The start
of last week brought a new weapon in the West’s financial war against Russia.
Since the invasion
of Ukraine began, Western countries have sought to use financial means, as well
as covert military ones, to degrade the war machine being unleashed against
Ukraine.
اضافة اعلان
On Monday, one of
the most far-reaching experiments began, an attempt to wield a financial weapon
that would strike at the heart of Russia’s war chest.
The West is
attempting to set a price cap for Russia’s oil, demanding that no country buy
Russian oil for less than the price they set. Europe has also banned seaborne
oil imports from Russia. To enforce the price cap, European and British
insurance companies – which dominate the field of insuring oil tankers – will
not insure vessels that transport oil sold at higher prices.
Already the cap is
having an impact. In the hours immediately after, there were queues of tankers
coming from the Black Sea outside Istanbul’s Bosphorus Strait, as Turkish
authorities demanded that they prove their ships were insured before transiting
the straits. Like many other countries, Turkey will not want uninsured oil
tankers passing through its territory, lest there is an accidental spill – and
no insurance company willing to stump up the millions required to clean it up.
More than any
recent conflict, the Ukraine war has demonstrated the interconnectivity of the
global financial system – its tilt toward the cities and institutions of the
West, certainly, but also the careful calibration Western governments need to
make in order to use these weapons.
Thus far, attempts
to hit Russia’s oil exporting capacity have had a limited impact. The West’s
various sanctions against Russia have only resulted in a 5 percent drop in oil
exports compared to pre-war levels. Other countries have happily stepped in to
buy the oil.
The oil price cap
is an attempt to reverse that. But it requires care. Turn the screws too far in
one direction and the pain may be unbearable for the West itself or its allies;
turn it too far in another direction and Russia may seek ways out of the global
system that would eventually undermine the power of the West.
Take for instance
the decision about where to set the price cap. For weeks, the G7 and the EU
have been locked in talks. The price decided was $60 per barrel, a price
roughly similar to where Russian oil is trading.
More than any recent conflict, the Ukraine war has demonstrated the interconnectivity of the global financial system – its tilt toward the cities and institutions of the West, certainly, but also the careful calibration Western governments need to make in order to use these weapons.
The Ukrainians
wanted the cap set much lower, perhaps as low as $30. That would severely dent
the amount of money received by Russia, with a concomitant impact on its ability
to wage war for a long period.
But the Western
countries were concerned that setting such a low price would mean it would not
make financial sense for Russia to pump oil at all – leading to less oil on the
market, a global shortage, a massive price spike for the commodity, and rampant
inflation in the West.
Instead, the price
had to be calibrated to a level where it impacted Russia’s ability to fill its
financial coffers, but not so low that it stopped the Russians pumping oil.
That is why Ukraine’s president called the cap “weak”.
The number chosen
appears to be straightforwardly political. By choosing a figure close to the
market price, it means Russia will rail against being held to ransom by the
West – naturally – but may not feel there is sufficient reason to respond
forcefully immediately, in a way that would critically hurt Western economies.
But later, with the principle established, the West could gradually lower the
oil price cap, squeezing Russia’s war chest.
That gamble may
just pay off. Russia’s immediate response to the oil price cap was to suggest
it would implement an oil price “floor”, a gentler response then, for example,
cutting oil production, something that would hurt Western economies.
But there is a
broader problem with the West’s new oil weapon, and it is one that will be
watched most closely in the Middle East.
The majority of
countries in OPEC – the 13 states that produce much of the world’s oil and have
the vast majority of its proven reserves – are Arab and African, including countries
like Libya, Iraq and Iran, which have not always had the warmest relations with
the West. If this new oil weapon works and manages to stifle Russia’s profits,
there is every possibility that it will be used again, most likely against OPEC
members.
That is something
the group will be seeking to assess closely and react carefully. On Sunday, the
group met and could have decided to slow production, a decision that would
almost certainly have spiked prices, frustrating Western economies. Instead,
they agreed not to change things.
Like most of the
world, they will be watching for the response from the major non-Western
purchasers of Russian oil, China and India. The two Asian giants could decide
to oppose the West, on the basis that they would not like to be similarly
pressured in the future (in China’s case over, for example, Taiwan) – or they
could seize an opportunity to negotiate a better price for oil. Either would
have consequences.
What everyone will
be watching now are the consequences. For the West, whether the careful
calibration of the oil weapon is enough to hurt Russia without impacting their
own economies; for oil consumers, whether the possibility of lower prices is
enough to compensate for bowing to Western pressure; and for oil producers, especially
in the Middle East and Africa, whether hoping for the failure of the new oil
weapon is enough – or whether it is sufficiently dangerous for them to prepare
counter-measures in case it is turned on them in the future.
Faisal Al Yafai is currently writing a book on the Middle East
and is a frequent commentator on international TV news networks. He has worked
for news outlets such as The Guardian and the BBC, and reported on the Middle
East, Eastern Europe, Asia and Africa. Twitter: FaisalAlYafai. Syndication
Bureau.
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