The latest in a series of oil sanctions against Russia came into force on Sunday, February 5. Will they make a difference? Was there ever any other choice?
On February 5, the second in a staggered run of petroleum product sanctions against Russia came into full force, such as it is. The European Union set a ban on imports of Russian diesel, gasoline, and other refined petroleum products, while the G7, the EU, and other allies established global price caps on seaborne refined oil trades. In the first phase of these bans, similar restrictions were put into place for Russia’s crude oil in December.
If these measures seem tentative and delayed, it’s because they had to be: for better and for worse. Back in February 2022, the first sanctions packages out of the US and Europe proved somewhat impressive, in that they immediately cut Russia off from the international payment system, SWIFT, and otherwise froze assets and banned direct trading with Russian financial institutions. But right away, world watchers noted what was not listed in those bans: huge exceptions carved out for the energy sector, because Russia is just too big a player in the world’s petroleum industry to ban sales of its products outright, without destabilizing critical energy, manufacturing, and transportation systems for the world.
In a piece I’d posted last February 23, “Oil imperialism and the struggle for human control over our futures”, I explored some of the earlier moves to offset Russia’s oil market dominance, including former US president Barack Obama’s 2014 sanctions to try to limit Russia’s oil futures, and the rise of “shale oil” or fracking in the US to defray any market shocks caused by Russian power plays. These efforts were mitigated in 2020 by Saudi Arabia’s own power plays, which experts differently interpreted as anti-US-encroachment and anti-Russian-tampering-with-OPEC-price-setting. (Why not both?) Then pandemic made a hash of so much.
The complexity of energy sanctions made itself felt this summer, too, while European countries struggled to divest themselves of Russian gas line reliance without falling into further economic precarity, and while Russia itself toyed with the operation of vital services. The mess of this situation also required Europe to seek energy allies in other regions complicit in difficult ethnic conflicts, as noted in “Armenia, Azerbaijan, Kyrgyzstan, and Tajikistan: the other Eurasian wars“.
All of which is to say that, although early assessments of the December and February bans are not promising, it’s also difficult to suggest that an alternative existed. CNBC recently reported that analysts have declared December’s crude oil sanctions a complete failure, with Paul Sankey calling the price cap “invented by bureaucrats with finance degrees [who don’t] really understand oil markets”.
The Economist agreed, going into greater depth as to the complexity of the situation, especially at this later stage in the war. First, the December sanctions: Yes, Russian crude oil now sells at a 38-percent discount, according to price-monitoring agencies and US Treasury Secretary Janet Yellen,, but a) this monitoring does not include all channels for purchase (Russia to Asia ferrying is private), b) the overall sale of crude oil has not appreciably dropped, and c) countries like China and India continue to serve as active trading parties. Indeed, there’s good reason to believe that China and India are even making up for any short-term loss to the West, because
[c]ustoms data from India and China show that they paid more for their Urals oil this winter than is widely thought. Another reason true pricing is hard to assess is that everyone has an interest in pretending that prices are low. Russia’s oil firms are keen to minimise their tax bills and Indian refiners want to squeeze other suppliers.“Why the West’s oil sanctions on Russia are proving to be underwhelming”, The Economist
And perhaps most critically of all, d) in the last year, Europe and North America weren’t the only economic regions adjusting to wartime realities. Russia has also withdrawn its reliance on Western trade, reducing the blow of further bans.
Which brings us to these latest sanctions, which could easily backfire for a few reasons. Short term, the existence of unsold refined petroleum products could still spike the cost of remaining refined petroleum, which would negatively impact Western consumers. Long term, Russia’s growing investment in crude oil exports to China and India could easily offset any loss of refined petroleum revenue. The global market would also be starved a bit, but only until refined petroleum products (diesel, gasoline, aviation fuels) re-enter from China and India, having been made with Russia’s crude oil. Simply put, these sanctions could easily incentivize a fuller economic transition that benefits Russia’s war chest in the end.
One other key consideration has been breaking through non-Western media, but not quite reaching mainstream news here yet: the way these war sanctions are also destabilizing the perceived value of the US dollar as a key unit of international exchange. India has been a clear proponent of buying Russian oil since early in the war, with the government expressly calling on state firms to prioritize this import market. This week, national institutions went one further, with The State Bank of India now clearing payments for Russian oil made in Emirati dirhams. This change allows more firms to bypass Western sanctions, and deepens the world’s move from the US dollar to the yuan and the dirham as more relevant currencies for global exchange.
The fragile human takeaway
If we could have weathered the brutal blow to our energy, transportation, and manufacturing sectors decisively last February, would Russia’s invasion of Ukraine have been ground to a halt much faster? Before Russia could realign its energy sector, the core of its war chest and key to its future as a regional power, in a way that might further destabilize global markets?
Perhaps, but the “if” in this hypothetical is fairly extreme. That would have been an almost impossible ask of the world in February 2022, still so delicately re-emerging from the COVID-19 pandemic’s greatest economic shocks.
Our world is far more interconnected than nation-state borders often suggest, and every bit as complicated as illustrated by the failure of our “experts” to come up with perfect solutions to the encroachment of specific leaders on our peace.
At some point, we will have to reckon as a species with how little it serves us to think about our economies in discrete national units, and how much a world run on petroleum opens itself to vulnerabilities such as we’ve seen in the last year.
For now though, these late-stage oil sanctions may well be the best we could have done—and also, they might not be good enough.
What can we do, going forward, if willing to face all these inadequacies head on?