Home / Opinion / Views /  Impress upon the West the futility of its oil cap

It was like a ship cruising along quietly at night, with barely a ripple across the global market for crude oil. On Monday, a much-hyped price cap of $60 per barrel on Russian oil shipments took effect. Imposed by a pact forged among the G7 countries, the EU and Australia (the US-led West, broadly), the complexity of this sanctions package is matched only by its futility. The EU has barred seaborne imports from Russia, even as European and British companies can no longer insure, trade or ship Russian supplies to non-EU countries like India unless the oil to be shipped is bought below that price. The proposal of a cap has been in the air since May, when the West began working on ways to squeeze Russia’s oil revenues to starve its war in Ukraine of funds. Its imposition put Opec+ in wait-and-watch mode, with the oil cartel reported to have kept its quota allotments on hold to first gauge the cap’s market impact. But price volatility stayed muted on Monday, with a slight hardening in early trading better attributed to an easing of China’s covid curbs amid a scenario of world demand softened by a broad economic slump. Moscow rejected the cap, of course, but has no cause for panic. New Delhi, too, can keep calm and carry on.

Spotting a bargain, India upped its imports of oil from Russia sharply this year, slurping up almost a million barrels per day—about a fifth of the total—at a discount in recent months. Analysts estimate that our recent deals were struck at $5-10 per barrel above the $60 cap. If so, the gap is not disruptively large and hence we can hope for even cheaper Russian shipments. This would be preferable to side-channel alternatives that dodge sanctions but push up shipment and insurance costs, especially since it would deprive us of the cost efficiency of a vast reinsurance industry. In other words, we might be able to benefit from the fact that Western sanctions are calibrated not to reduce Russia’s export overall volumes, which could cause a supply shock. With a Russian barrel of oil estimated to cost under $45 to produce, the price cap only aims to cramp profits, not eliminate them. And as the oil market did not get rattled, the West may want to congratulate itself on a finely balanced cap that tightens Russia’s cash flows without choking output. Yet, this need for a balance also betrays how marginal its effect on the Kremlin’s wherewithal for warfare will be. Other sanctions have failed, the aggressor of 2022 will end this year with a huge trade surplus, and this week’s move achieves nothing positive for anyone. All it has done is split a major commodity market along geopolitical lines and advertised the West’s willingness to weaponize trade and push globalization back. Since this is bad for the world economy’s long-term prospects, India should not just oppose such punitive policies, but also initiate talks on a global treaty to safeguard economic ties from geopolitics.

How the Kremlin responds to the West’s latest pressure tactics is a factor that will be under watch for a while. As Moscow has shown little restraint in its periodic nuke rattling, a recklessly disruptive pushback remains a risk. While we in India have a special interest in softer oil prices for stability on the external front at a time of slowing exports, with all its secondary internal benefits, we must impress upon other countries the world’s need to keep trade going through thick and thin. For everyone’s sake, the high seas must stay free and open everywhere.

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