Why imposing price restrictions on russian oil is a bad idea

Why imposing price restrictions on russian oil is a bad idea

Attempts to use trade as a weapon will only distort the global market and hurt energy-poor consumers not responsible for the war.

On Monday, the G7 proposal to impose a price cap on Russian oil came into effect. Buyers now have until January 19, 2023, to unload the Russian crude oil loaded on ships before December 5. The proposal, which took months to fructify, seeks to achieve a delicate balance — how to starve the Russian state of oil revenues so as to financially cripple its war against Ukraine, but without causing supply disruptions in the global oil market which would cause prices to spiral. The move, however, risks fracturing the global crude oil market.

Broadly speaking, Russian oil can now be shipped across the world using the infrastructure of the G7 countries — tankers, insurers, etc — only if it is sold at a price of $60 per barrel or less. This makes buying oil from Russia at a higher price — in the week prior to this announcement, Urals crude was trading in the mid-$60s range — a difficult proposition as most of the companies that offer shipping and insurance services are located in these G7 nations. While Russia has refused to abide by this measure, and the cap will place countries that do opt for buying oil from Russia at a price higher than $60 at a disadvantage, it will still be at a considerable discount compared to Brent crude oil which is currently trading at around $81 per barrel. It is also possible that these countries will find creative ways to bypass the restrictions imposed by the G7.

So far, despite objections from western nations, countries like India and China have continued to trade with Russia. In fact, as reported in this paper, India’s bilateral trade with Russia has surged to an all-time high in the first five months of the year (April-August). Putting its interests first, India has raised its oil imports from Russia, taking advantage of the discounts being offered — the country which used to import less than 1 per cent of its import requirement from Russia, now imports around a fifth from it. After all, for an oil importer like India, which meets an overwhelming share of its requirements through imports, lower crude oil prices will moderate the price pressures in the economy and bring relief to the current account deficit, easing risks to macroeconomic stability. The country’s response so far to the West’s retaliation against Russia for the war in Ukraine has been guided by its sovereign interests. This must continue to be the guiding principle. Attempts to use trade as a weapon will only distort the global market and hurt energy-poor consumers not responsible for the war.