Oil cap targets Putin’s war chest
It remains to be seen whether the $US60-a-barrel price cap imposed on Russian oil exports is the silver bullet Western democracies have been seeking to seriously damage Vladimir Putin’s economy and its funding of the Kremlin’s war machine. The Albanese government is right to have placed Australia in the forefront of the initiative, beside G7 countries and the 27 EU nations. The hope is that the price cap and accompanying embargo on insurance for tankers carrying Russian oil will pressure Mr Putin to think again about the criminal course he is on in Ukraine.
Achieving that aim will be hard. Hopes that the price cap, which came into force on Monday and is just short of the current price of $US65 for Russian Urals crude, will prove effective have already been undermined by India, the world’s largest democracy and a member of the Quad alliance with Australia, the US and Japan. India declared on Sunday that it would ignore the cap and would continue importing Russian crude oil in defiance of its Western allies and their concern about the carnage Mr Putin has inflicted on Ukraine. Like China, India has substantially increased its oil imports from Russia, its longstanding ally, since the war began in February. Russia reportedly is selling crude oil to India at the bargain basement price of $US33 a barrel, barely enough to cover production costs.
Moscow, unsurprisingly, has rejected any prospect of co-operating with the price cap. But that does not lessen the importance of the plan and the prospect of it doing serious damage to the Russian tyrant’s onslaught in Ukraine. Russia’s oil earnings reportedly amount to $US104bn ($152.5bn) from the EU alone since the war started. That income is a reason sanctions against Moscow have fallen far short of crippling the Russian economy. Disrupting that cashflow is imperative. The US and its allies hope the plan drawn up by US Treasury Secretary Janet Yellen will do so. A successful outcome depends not only on imposing a maximum price below what Russia has been getting but also using British and European domination of global shipping insurance markets to deny essential cover to tankers carrying Russian oil sold above the price cap. That should put the kybosh on hopes Mr Putin may have of using Russian or pirate tankers to ship Russian oil beyond Europe.
EU members that have relied heavily on Russian oil imports are confident that, having agreed with the G7 and Australia to ban oil supplies from Moscow, apart from those allowed under the price cap, they are assured of imports from elsewhere. The US has helped with major oil releases from its reserves. The US and Australia barred all Russian oil imports soon after Mr Putin launched his invasion in February.
Ukrainian President Volodymyr Zelensky is critical of the $US60-a-barrel cap. He argues that to do real damage to Russia’s economy it should be no more than $US30 a barrel. The price cap’s architects, however, wanted to set the price at a level sufficiently above Russia’s production costs to make it attractive for Moscow to continue to produce oil but low enough to damage Russia’s cashflow. They believed that approach would avoid disruptions to energy supplies to countries outside the G7 and EU. As one US analyst put it, the target was the flow of hard currency into Russian coffers and the Russian war machine, not the flow of crude oil out of Russian wells. With the EU, Mr Putin’s main customer, banning the import of Russian crude and other petroleum products, he faces a challenge. Ms Yellen’s plan to disrupt Russia’s income without upsetting global energy markets is worthwhile. Nations such as India should climb on board to help ensure the success of the strategy.