A cap on Russian oil prices could be a tipping point with profound and partially unexpected consequences, for at least two reasons. First, such a measure could lead to a financial strangulation of Russia that would be more effective than any other punishment imposed thus far; Also more effective than a potential gas price cap in Europe. There is also another class of consequences, even less predictable: applying such a measure to Russian oil, the world’s first or second largest exporter until 2021, accelerates the globalization of conflict for Ukraine with repercussions that could reach directly to China and India. And all countries that are neutral or close to the Moscow regime.
Provided that the price ceiling works
Of course, the condition that all EU governments, after the G7 agreement, give the green light and the measure comes into effect as expected: from December 5 for crude oil and from February 5 for refined products. At this point, the “ceiling” will operate, in all likelihood, on the basis of the threat of secondary sanctions against companies in any other country that violate rules set by the United States, the European Union, Japan, Canada and Great Britain. .
Basically, the West and its allies will seek to impose their healthy encirclement of Russia on all countries of the world. The “maximum”, let’s imagine that $50 a barrel is set, is likely to work like this: if a Chinese or Indian company buys Russian oil at $60 or $70 a barrel – that is, above the maximum levels that the West has indicated as acceptable – Then you lose access to the dollar and euro markets. The same kind of threat that weighs on us today, for example, on European banks that would have done business with Iran: they know they will be cut off immediately from American markets, so they refrain from contacting brokers in Tehran.
Risks for countries allied with Russia
With the G7 agreement, companies from all countries that are neutral or allied with Russia (China in particular) automatically end up under the threat of sanctions. It is likely that they will try to circumvent it with hidden or external payments, especially if the Beijing regime gives indications to this effect to any of its affiliates. But the repercussions of the war in Ukraine are bound to lead to a global struggle between intelligence systems, to evade sanctions or pursue any company that bypasses them. To be sure, the threat of secondary sanctions by the West is already having an effect. For example, the Chinese technology company Huawei has stopped signing new contracts in Russia for fear of being excluded from European markets.
In 2023, Putin may have fewer resources
From December, if the “ceiling” succeeds, the consequences for Vladimir Putin’s regime could become dire as never before. For Moscow’s general budget, oil and gas account for about 45% of revenue, thanks to taxes on extraction and exports. Traditionally, about two-thirds of them always come from oil and only a minority from gas. With the setting up of a Russian gas cap in Europe and a sharp drop in supplies already running, methane revenues could drop dramatically. The oil “cap” can severely reduce the main source of income as well. In 2023, Putin could have had far fewer resources to pay his soldiers in Ukraine, reward victims’ families, and invest in new weapons and equipment. With the “ceiling” of oil, the economic war between the West and Russia is entering a new stage: tougher and more global.
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