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Will Russia actually be affected by capping the price of its fuel?

December 10, 2022 at 1:11 pm

The Liberian-flagged oil tanker Ice Energy (L) transfers crude oil from the Russian-flagged oil tanker Lana (R).[ANGELOS TZORTZINIS/AFP via Getty Images]

Every time Western countries led by the US impose sanctions on Russia to crack down on it and force it to end its military operation on Ukraine, the opposite happens. As a result, European countries, with the exception of the US at times, suffer due to their sanctions on Moscow.

The latest of these sanctions was the G7 countries imposing a cap on the Russian fuel price at $60 per barrel to reduce Russia’s revenues and, therefore, make it unable to fund its war. The decision went into effect last Monday and, of course, it did not immediately impact the global fuel markets for many reasons. The most important is that applying the new price cap will not occur until next January because Moscow has contractual obligations at the current market prices that last until the end of the year. On the other hand, these markets currently witness a state of uncertainty because of the recession suffered by the global economy.

Russian oil - Cartoon [Sabaaneh/Middle East Monitor]

Russian oil – Cartoon [Sabaaneh/Middle East Monitor]

The economic sanctions imposed on Moscow are purely political and aim to weaken it as much as possible. The European countries, especially the major countries, received the shock harshly and entered into a cycle of long-term economic challenges. These countries still have not recovered after the global gas crisis, which resulted in it replacing Russian gas, which is cheap and ready to use, with US gas, which is being sold for six times the price. This does not include the crises of importing cereals and foodstuffs, which affected these countries and many world countries, causing the global economy to suffer unprecedented inflation rates and an economic recession.

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It is strange that the engineers of these sanctions imposed on Moscow are entirely ignoring economic logic. They constantly avoid looking for replacements to reduce the magnitude of losses, especially for Europe. This time, there was blatant interference in the mechanisms of the global oil market, with the continued threat to energy security and oil supply. They definitely did not calculate the consequences of this dangerous decision.

Meanwhile, the Russian response was to refuse to comply with the decision to cap its gas price. The Kremlin did not openly announce its measures, but it will align with its interests and crush Western ambitions to destroy the Russian economy.

The fear is that Russia will go through with its threat to reduce its production, stop selling it in international markets and head towards other countries directly. This is especially true since it is currently linked to India, China and Turkiye at preferential prices. These countries announced that they would not be subjected to the decision, especially since the costs of their agreements reached $66.50 per barrel. This is a price they cannot obtain from other producers. It is worth noting that Russian fuel products go to European countries at relatively high prices and that Japan, which is part of the G7, will continue to buy Russian gas until June as part of an exception agreed on in the decision.

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The consequences of the Russian reaction are dangerous, especially if Moscow goes through with its threat to stop supplies to global markets, which will suffer great imbalance due to uncalculated interventions that go against the logic of the market. This will cause a rise in demand with a low supply until fuel prices reach record levels, the consequences of which will reach all countries of the world and increase inflation rates. In particular, it also reduces the ability of Western citizens to meet their energy needs.

Any tampering with the mechanisms of the global markets, or with the ability of a country or a bloc to impose decisions such as these, adds a sense of uncertainty for investors in the fuel sector due to the great risks they cannot bear.

On the other hand, this decision, considered a violation of free market laws, will contribute to the crisis for European insurance companies committed to contracts with Russia to transport its fuel by sea at market price. Russia confirmed it had the ability to transport and insure its fuel through companies it owns to reach countries linked to it through agreements and contracts.

Many issues will arise. However, what will happen to Moscow is much less severe than what the decision-makers are hoping for. Russia announced that it would adopt a transparent system to price its fuel, as it possesses a great deal of assets. However, imposing the decision will be costly since it is the most important path in the crisis-ridden global energy sector, which will suffer even more after this. This will exacerbate the global economic crisis, which will be difficult to resolve for years to come.

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Translated from Addustour, 8 December, 2022.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.