Imposition of Energy Sanctions by the Western World on Russia in the Context of Geopolitical Conflicts:the Logic Behind and Its Implications

Zhao Xingshu

Since the outbreak of the Ukraine crisis on February 24, 2022, the Western world led by the US has imposed rounds of extensive and intensive sanctions against Russia,among which energy sanctions are a powerful policy instrument.

OIL PRICE CAP IS A NEW MEANS ADOPTED BY THE US AND ITS WESTERN ALLIES AGAINST RUSSIA

The Price Cap Coalition of the EU,the G7, Australia and Switzerland has imposed a price cap on Russian oil and petroleum products.According to the Coalition, those above the price cap would not enjoy its support services including shipping, insurance,trading, financing and commodities brokering.Starting from 5 December 2022, a price cap would be imposed on Russian crude oil at $60 per barrel.And from 5 February 2023, high-value Russian exports would be capped at$100 while lower-value products at$45.The Coalition would also periodically review the enforcement of these sanctions and adjust the cap in light of its objectives and the market.

The oil price cap against Russia is to cut off Russia’s military funding by reducing its energy gains.But the cap also aims to maintain Russia’s oil supply to the global market and to calm the rising global oil prices caused by the sanctions.

First, energy exports are an important source of revenue for the Russian government.Russia can break even when the price of oil is $60 to 70 per barrel.But a drop to $50 would cut its energy gains and make it impossible for Russia to balance the state budget, and a price as low as $30 would bring a financial crisis to Russia.Thus, the $60 price cap on Russian oil would prevent the country from profiteering from oil sales and increase its budgetary pressure as the military spending soars.Meanwhile,Russia would continue exporting oil despite the price cap since otherwise it would lose the foreign market and even suspend production.The cost would be much higher.

Second, the US and its Western allies cannot bar non-coalition countries from purchasing Russian oil.The demand for Russian oil on the international market is still high.In 2022, China and India saw a significant increase in their oil imports from Russia.Brazil also said it would buy “as much Russian oil as possible”.Emerging economies will become the main source of demand of oil in the future.It is estimated that by 2040, oil demand in OECD countries will decline by 9.6 million barrels per day compared to 2018.In contrast, oil demand in non-OECD countries will grow by 21.4 million barrels per day.The oil price cap will also enable potential buyers to buy cheap oil by identifying the price of Russian oil.Thus it will boost oil-importing countries like India and Türkiye that have remained neutral during the Ukraine crisis to support the sanctions and make them more legitimate.

On January 17, 2023, European Commission President Von der Leyen delivered a speech at the World Economic Forum’s annual meeting in 2023, stating that the 10th round of sanctions against Russia was imminent.

THE STRATEGIC LOGIC BEHIND THE OIL PRICE CAP ON RUSSIA

Sanctions on Russia including the oil price cap have been imposed amid changes of the strategic context.For one thing, the shale gas revolution and the response to climate change have led to significant transformation of the international energy power structure.For another, the US and its Western allies have unique economic advantages, which make it possible for them to set oil price cap.

I.Global energy abundance is a key precondition for the effectiveness of sanctions

On the one hand, the shale revolution has changed the world energy landscape and geopolitics.Thanks to the development of fracking technology, the oil and gas industry in the US has kept expanding since 2009, with soaring of output and falling of production costs.The rapid development of unconventional energy sources has not only brought the world into a new period of energy abundance,but also shifted the global center of oil and gas production to the west and the center of consumption to the east.The world energy landscape has thus been greatly changed and the dominance of traditional oil and gas powers has been broken.

The expansion of oil and gas industry not only strengthens the US energy security, but also greatly influences its foreign policies.Energy has become an important tool for the US to advance its global strategic goals.Energy sanctions against Venezuela in 2017 and Iran in 2018 are good examples.The imposition of energy sanctions on Russia by the US and its Western allies after the Ukraine crisis once again demonstrates that oil and gas have become a new tool in the geopolitical competition with their rivals.

