By — Ratish Mehta;
The price cap mechanism on Russia’s seaborne crude oil exports that took effect on December 5th 2022 has more or less brought to light the divide in the global north and south’s energy interests. On the one hand, western enforcers of the price cap, comprising of the G7 countries and Australia, have sought to limit Russian profits of war through a set of sanctions, while on the other hand, countries from the global south see the embargo as detrimental to their vital energy security. At present, with the European Union’s (EU) commitment to zero down on Russian energy imports, Moscow has diversified its exports to the Asian markets by offering discounted prices. This has also led to prominent markets such as India, China and Turkey securing far higher quantities of Russian crude oil, which was otherwise imported from other suppliers.
India, which meets around 85 per cent of its energy requirements through imports, and has purchased crude oil from Russia in the past months at an all-time high, finds itself in an uncertain position with the sanctions taking effect. What is the significance of the sanctions and how can India tackle the upcoming energy challenges amidst a global divide, both immediately and in the long term?
Significance of Western Sanctions on Russian Oil
The price cap mechanism, in essence, intends to forge a ‘buyers’ cartel’ while enforcing the burden of implementation on western maritime service providers. As per the guidelines notified by the U.S Department of the Treasury, the embargo restricts maritime service providers from trading, brokering, financing, insuring, flagging and customs brokering for Russian seaborne crude oil sale to third-party countries; that is, if it is purchased above the set price cap agreed upon by the coalition.
Western companies in particular have a stronghold over maritime services with over 90 per cent of the facilities being provided by western providers for the transportation of Russian crude oil. The E.U. and G7 countries provide a large market share for Russian tanker trade and is estimated that countries such as the U.S., Canada, France, Germany, Italy and the U.K., cover at least 95 per cent of the global fleet for shipping insurance services alone. More so, vital destination trade ports refuse to permit non-insured tankers from berthing, thus making the non-availability of western insurance services a significant action to limit Russia’s international crude oil trade.
The implementation of the price cap mechanism has however faced certain impediments that have posed significant challenges to the enforcement of the sanction while also hindering the coalition’s effort in targeting Russia’s essential revenue sources. Firstly, a significant roadblock in the joint response proposed by the coalition came in the form of internal disagreements on the price limit at which the sanctions were expected to be imposed. Countries within the E.U., vocal against Russia’s war, sought to cap the price at as low as USD 30 per barrel (a price closer to its cost of production) in order to disincentivise Russian oil exports into the global economy, which otherwise they claim could be a potential promotion of discounted rates for Russian oil. The U.S. on the other hand had remained adamant to cap the price at a rate that does not disincentivise Russian oil exports oil altogether, a scenario that could potentially lead to a global recession and a prospect that it feared could backfire on their proposed sanctions. Finally, after much deliberation and with the deadline approaching ahead, the coalition agreed to cap the price at USD 60 per barrel as an upper limit while also agreeing to regularly review the capped price in order to ensure that it remains 5 per cent below average market prices.
Furthermore, in a bid to cushion the impact of the price cap on the global oil supply chain, the Biden administration attempted to persuade Saudi Arabia and the Organization of the Petroleum Exporting Countries (OPEC) to increase their output production in lieu of a potential fall in Russian oil supply that could be provoked by the sanctions. On the contrary, however, the OPEC Plus coalition (comprising of Russia) declared in October that it was reducing its output by 2 million barrels per day. The output cut since then has put the coalition’s effort under significant stress as the measure further strains the global energy sector.
The Global Divide against the Price Cap Mechanism
The difficulty in narrowing down onto the mechanisms of the sanctions has mostly created a sense of uncertainty, especially within countries from the global south. India and other prominent importers of Russian crude oil had been requested to join the coalition for stricter enforcement of the price cap. The proposal however has found little interest in New Delhi. In a recent joint press conference between Secretary Antony J. Blinken and India’s External Affairs Minister (EAM) S. Jaishankar, the EAM stated that the price cap was solely ‘a G7 initiative’, thereby also indicating how New Delhi viewed the proposed plans of an embargo- mostly as one that poses significant challenges to the global south’s energy interests. The minister also went on to state that countries in the global south found it ‘extremely difficult to compete for limited energy supplies due to escalating prices as well as availability issues’, thus also signalling that the price cap initiative would find little interest within the global south.
