As President Trump slapped an additional 25% on Indian imports to punish the country for buying so much Russian crude, the European Union was mulling over its new sanction package against Russia. That would be its 19th in a row. And there is not a lot left to sanction. Meanwhile, Russia’s income from oil and gas remains quite healthy.
Ever since the West launched its sanction offensive against Russia, turning it into the most sanctioned country in history ever, there were warnings that this could backfire: first, the sanctions would motivate Russia to look for alternatives to its Western oil and gas markets. Second, they could hurt those doing the sanctioning more than Russia.
The latter is already a fact. While far from unscathed, Russia’s economy is doing better than the economy of its biggest European gas buyer, Germany, the eurozone economy as a whole, and most of the European Union economies, plus the UK. The latest GDP figures reveal 1.1% growth for Russia in the second quarter, which was significantly lower than the 4% growth a year ago but markedly better than Germany’s performance, which was yet another quarterly contraction, at 0.3%, while the eurozone posted a unremarkable growth of 0.1%. The UK surprised observers with quarterly growth of 0.3% in the second quarter, which was celebrated by double-digit growth.
This is the context in which the EU and the UK struck a deal to lower the price cap that the G7 had come up with to try to reduce Russia’s oil and gas revenues without causing a price spike by interrupting export flows. Originally, the cap was set at 60%, which the G7 decided would be low enough to hurt Russian revenues but high enough to keep the oil flowing. Enforcement, however, has been tough.
The only way to enforce the cap was by effectively prohibiting Western insurers from doing business with shippers transporting Russian crude unless that crude is sold below the cap, and discovering there are also plenty of Russian, India, and Chinese insurers who would provide coverage for those shippers. The cap has arguably been the most ineffective sanction against Russia, because, according to Reuters calculations, Russia’s flagship Urals has traded above the cap for 75% of the time since the cap was imposed in December 2022. It seems the only times it didn’t trade above the cap was when the price fell in tune with international benchmarks.
Despite this, the EU and the UK agreed in July to lower that cap 15% below the market prices for Urals, which is currently around $46.50 per barrel—not that those buying Russian crude and those producing it would notice the new cap. Insurers in the West who are losing business because of the cap will notice.
This is not to say that the sanctions have had no effect on Russia’s economy whatsoever. They have had an effect—though it was not the intended one. Revenues from energy exports have suffered a certain decline, but the latest part of this decline has been more of a result of the international oil price downward trend rather than any sanction action.
What the 19th package of European Union sanctions against Russia will contain is anyone’s guess. The more that Brussels—and London—sanction, the less to sanction later. Meanwhile, fighting in Ukraine continues, strongly suggesting the effectiveness of those sanctions as a deterrent for military action has been a net zero. Also meanwhile, Russia just signed a deal for a second gas pipeline to China, cementing its eastern pivot and insulating a bigger portion of its future gas exports from sanction action from the West.
By Irina Slav for Oilprice.com
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