At the same time as the military conflict in the Ukraine escalates, a fierce competition is raging over Russia's gas and oil exports. Nearly 90% of Russian oil imports to Europe will be impacted by the end of the year due to maritime restrictions imposed by the EU and the U.S., severely lowering Russia's trade revenues and perhaps impacting European residents.
If the conflict in the Ukraine is not resolved and the illegally occupied territories are not returned, Russia will have to act to impose economic hardship on the European Union (EU) by cutting off its supply of hydrocarbons, forcing the EU to lift some of the sanctions it has imposed on Russia.
As a result, the inhabitants of the European Union (EU) will be miserable if they choose either of the options. It wasn't long after the decision to stop gas distribution via a key pipeline that the G7 countries set a deadline of December for a price ceiling on maritime trade of Russian oil. To counter the political and economic pressure exerted on it by Western sanctions, Russia is waging a continuous campaign of planned disruptions and stoppages to create gridlocks of petroleum exports as a weapon.
The country has benefited from the increase in oil prices, but its gas reserves have been its most effective tool. Russia's move is paying off, especially in light of the EU's vulnerable energy situation. Russia may significantly raise gas prices and leave Europe without a critical energy commodity before a forecasted hard winter by shutting off delivery to Europe. Even though there are several alternative crude oil sources in the globe, much of it is stuck in political wrangling and supply bottlenecks.
Politicians in Western Europe's industrialized nations may expect public discontent, since several demonstrations have already taken place and are only expected to get larger and more violent in the future. The Kremlin is placing its bets on European voters being unwilling to support the Ukraine at the price of their own economic misery. Russia has almost nothing to lose by acting fast and resolutely. As oil and gas production in Russia takes a hit, so too will the European economy. As a last ditch effort to sow discord among EU leaders and citizens, the G7 and EU must act in concert by the end of the year on oil embargoes and price controls.
While the agreement to restrict oil prices is a step in the right direction, it does not address all of the concerns over the dangerous and rapidly rising geopolitical scenario. Participating nations are forbidden from providing financial, insurance, or brokerage services to oil shipments that fetch prices over the agreed-upon cap. Overcompliance, when service providers refuse to cover any Russian oil for fear of accidently infringing laws and regulations, is a possible hazard.
When it comes to the price of oil shipments, how precisely will government agencies settle on a number? Can consumers identify genuine Russian oil from that sold by middlemen? And what if Russia really stops exporting oil to nations who impose the limit, as it has threatened to do? This would not only deprive nations of much-needed energy, but it would also put immense pressure on oil prices, leading to severe market instability.
Even the G7 partnership is beginning to show signs of cracking. The question of how to make the price cap have a worldwide impact, given the small size of the sanction coalition, remains unanswered. The coalition hopes that non-sanctioning countries will be compelled to adhere to the cap so that they may take benefit of cheaper prices and not have to worry about running out of oil.
However, countries like India and China are already benefiting from the drop in Russian oil prices, and they have other alternatives for risk management, including the protection and indemnity (P&I) insurance provided by Russian insurers. If it means preserving these important oil clients and making its battle against the cap effective, Russia will almost likely have the political will to issue sovereign guarantees to reassure Chinese and Indian insurers contemplating taking over coverage from Western businesses.
A resolution to the Ukraine problem is highly doubtful, and sanctions will likely not be lifted until peace is restored, due to Russia's hard line and lack of dialogue. This winter, when energy costs spike and citizens protest in reaction, Russia will reap the financial rewards of massive state subsidies like those in Sweden, Finland, Germany, and the United Kingdom. The Russian administration is the only one that doesn't seem to be concerned about the next harsh and dreary winter.
~ Anne Charman, Vice-President Market Research - Brightside Industries Group, LLC
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