The price of oil has risen after the Group of Seven (G7) nations vowed to impose new sanctions on Russia on June 27. This news comes as Russia is rapidly approaching default on its international debts and is becoming increasingly isolated from the world’s financial markets. Western leaders hope to limit the price of Russian oil to help ease the pain for energy consumers, but the details are still being ironed out.
The latest EU package of sanctions imposed on Russia will target the country’s oil exports. That ban will go into effect after six or eight months. The aim is to cut energy prices and ensure that Russia has no access to the world’s oil supplies. This package has been welcomed by many countries because it will allow them to increase their own production and exports. However, there is still an unknown quantity of Russian oil.
This proposal is unlikely to deter Russia from advancing into eastern Ukraine. In the meantime, the Luhansk region’s governor has urged civilians to evacuate Lysychansk, the last city not yet captured. Meanwhile, Ukrainian troops withdrew from Sievierodonetsk under heavy Russian bombardment. If this doesn’t deter Russia, the deal won’t stop the Russian military advance.
The plan hasn’t offered many details, but its general principle is to set a cap on the price of Russian oil at a certain level – slightly above its production costs. In addition to this, the plan also aims to penalize shipping companies that move Russian oil. The article in Foreign Affairs describes how the cap works. A similar scheme led to a 60% reduction in Iranian oil exports during the Obama administration.
In addition to the oil industry, Russia’s automotive sector is a major victim of the new sanctions. Nearly all foreign carmakers have decided to withdraw from the country, and production is down 97 percent in May 2018 compared to 2021. This means that fewer Russian cars will have airbags and automatic gearboxes. However, this could make the world’s oil supply more resilient than ever before.
The United States is the world’s largest oil consumer. Its political position makes it unlikely that the United States will pursue any measures that worsen the situation. As such, the United States is likely to seek a diplomatic solution with Russia to alleviate the tight energy supply situation. Further sanctions are unlikely to further exacerbate inflation. There are several other ways for the G7 to address the problem. The United States should seek talks with producing nations to secure a stable supply of oil.
While most developed economies in the West support the new Russian sanctions, emerging market economies are not as supportive. The sanctions have no immediate impact on Russia’s economy, but the country’s payments system is already being affected. The Bank of Russia’s figures on June and the first quarter of 2022 show that sanctions are having a real impact on the country’s economy.