and prolong the defeat of its rhetoric. Ultimately, these sanctions and strategies, the NATO induction of Finland and Sweden, and the pseudo-candidacy of Ukraine to the European Union have done nothing to derail Russia. And expecting Putin to hang his gloves just because the West is exhibiting its renewed post-Cold War cohesion is as fantastical as expecting a Ukrainian victory against the Russians.
[Photo by 首相官邸ホームページ, CC BY 4.0, via Wikimedia Commons]
The views and opinions expressed in this article are those of the author.
Syed Zain Abbas Rizvi is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Rizvi has written extensively on foreign policy, historical crises and economic decision making of Europe and the US.
