Opinion
Vladimir Putin is getting a cash boost and the West needs to stop it
Stephen Bartholomeusz
Senior business columnistA recent surge in oil prices and a narrowing of the discounts on Russian oil may force G7 countries to contemplate tinkering with the price caps on Russian crude or strengthening their enforcement.
From mid-July, the oil price has risen from around $US78 a barrel to more than $US85 a barrel even as evidence of some Russian oil being sold at prices above the $US60 a barrel price cap has emerged, albeit that those prices exclude transport costs being absorbed by Russia.
Vladimir Putin’s Russia has been greatly increasing its oil sales to China, India and other Asian countries, which are markets the Saudis traditionally extracted premium prices from.Credit: AP
The surge in oil prices in the past few weeks has been driven by the decisions of Saudi Arabia and Russia to voluntary cut their own production, beyond the 1.6 million barrels a day members of the OPEC+ cartel agreed to in April.
Last month the Saudis said they would extend the one-million-barrels-a-day cut they announced in June through to the end of August. Then, late last week, they said the lower production would be sustained through September and might be extended further and even reduced.
Russia, which had unilaterally cut its production by 500,000 barrels a day last month in tandem with the Saudi action, said last week it would reduce its supply by 300,000 barrels a day.
There is some confusion over whether that’s in addition to the previously announced 500,000 barrels a day reduction or a tapering of the existing production cut, but, in any event, the Saudis’ continued withholding of supply in a market where demand has held up thanks to the reasonably solid growth in the global economy has delivered what the Saudis, and Russia, wanted.
The Saudis need a price of around $US80 a barrel to balance their budget and Russia wants higher prices so that, even with a $US20 to $US25 a barrel discount to Brent crude, it maximises oil revenues that have been nearly halved by the G7’s (and Australia’s) price caps.
Whether the Saudis, who have borne the brunt of the total cutbacks by OPEC+, maintain production at its current level probably hinges on China, which has been gorging on the lower-priced oil – particularly heavily discounted Russian oil – over the past year, building significant inventories of crude and refined products in anticipation of an economic rebound from last year’s zero-COVID weakness.
So far, however, that hoped-for bounce hasn’t occurred, with the economy almost flatlining under the weight of a myriad problems, some of them policy-induced. Consumer confidence and activity is low, factory production and exports have been falling, local government finances are brittle and the property sector remains depressed.
If China were able to stimulate its growth rate, oil prices would probably head above $US90 a barrel and potentially towards $US100 a barrel unless either OPEC+’s production increases or some other new source of supply enters the market.
The surge in oil prices in the past few weeks has been driven by the decisions of Saudi Arabia and Russia to voluntarily cut their own production.Credit: Andrey Rudakov
The US has been trying to negotiate a new agreement with Iran under which it would relax sanctions (and enable Iran to export a lot more oil) in exchange for agreed limits on the extent to which the Iranians could enrich their uranium. If that deal were done, it would change the dynamics of the oil market and reduce the influence the Saudis and Russia have over the price.
China and India have been the biggest buyers of Russian oil since its invasion of Ukraine and both have benefitted from the G7 embargoes and price caps on Russian oil. Both have been buying more crude than they need, refining it and then selling it back to Europe, America and even Australia – the economies that have imposed the sanctions.
That’s not a flaw in the sanctions, which were designed to reduce Russia’s revenue from oil while keeping that oil flowing to avoid the $US120 a barrel prices that were experienced in the immediate aftermath of the invasion.
The effectiveness of the price caps is in that ability to squeeze Russia’s oil revenues and, until recently, they were highly effective. Russia’s oil and gas revenue was down nearly 50 per cent in the first half of this year and the record trade surplus it posed in the June-half last year was almost wiped out.
With oil prices now rising sharply, the potential for Russia to generate more revenue to fund its war if it can evade the caps and the incentives to do so have also increased significantly.
While Russian crude and refined products shipped out of the Baltic and Black Sea ports, which used to be sold into Europe, have generally been bought at prices below the $US60 a barrel cap, oil shipped from its Pacific ports, which wasn’t sold into Europe pre-invasion, has been sold at prices above the cap (albeit that, with the shipping costs and the investment in the “grey” fleet of old tankers Russia has acquired to circumvent the sanctions, much of it would still, in net terms, effectively end up within the cap).
Russia’s ability to achieve at least some sales at prices above $US60 a barrel is occurring despite a significant proportion of that oil being exported on tankers owned or insured by entities in countries that have signed up to the caps and the leverage provided by the UK and European dominance of the insurance market to enforce the caps.
Where monthly energy revenues had been falling steadily this year, last month they jumped more than 50 per cent from their June levels as the price of Russia’s flagship crude, Urals, broke through the cap for the first time since it was imposed last December.
While the US professes no concern about the recent increase in the prices Russia is achieving – it makes the point that pre-war Russia generated more than a third of its government revenue from oil and gas, and now it is only 25 per cent – it wouldn’t be that difficult to tighten some loopholes in the sanctions that police the price caps.
Given the still-dominant presence of Western entities involved in the transport of Russian oil, strengthening the enforcement mechanisms and increasing the threat of severe liability for those entities and, indeed, third countries helping Russia circumvent the caps and embargoes shouldn’t be that difficult.
With oil prices now rising sharply, the potential for Russia to generate more revenue to fund its war if it can evade the caps and the incentives to do so have also increased significantly.
More might have to be done if the G7 and its allies are to ensure that the original intent of the caps – keeping Russian oil flowing while significantly reducing the revenue it gains from those sales – is achieved.
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