Why India should not support price caps on Russian energy

The European Union is contemplating imposing price caps on Russian oil and gas. The G7 group of rich nations had earlier proposed enforcing a cap on the price of Russian oil exports. Russia has responded with the prospect of cutting off all energy supplies, if the EU goes ahead with such a move. Russia seems also to have persuaded the oil producers’ cartel, OPEC, to slash production, and thereby prevent the ongoing slump in oil prices since late August.

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The proposal to cap Russian crude prices is to be given effect by European companies refusing to insure Russian cargoes of oil at higher prices and European tankers refusing to carry Russian crude at prices above the cap. The net effect might be to create a new insurance and re-insurance business pertaining to Russian crude exports in Asia, whether Shanghai, Hong Kong, Singapore or India’s GIFT City. Russia would simply divert its crude shipments to countries that are not part of trying to penalize Russia for its invasion of Ukraine. A cutback of Russian supplies of crude to Europe, amounting to some 30% of the continent’s total import of oil, would raise Europe’s demand for crude from other sources, pushing up crude prices in general and potentially swelling the ranks of nations seeking access to relatively cheaper Russian crude.

The Czech Republic, which holds the EU’s rotating presidency right now, is against taking up the price cap proposal at the forthcoming meeting of EU energy ministers on Friday. Since Russia has threatened to freeze Europe this winter by withholding all energy exports, if the EU were to impose a cap on Russian gas prices, such a decision would be beyond the remit of energy ministers: it would take an EU summit of heads of governments to decide on a price cap on Russian gas.

Russia has already cut off supplies to Europe via Nord Stream1, the key pipeline from Russia to Germany. Some gas still flows to Europe via Ukraine, and through TurkStream, a pipeline that reaches Turkey. The flow of gas via Ukraine has dropped far below full capacity, and Russia could, as winter deepens, reduce supplies further, forcing Ukraine to make a choice between letting gas flow through its territory on to Europe or utilizing the gas for its own uses. That would be designed to incite passions in Europe against Ukraine.

Using sanctions against Russian energy, food and fertiliser to punish Vladimir Putin for invading Ukraine has meant punishing the entire world, particularly developing countries, by squeezing pandemic recovery with higher than warranted energy and food prices. Given the prospect of starvation in parts of the world that used to depend on imports of grain, the West relented on sanctions against food. Food prices have eased significantly.

Now, they should relent on energy. Let oil and gas flow freely from Russia, as well as fertilisers and other stuff, including gear an expanded fracking industry in the US needs. This would ease energy prices across the world, and penalize Russia indirectly. Lower export earnings from lower prices for oil exports would hurt the Russian war effort, more than infructuous attempts to cap Russian oil prices.

If the West wants to contain Russia, it should expand its war support for Ukraine: give the Ukrainians more weapons like the Himars (High Mobility Artillery Rocket Systems) kit supplied by the US, or, in the extreme case, send in the West’s own men and not just selective materiel to fight the war. Or the West should encourage Ukraine to sue for peace, instead of encouraging the Ukrainians to keep fighting a war that is increasingly costly for Ukrainian lives and for the world economy.

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