On the other hand, it is a global trend to embrace clean energy transition for the fight against climate change.To further implement the Paris Agreement, in 2021, parties to the United Nations Framework Convention on Climate Change for the first time agreed to phase out the useof fossil fuels.Despite the COVID-19 pandemic, countries have still actively directed more funds to combat climate change.From April 2020 to the end of 2022, economic recovery plans adopted by governments around the world have provided a total of $1,215 billions investment for clean energy,two times more than the financial commitment to green recovery after the 2008 financial crisis.

Demonstrators express their dissatisfaction with the government’s energy policy and call on the federal government to lift sanctions against Russia on October 8, 2022, outside the parliament building in the German capital Berlin.

In the transportation sector, as clean technologies such as biofuels,electric vehicles, and energy efficiency boom, the demand for fuel used in transportation will not grow unlimitedly.The Zero Emission Vehicle Transition Council established in 2020 aims to accelerate the pace of the global transition to zero emission vehicles.In 2021, the sales volume of electric vehicles hit a record high, accounting for over 8.5% of global vehicle sales.

In the 1970s when oil was a scarce resource, the Arab countries were able to use oil as a weapon to prevent the Western world from supporting Israel.An oil embargo worked since the West was heavily dependent on oil produced in the Middle East.However,things have changed today.The shale revolution has significantly increased global oil and gas supplies.And alternative energy technologies continue to develop to address climate change.Changes in both supply and demand may lead to a peak of oil demand.The International Energy Agency(IEA) predicts that oil demand will not increase from the mid-2030s and will decline slightly in the middle of the 21st century.It means that Russia’s status as an energy superpower will be undermined as the established energybased order and geopolitical balance of power among Russia, the US and Europe have changed.

II.The US and its Western allies have made the oil price cap possible by leveraging their economic advantages

Oil transporters in the parking lot of Gazprom Neft photographed on December 30, 2022.

The essence of the oil price cap is a game of dependence and power,which is very complex.Both sides are trying to gain relative power by taking advantage of the other’s dependence.It may seem counter-intuitive for Europe to impose energy sanctions on Russia since it is highly dependent on Russian energy.But if we give it a second thought, such “energy decoupling” is logical.

Russia and Europe are obviously interdependent.For Europe, it is reliant on Russian energy.45% of its gas supply and 25% of its oil supply come from Russia.While for Russia, energy is always a pillar of its economy.The export volume of oil and gas accounts for 70% of its export earnings and 52% of its budget revenues.It’s fair to say that both sides benefit from the EU’s large energy imports from Russia.But as mentioned above, the world has entered a period of energy abundance and the Europe’s dependence on Russian energy will not persist.

Apart from the energy trade, there is also hidden interdependence between Russia and the Western world.Russia’s energy trade counts on key services provided by the US and some Western countries, including shipping,insurance, trade financing and customs services.For instance, more than half of Russia’s seaborne oil is handled by Greek vessels, around 95% of Russia’s seaborne oil is insured through the International Group of P&I Clubs,a London-based company, and banks trading Russian oil have to rely on the global financial system led by the US.

Those services are essential for oil trading, without which things will become very difficult for Russia.But Russia can get access to the key services from service providers of Price Cap Coalition countries only when the oil is sold below the price cap.Therefore,the “service provider cartel” formed by the US and its Western allies in the service sector is one of the most important tools against Russia.

With a clear understanding on the energy interdependence with Russia,the Western world has leveraged its advantages in banking, insurance,shipping services and other areas, and imposed the oil price cap.The aim is to change the disadvantaged position of Europe and effectively attack Russia.The price cap will also further increase Russia’s costs and squeeze its revenues, posing a severe challenge for its oil industry.

