What does the Russian Oil export ban mean for the West?

Hello everyone, this week I will be looking at the effect of the Russian oil export ban on the western nations announced by Russian President Vladamir Putin on Tuesday.

In early December, the G7 group of countries, the European Union and Australia imposed a $60 per barrel price cap on Russian seaborne crude oil in the market to halt Putin's war machine in Ukraine and bring the brutal war to an end. The price cap aimed to reduce Russia's earnings that it earned from its vast oil exports while preventing a spike in global oil prices. This price cap took effect on December 5 and was defied by the Russian government. According to the price cap, Russia would not be allowed to export oil at a price higher than $60 per barrel to the countries that imposed the price cap. Soon after the agreement was signed between the nations, Russia argued that this price cap was not legitimate and was only benefitting the West as it was way below the market prices of crude oil in the global oil market. Therefore, in response to these economic measures undertaken by the Western nations, Russia on Tuesday announced its plans to impose an oil export ban on Russian crude oil to all the countries participating in the price cap agreement. This would squeeze the oil supply to many nations, which are already dealing with an economic crisis currently.

The Price-cap:

On Dember 5 2022, the price cap imposed on the Russian seaborne crude oil took effect in the market which forced Russia to sell its crude oil to participating countries at a very low price of $60 per barrel. This move by the West sparked concerns in Russia, which stated that it will not abide by the price cap imposed on its oil exports. The main aim of the price cap remained to dwindle Russia's earnings from its exports of crude oil and bring down the Russian economy to help put an end to Putin's war in neighbouring Ukraine. However, Russia criticised the Price cap and labelled it as favoured towards the West.

Russian Oil finds a new market?

Since Russia began its invasion of Ukraine in February this year, the supply of Russian oil to the European market has been falling as Europe unveiled its plans to phase out 90% of the Russian oil from its markets by the end of this year. However, these falling oil exports have not had the same effect on Russia's oil revenues as the Western nations might have thought as the giant oil exporter has found new deals in South Asia. Two giant South Asian economies- India and China, have shown their interest in purchasing cheap Russian crude oil. Russia has been selling discounted oil to India to help the Russian oil flow in the market as well as defy the West's attempt to dwindle its State coffers. On the other hand, the Indian government has also shown a keen interest in buying cheap Russian oil in comparison to the higher price imports from its traditional oil importers of the Middle East like Iraq, which has been selling oil at the world price. The price cap imposed by the West has had no effect on the Indian oil imports from Russia as India has been gaining a lot economically because of the cheap Russian crude oil. Therefore, the $60 price cap has failed to achieve its goals.

Putin's Counter-attack:

The Kremlin has announced the oil export ban on the Russian oil supply to the participating countries of the price cap deal, which is seen as a fierce counter-attack to the price cap imposed on Russia. This counter-attack by Putin will have far-reaching impacts on economies as Russia is the second largest oil exporter after Saudi Arabia and this move could be a major disruption to the global energy supplies in the short run. The ban is expected to kick in from February 1 2023.

Analysis:

Soon after Russia's war in Ukraine began, the US and EU decided to crack down on Russian natural gas and oil, the main source of revenue for the nation, and deprive Russia of its finance for the war in a bid to bring a halt to Putin's war machine. The West agreed to a price cap of $60 per barrel on the Russian seaborne crude oil coming into effect on 5th December 2022, however, Russia remained defiant to agree with the price cap. On Tuesday, the Russian government laid out its plans to counter the West's oil attack on Russia and banned oil exports to all nations abiding by the price cap. This move by the nation could be seen as the start of an energy war between the West and the Russian Federation. Though Europe had already planned to phase out 90% of the Russian oil from its markets by end of 2022, it did not have much effect on Russia's oil revenues which diverted its oil supplies to India, China and Turkey, selling well below the market price. This prompted the three countries to show interest in Russian crude oil, which helped Russia maintain its oil revenues steady throughout the war.

Russia has now imposed a ban on oil export to nations that are a participant in the price-cap deal. However, this move by Russia may act as a supply shock to the oil market in the short run but will not be damaging to these countries in the long run as there are a lot of Middle East countries who are ready to sell oil to Europe and US, such as Saudi Arabia and Iraq. Though, this could be seen as the start of an economic war between the West and Russia as trade relations between the two deteriorate at a fast rate following Russia's brutal and illegal invasion of Ukraine, as labelled by the West, which has prompted a swift response in Europe. The sanctions imposed by the West and the defiance by Russia and its partners to abide by the sanctions have resulted in an unchanging situation on both sides. Russia has been successful in bypassing the West's sanctions by finding new trade partners in Asia and Europe has been triumphant in maintaining its energy security both in terms of oil and gas. Though it's yet to see what 2023 brings for both sides.

---

References:

Guardian News and Media. (2022, December 27). Russia bans oil exports to countries that imposed price cap. The Guardian. Retrieved December 29, 2022, from https://www.theguardian.com/world/2022/dec/27/russia-bans-oil-exports-to-countries-that-imposed-price-cap

deutschewelleenglish. (2022, December 28). Putin bans oil export to nations upholding EU price cap | DW news. YouTube. Retrieved December 29, 2022, from https://www.youtube.com/watch?v=odNYZPASQFo

YouTube. (2022, December 28). Russia bans oil exports to countries that imposed price cap | latest english news | WION news. YouTube. Retrieved December 29, 2022, from https://www.youtube.com/watch?v=2V_yCBH0XzQ

Putin bans Russian oil exports to 'unfriendly' countries: Details. Hindustan Times. (2022, December 28). Retrieved December 29, 2022, from https://www.hindustantimes.com/videos/putin-to-ban-oil-exports-101672197023360.html

Annabelle Liang & Daniel Thomas. (2022, December 5). Ukraine War: Oil prices rise as cap on Russian crude kicks in. BBC News. Retrieved December 29, 2022, from https://www.bbc.com/news/business-63855030

BBC. (2022, December 27). Russia bans oil sales to countries using price cap. BBC News. Retrieved December 29, 2022, from https://www.bbc.com/news/world-europe-64102180

Afp. (2022, December 28). Russia to ban oil exports to countries with price cap from February. The Hindu. Retrieved December 29, 2022, from https://www.thehindu.com/news/international/russia-to-ban-oil-exports-to-countries-with-price-cap-from-february/article66311757.ece