The European Union has just new sanctions against Russia approved, including a price cap on oil sales, following the announcement of new economic sanctions by the United States on September 30. Both announcements are in response to: Russia’s annexation of four regions of Ukraine.
The target of sanctions against Russia is to cripple Russia’s ability to wage war and reduce Vladimir Putin’s access to the materials and funding needed to fight.
However, because there are still countries that want to buy Russian petroleum products, sanctions increase Russia’s revenues, not decrease them.
Worse, the sanctions are pushing up global oil and natural gas prices, causing global spikes in inflation and, ironically, the world’s access to the metals and minerals necessary for the transition from oil and natural gas.
Widespread impact of sanctions
At the beginning of March, sanctions against the Russian oil sector had oil price estimates up to $185 a barrel and the price of natural gas in Europe reached nearly $500 a barrel. At the end of August, the price of natural gas was reduced to US$410 per barrel.
As winter approaches, Anne-Sophie CorbeauGlobal Research Scholar at Columbia University’s Center on Global Energy Policy, stated that current natural gas prices of US$300 a barrel could cause not only a natural gas crisis, but a power crisis as well.
This increase has had widespread effects beyond the oil and natural gas industry, affecting agricultural products, minerals and rare metals needed for green technologies, manufacturing industries and fertilizer production.
There is concern that the monetary policies put in place to contain those inflationary effects could: squeeze the amount of money and help previously focused on investments in green energy.
Another concern is that some countries review their short- and long-term energy security policiesmaking energy security ahead of energy transition.
Sanction picking is not effective
Unlike previous “one-size-fits-all” sanctions against Iran and Venezuela, countries boycotting Russia are: choose only the restrictions they can afford. All major oil importers will have to refuse Russia’s oil exports for the sanctions to be effective. but so far this has not happened.
Christof Rühl, a senior researcher at Columbia University, has described this “sanction-picking” as a reckless gamble. He warned that energy sanctions will backfire, driving up oil prices, which will hurt sanctioned countries economically.
The perception that sanctions against Russia’s oil will contain Russia economically does not take into account the dynamics of the global oil market. The US Treasury Secretary warned Europe against imposing full sanctions on Russia’s energy exportswarned that this could lead to increased oil prices that would benefit Russia but be detrimental to the global economy.
Although Russian crude has been sold at a discount this year, the price is still higher than before the pandemic. This means that Russia still earns more than the minimum price needed to finance the government budget and international financial obligations.
There is also the issue of Russian oil being traded under the radar. This could lead to the emergence of three different groups: countries that want to trade with Russia, countries that are energy independent from Russia, and countries that are not sure of energy and need to be neutral. This would support further sanction selection and hold back on our global energy security and transition goals.
Refocus International Trade
Despite the sanctions Russian exports are still flowing to the global economy. This is because although trading firms have discontinued new business with Russia, they continue to: fulfill their pre-conflict contracts. those contracts giving trading companies the flexibility to buy as much oil as they can each month.
While some of Russian exports are lost, export flows are likely to change. Some of the Russian crude oil destined for Europe will diverted to Asia due to EU’s unwillingness to buy Russian oil. refineries, especially in China and Indiaare still willing to buy Russian oil at a discount.
To cut itself off from Russian exports, Europe tries to replace Russian oil imports with deliveries from the Middle East and Asia to the extent permitted by their contractual obligations, refining configuration and import capacity. One result of this trade realignment is that: diesel prices in Europe rise due to higher transport costs.
Russia is resilient to sanctions
While some experts have argued that imposing sanctions on the Russian oil sector, rather than their gas sector, will be more effective, this is not the case. The argument that oil is Russia’s largest source of income is not supported by .
The World Bank’s concentration index indicates that: The Russian economy was relatively diversified in 2020, with a concentration index of 0.26. To put that into context, Saudi Arabia was in the top 20 percent of the least diversified economies with a concentration index of 0.55.
Russia also has shifted from western markets to the Chinese market, ever since after the annexation of Crimea.
This means that imposing sanctions on the Russian oil sector will have limited impact on the Russian economy.
What can be done?
The sanctions against Russia are strangling a major international source of energy, critical metals and minerals, causing non-renewable and green energy shortages and driving inflation up. Given the role that Russia plays in the energy supply, the global economy could soon face one of the biggest energy supply shocks ever.
Ultimately, the impact of oil sanctions on Russia is limited, while the consequences for the global economy and countries opportunities to achieve energy security and menopause are serious.
Like Nikos Tsafos, the previous chair of energy at the Center for Strategic and International Studies wrote in March: “A weapon is most useful when it is aimed at something – it is not clear what exactly western armaments of energy exports are supposed to achieve.”
It is time to evaluate the economic costs of sanctions against the world and against Russia. Polls show inflation is the most pressing issue to the public in many countries. There is room for political leaders to argue that some sanctions are not working and need to be changed.
How sanctions against Russia are working out for the world
Quote: Sanctions against Russia are increasing, not decreasing, earnings (2022, October 19) are retrieved on October 19, 2022 from https://phys.org/news/2022-10-sanctions-russia-decreasing-revenue.html
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