THE OIL PRICE CAP GIVES A GLIMPSE OF MAJOR POWER COMPETITION IN THE FUTURE

After the Ukraine crisis, the Western world has been unprecedentedly united, in particular, on imposing energy sanctions against Russia.It not only reflects their strong will, but also great capabilities especially policy coordination capability, which is possible to be exerted in the future strategic competition against other major powers.

First, the US has further tightened its alliance by playing the security card and emphasizing common values.The Ukraine crisis, as a security shock, provides the US and Europe with an important opportunity to strengthen their alliance.Europe resolved to break away from its energy dependence on Russia through diversifying their energy resources in 2009 when Russia severed the supply of natural gas to Europe.The Ukraine crisis is a turning point in European history.The political choices of the EU and its member states are increasingly affected by military security.With the encouragement of the US,Europe decided to use the crisis to accelerate its diversification and de-Russification in the energy sector.

In previous Russian-Ukrainian frictions, many developed Western countries took a neutral stance and wouldnot follow the US to impose sanctions against Russia, indicating that these countries were reluctant to be caught up in the strategic competition between the US and Russia.However,an unprecedented change occurred after the Ukraine crisis.Neutral European countries such as Sweden and Finland sought NATO membership.In addition, in June 2022, Ukraine and Moldova were granted EU candidate status.The Atlantic partnership has been further tightened as a result of the Ukraine crisis.

On January 28, 2023, during Italian Prime Minister Meloni’s visit to Libya, the two countries signed a gas deal worth 8 billion U.S.dollars.

Second, the US is actively mobilizing resources to help its allies prevent further damage.The US-EU Task Force for Energy Security was established to help reduce Europe’s energy reliance on Russia.On the one hand,the US has increased its production capacity and exports to Europe.The US Energy Information Administration (EIA) estimated that US crude oil production would reach 12 million barrels per day in 2022 and hit a record high at 12.6 million barrels per day in 2023.In addition, in March 2022, the US announced to release 180 million barrels of crude oil from the Strategic Petroleum Reserve over the next following months, and the IEA member countries agreed to release 60 million barrels of oil to show their support.

On the other hand, the US has facilitated Europe to broaden its sources of oil and gas supply, including the energy cooperation with Middle Eastern and North African countries.Algeria and Qatar have committed to maintain (and expand as much as possible)their gas supplies to Europe.In June 2022, Israel, Egypt, and the EU signed a deal in which Egypt will export Israeli liquified natural gas to Europe.As a result, Europe significantly reduced its oil and gas imports from Russia in 2022.By the end of 2022, pipeline gas from Russia accounted for about 8%of EU gas imports, far below the 40%at the beginning of the year.

Third, major country competition gradually becomes bloc confrontation with more targeted attacks.The US has used the Ukraine crisis as an opportunity to bring Russia and the entire Western world into confrontation,and to reshape its own dominance and leadership in the West bloc.In the“gray area”, the US is using all kinds of tools but directly triggering a war,not limited to economic, financial,energy, science and technology, politics, diplomacy, and public opinion.The most notable thing is that the US and its Western allies have integrated their strengths and launched targeted attack against the key sectors of their competitors.The oil price cap on Russia is jointly imposed by the US and its Western allies, reflecting that the US is conducting close cooperation with its allies in the fields of technology, investment, and finance to maximize the synergy.

CONCLUSION

The Western world imposed comprehensive sanctions against Russia including the oil price cap immediately after the Ukraine crisis, bringing additional economic challenges for Russia.The Ukraine crisis has once again drawn attention of the international community to issues related to energy security.But it is temporary.The long-term trend is that the world is accelerating the implementation of the Paris Agreement to address climate change.The only way to realize true energy security is to get out of the highly volatile market of traditional oil and gas, and speed up the transition to a green, low-carbon and efficient energy system.It would have been difficult for the US and some Western countries to implement sanctions against Russia in the oil sector,but they made it out of common security concerns and on the basis of common values.This may become a strategic choice taken by the US and its Western allies in the major country competitions in the future.