Russia makes the same amount of money energy exports, as they were before his invasion at the end of February. Meanwhile, inflation is rising around the world, increasing political pressure on leaders such as US President Joe Biden, British Prime Minister Boris Johnson and French President Emmanuel Macron.
“There are tools to be tougher after Russia, but they come with significant costs directly to consumers in the US and Europe,” said Robert Johnston, senior fellow at the Columbia Center for Global Energy Policy.
“It distorts the market at a time when the market should certainly function well and there are too many workarounds,” Johnston said.
Russia continues to earn
The US, UK and Canada announced a ban on the import of Russian oil. More importantly, Europe will follow suit with Russian oil, which it imports by sea, a huge step given its long-standing dependence on Russian energy supplies. The block says that by the end of the year the ban will cover 90% of Russian oil imports.
European customers have already retreated. Russian oil exports to Europe fell to 3.3 million bpd in May, down 170,000 bpd from the previous month, according to the International Energy Agency.
But rising exports to Asia helped offset much of that loss. China, taking advantage of huge price discounts, saw its imports hit 2 million barrels a day for the first time. India’s imports also rose sharply, reaching around 900,000 barrels a day in May.
Russia sells barrels of its Urals oil for about $35 less than Brent. a global benchmark that last traded around $113 a barrel. But since prices have skyrocketed this year due to the effects of the pandemic and the war, they are still making a ton of money.
According to the IEA, Russian oil export revenues increased by $1.7 billion in May to about $20 billion. This is well above the 2021 average of roughly $15 billion.
“The Russians are still getting a pretty good price,” Johnston said.
“We expect them to ask how we can take steps that will further reduce Russia’s energy revenues?” one official said. “And how do we do that to stabilize global energy markets and reduce the disruptions and pressures we are seeing?”
What tools are left?
However, May Rozner, a campaigner for non-profit organization Global Witness, believes that Western countries need to go even further to quickly remove Russian oil from the market, since any delay gives market participants time to come up with creative ways to get around the rules.
“These scattered sanctions leave loopholes for the fossil fuel industry to exploit,” Rosner said.
The United States, with European support, could impose so-called secondary sanctions on third countries that continue to do business with Russia, as they did with Iran and Venezuela. The US government has not ruled it out.
But such a move would cause so much upheaval that experts say it’s unlikely, especially as rising political leaders in the West face the fastest rise in prices in decades.
If China and India had to find new barrels, the price of oil could easily top $200 a barrel, according to Darway Kung, commodity portfolio manager at DWS.
“It is hard to imagine a world in which the United States [such] sanctions on Iran, Venezuela and Russia at the same time,” Johnston said. “Oil has to come from somewhere.”
Biden has increasingly stressed that fighting 40 years of inflation is a top priority ahead of the midterm elections in November.
Limiting the price of Russian oil is one of the solutions that has been abandoned. This would mean that Russia is not completely cut off from the market, but will be forced to sell oil at such a low price that it will not be able to make a profit.
The price cap “would lower the price of Russian oil and lower Putin’s income while allowing more oil to enter the world market,” Treasury Secretary Yellen said last week.
“I think the more complex the system, the more problems it has,” Kung said. “[The] the market system works because, in a sense, it is very simple. It’s very efficient.”
Governments in the West could also try to loosen restrictions, either by increasing supply or by allowing prices to rise so high that demand begins to fall. None of them is simple calculus.
In the event of a global recession, driven in part by high fuel prices, demand for energy would fall and prices could start to fall on their own. But it would be very painful, including job losses and economic damage, especially for low-income families.