Roving Periscope: G7’s price-cut to tame Russia half-hearted; India ‘unaffected’

Virendra Pandit

New Delhi: As parts of Europe and war-torn Ukraine started freezing in extreme winter amid the ongoing Russian aggression of its neighbor, the Group of Seven (G7) largest economies of the West and Australia imposed a crude price cut trying to bleed Moscow financially, but the latest move is unlikely to impact India.

Oil prices surged higher on Tuesday, after a G7, European Union (EU) and Australian proposal imposing a price cap on Russian seaborne oil came into effect on Monday. Both the global oil benchmarks – Brent and West Texas Intermediate Crude—rose 60-70 cents a barrel in early trade on Tuesday, the media reported.

Starting Monday, the EU said it would implement a plan originally floated in May, with the G7 and Australia also signing up on the plan to impose the price cap on Russian crude oil shipments, pegged at USD 60 a barrel for now.

The price cap intends to prevent firms in signatory nations from extending shipping, insurance, brokering, and other services to Russian crude oil shipments sold at any value above the designated per-barrel price (USD 60 for now). Since it came into effect on December 5, the cap will only apply to shipments that are “loaded” onto vessels after the date and not apply to shipments in transit.

That it took nearly six months for the EU and the US to thrash out an agreement on the price cap reflects the complexity of this proposal and the internal wrangling with the groupings for arriving at a figure. It also presented a paradox: the price cap could shoot up global energy prices and stoke inflation further worldwide, including in the US and Europe. Some countries, like Poland and the Baltic nations, opposed the USD 60 price because they couldn’t afford it. Others wanted USD 30 per barrel to squeeze Russia. There was no unanimity among the stakeholders.

With their half-hearted attempt against Russia, the so-called oil embargo and price cap may have little impact on Russia, as the price cap, USD 60 per barrel, is just marginally below the current market price for Russian crude. Russian oil is already trading at a discount of about USD 68 per barrel as compared to USD 85 for Brent crude.

The main concern for the EU and the US would be the routing of Russian oil, outside of the price cap remit, through non-European shipping channels to countries such as China, Turkey, Indonesia, and India. Moscow has already said it will refuse to use tankers that joined the oil cap scheme and could cut its oil exports by relying on a smaller group of nonwestern tankers and insurers.

Despite G7’s efforts, Russia’s current account surplus in 2023 will be over USD 250 billion, next only to China’s. The latest price cap will not really impact its earnings for now, with crude prices hovering where they are now. If crude falls, and the price cap stays, then it could imperil Moscow and many countries.

Despite the US-led sanctions on Russia, India not only continued with Russian oil imports but also doubled its trade with Moscow in the “near foreseeable future”. New Delhi, for now, is non-committal on any such pricing cap arrangement.

On November 9, External Affairs Minister S Jaishankar and Russian Foreign Minister Sergey Lavrov said this arrangement will continue.

“… But, as the world’s third-largest consumer of oil and gas, as a consumer where the levels of income are not very high, it is our fundamental obligation to ensure that the Indian consumer has the best possible access to the most advantageous terms to international markets. And in that respect, quite honestly, we have seen that the India-Russia relationship has worked to our advantage. So, if it works to my advantage, I would like to keep it going,” Dr. Jaishankar said in Moscow.

India, which imported less than 1 percent of its total crude from Russia before the Russia-Ukraine war began in February, now imports over 20 percent of its requirement from Moscow. Crude imports from Iraq and Saudi Arabia, which were the top two suppliers of crude to India, constitute around 21 and 16 percent, respectively, of India’s total imports.

The USD 60-a-barrel price cap on the import of Russian crude oil came into force on Monday. However, Russia said it will not abide by the price cap decision and would reduce production if needed. This lifted the crude oil market.

But there is more to surface in 2023, which is only 25 days away!