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Oil sanctions are a fail for the West, a win for Russia: The Economist

  • By Al Mayadeen English
  • Source: The Economist
  • 2 Feb 2023 14:37
  • 4 Shares
4 Min Read

It is argued that Russian oil now sells at a 38% discount per price-reporting agencies, which Treasury Secretary Janet Yellen, who helped devise the price cap, sees as a success that the cap is working effectively. 

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  • Russian crude and fuel have been subject to a European price cap with a second round due this month (Reuters)
    Russian crude and fuel have been subject to a European price cap with a second round due this month (Reuters)

The price cap is proving to be a flop for the West as the second round of sanctions on diesel and other refined products by the EU is due to take effect on February 5th. 

Sales of Russian crude have not decreased as the West had hoped, and shipments have dodged European ports and headed to China and India instead.

In a report by The Economist, it is stated that this actually goes towards the point of the price cap: to keep Russian crude on the market and thus keep the market stable but to curb its profits through the price. 

This in turn offers buyers negotiating power, considering that the longer export routes also pose higher freight costs which Russia has to compensate. 

It is argued that Russian oil now sells at a 38% discount per price-reporting agencies, which Treasury Secretary Janet Yellen, who helped devise the price cap, sees as a success that the cap is working effectively. 

How is the cap possibly a flop?

These price-reporting agencies haven't applied their techniques to areas where Russian oil is sold through channels that they are not aware of. For instance, European refiners report to these price-tracking agencies, but Indians do not.

Rates for ferrying oil from Russia to Asia are private and thus not available for these price-reporting agencies to evaluate. Hence, the discounts that Western analysts refer to are actually inaccurate. 

The Economist also adds that it is difficult to evaluate real pricing because everyone pretends the prices are low.

Read next: Putin signs decree banning sales of oil to price cap abiding states

Russian export, as a result, has become less dependent on Western shipping and financing, which helped evade the sanction somewhat. More than half of western Russian crude was managed by a European shipping or financing firm, but that percentage has decreased to 36%.

Regarding market pricing, Putin said on December 22, "You know, this is a slightly different regulation than an attempt to regulate oil prices. Here, the European Commission talked more about the need to regulate the situation on the stock exchange, linking it to LNG, saying that prices should be correlated with LNG prices and so on, but still it is an attempt to administratively regulate prices."

What's in store for the Feb. 5 sanctions?

As of February 5, Europe will and can no longer purchase Russian diesel and will enforce the price cap on its shipping and insurance companies. 

Although Russia "won't find a replacement for their EU buyers," both China and India pose as possible candidates even though they have refineries of their own, according to reports. 

Moreover, a majority of Russian refined products amounting to a third of Russia's oil-export revenues could raise global prices even higher as they would go unsold.

But here's the twist: These outcomes may fade with time since Russia would make up for the loss of refined with crude instead. With that and with time, the West will find itself having to resort to Chinese and Indian diesel supply, which will come from Russian crude. 

That proves that Western-imposed sanctions will eventually become ineffective for the economy and the war in Ukraine.

Bloomberg revealed on Thursday that the US is hesitant to approve a lower price cap on Russian oil, despite some EU countries urging for further cuts to Russia's energy profits.

According to the report, citing people with knowledge of the issue, Washington will review the price cap on Russia's crude oil only after the G7 adopts price caps on Russian oil derivatives, such as diesel.

  • crude
  • Russia
  • West
  • US
  • Price cap
  • European Union

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