In an intricate global economy where energy serves as the lifeblood, the European Union has recently introduced its 18th package of sanctions against Russia, a move indicative of the geopolitical tensions surrounding the Ukraine crisis. This recent enactment is particularly significant as it aims to further tighten the noose around Russia’s energy-based revenue streams by lowering the price cap on Russian crude and outrightly banning the imports of fuels refined from Russian oil. However, the intricacies of global trade and the dynamics of energy markets suggest that these measures may not only have unintended consequences for Europe but also strain its trade relations with significant partners such as India.
The sanctions are ostensibly designed to deplete Russia’s war chest by curbing its income from energy exports, a logical strategy given that energy is a foundational pillar of the Russian economy. But the path to implementing effective sanctions that can stop Russian energy exports altogether is fraught with complexity and resistance, revealing the limits of economic sanctions as a tool for geopolitical leverage.
When the EU initially prohibited Russian oil imports and implemented a price cap for Russian oil, the intention was to leverage Western control over shipping and insurance markets. Indian refineries, responsible for sourcing 85% of their oil from abroad, found an unintended advantage in this arrangement. As Russian oil flows were diverted from Europe to Asia, India started purchasing discounted Russian crude, processing it into fuels, and selling these back to the EU. This circular trade route emerged silently but significantly, only gaining outspoken criticism with the deployment of the 18th sanctions package.
The latest sanctions propose a more aggressive stance, setting the price cap for Russian crude at 15% below the market value of Urals blend, a popular Russian export. Critics of the sanctions argue that prior measures have failed to substantially impact Russia’s revenue or offer any meaningful deterrence, other than affecting the earnings of Western insurers and tanker owners. At a time when Urals is trading above $63 per barrel, the new cap suggests exporters would need to sell at around $53 per barrel if they opt for Western shipping and insurance – a choice Russian exporters seem increasingly inclined to avoid.
Russian exporters have shown resilience and adaptability by eschewing Western logistics in favour of local tankers or those from buying nations, alongside a growing reliance on a so-called “shadow fleet.” This fleet, targeted recently by the UK government with sanctions against 135 tankers and two Russian companies, represents a workaround to Western restrictions. The UK, having banned Russian oil imports in 2022, exemplifies national efforts to isolate Russian energy commerce, yet the effectiveness of such measures remains debatable.
The announcement of the 28th sanctions package inadvertently spurred a rise in oil prices, illustrating the paradoxical effects of such policies. The sanctions’ architects aimed to reduce Russia’s oil revenue without constricting global oil supply and thereby spurring price hikes. This delicate balance seems undermined by the reality that Russia has options beyond Western infrastructures, forcing a recalibration towards refined products made from Russian crude – a significant component of EU imports.
In particular, the EU’s reliance on diesel and jet fuel imports from India, which accounted for 16% of the EU’s total fuel imports last year, is under scrutiny. Following the sanctions, Indian refiners are cut off from the EU market, necessitating a search for alternative sources, likely at a higher cost. Moreover, there’s an exemption for countries that are net exporters of crude oil, even if it originates from Russia, highlighting the complexities and potential loopholes within the sanctions regime.
The repercussions of these sanctions extend beyond immediate economic impacts, potentially straining the EU’s relationship with vital global players like India. Notably, with India as the EU’s second-largest trading partner, souring trade relations could have broad economic ramifications. Furthermore, considerations within the EU to deploy the Anti Coercion Instrument (ACI) in response to U.S. tariffs illuminate the fraught nature of international diplomacy, even among traditional allies.
This web of sanctions, trade relations, and geopolitical maneuvers underscores a challenging era of international relations, where the efficacy of traditional economic leverages is tested by the globalized nature of trade and the adaptability of states under pressure. As the EU navigates these troubled waters, the ultimate outcome of its latest sanctions against Russia remains to be seen, serving as a stark reminder of the interconnectivity and complexity of modern geopolitical and economic landscapes.