However, more recently, officials from the Biden administration have begun to accommodate India’s as well as other global south countries’ interests in purchasing Russian crude oil at discounted rates. For instance, Janet L. Yellen, the Secretary of the Treasury of the United States of America, in an event in New Delhi, recently claimed that the U.S administration ‘was fine with India, China or Africa getting a bigger end of the bargain so long that it did not use western maritime services.’ US Sherpa and Deputy National Security Adviser Michael Pyle, too asserted that the recent price cap on Russian oil will help countries like India to lower their costs, regardless of whether India joins the coalition or not.
The American administration’s current position is a step down from its erstwhile stand when it imposed an embargo on Iranian oil and Venezuelan oil in 2019, which compelled India to significantly reduce its oil imports from two of its largest exporters.
These recent concessions in the Biden administrations stand however have more to do with global factors than its convergence of interests with the global south. Firstly, the reluctance of the OPEC Plus grouping to increase its oil production in lieu of the expected shortfall led President Biden to warn the Saudis that it would have to face ‘consequences’ for the groupings ‘siding with Russia’s war’. The production cut decision was bound to have an impact on the global economy especially when the price cap was potentially going to result in a shortfall in the global supply of crude oil.
More so, its softer approach in negotiating the price cap mechanism grew from its fear that a significant reduction in Russian oil supplies coupled with a production cut by the OPEC plus countries as well as the western embargo on Iranian and Venezuelan oil could drive the global economy into shambles.
Navigating India’s Way Forward
India on the other hand, would still require to tread uncharted times more carefully. Even after Washington’s accommodative stand, a heavy dependency on Russian crude oil, although monetarily beneficial, is a speculative bet that can lead to some unsuitable circumstances.
Notwithstanding the fact that the present price cap would potentially benefit India, depending on the enforcement of the sanction mechanism, the hardliners within the western coalition are only expected to double down on vital Russian revenue sources and the discounted price range may not sustain for long. Currently, Russian discounted rates per barrel have been trading at around USD 65 – USD 70 in the global market. A price cap at USD 60 would grant India the leverage of buying larger quantities of crude oil at a similar discounted price to which it is currently trading albeit without western services.
India’s energy priorities therefore must focus on safeguarding its long-term energy interests; mostly by aiming to diversify its oil basket to meet its crucial requirements. An initial step in the same direction would be to seek oil imports from other countries that can provide a stable supply chain for domestic demands. A determined step in securing not only India’s domestic needs but also of the global south as a whole would be to persuade the Biden administration to waive off western sanctions on essential suppliers such as Venezuela and Iran, or to either reinstate the sanction waiver protection that India and some other countries enjoyed permitting Iranian crude oil imports. The attempt would also present India the opportunity to revive its bilateral relations with Iran which ran into its own set of difficulties due to the oil embargo that was enforced. Having said so, given the volatile situation in Iran, India’s push to lift sanctions for its exports could perhaps find divided interests in Washington.
In the context of Venezuela, although recent reports have suggested that the White House is looking to open global markets to Venezuelan oil as well, it would take a far more persuasive effort from global actors in order to negotiate for the same to be expediated. Therefore, India’s diversification process apart from its bid to persuade for a complete overhaul of sanctions or even a waiver must also include seeking other crucial oil suppliers that could cater to India’s immediate as well as long-term crude oil requirements.
Contemporary global energy security woes have been a cause for concern to many developing economies. India along with other emerging countries has sought to safeguard its energy requirements yet the Western coalition’s effort still remains ambiguous in terms of its consequences. India in any case must remain prepared to safeguard its interests both in the short as well as long term; for a volatile energy sector has the potential to cause uncertain economic consequences, one that could perhaps prove to be detrimental to its economic stability.
Ratish Mehta is a post-graduate in Global Studies from Ambedkar University and holds a Bachelor’s degree in Political Science Hons from Delhi University. His research interests include understanding the role of narratives in geopolitical relations and deconstructing narratives in international affairs as well as in domestic politics within India. He was previously associated with the Pranab Mukherjee Foundation as a Research Associate and is currently a Research Associate at the Organisation for Research on China and Asia.