Cap Doesn’t Fit – A price ceiling on Russia’s oil exports unlikely to work. India should act in its national interest

Source: The post is based on the article “Cap Doesn’t Fit – A price ceiling on Russia’s oil exports unlikely to work. India should act in its national interest” published in The Times of India on 5^th November 2022.

Syllabus: GS – 2 – Effect of policies and politics of developed and developing countries on India’s interests.

Relevance: About the recent sanctions on Russian oil.

News: Recently, G7 plus Australia imposed a price cap of $60 a barrel on seaborne export of Russian crude oil. This is an effort to squeeze the country’s revenue and thereby undermine Russia’s warfighting capabilities.

About the price cap and its impact on Russia’s warfighting capabilities

The price cap represents a 30% discount to the price of the benchmark Brent crude.

The ‘price cap coalition’ plans to enforce the ceiling price by using its clout with the major shipping, insurance and re-insurance companies headquartered in Europe. The coalition aims to weaken the Russian military without triggering a spike in oil prices.

What will be the impact of the price cap?

Emerging market economies: They will be affected directly by the price cap. For instance, it will end up hurting a country like Bangladesh which finds itself facing a tough balance of payments situation because of an energy shock.

Note: Russia is now India’s third largest crude supplier.

On Russia: The eight months of sanctions on Russia since it invaded Ukraine has neither brought the fighting to an end nor had any impact on Russia’s behaviour.

What are the potential outcomes of the sanctions?

The sanctions are a blunt tool that ends up hurting countries unrelated to the problem, without achieving any of the core objectives of Western nations imposing sanctions.

For instance, the series of sanctions initiated by the US on Iran since 1979 have failed to provide any meaningful impact on Iranian foreign policy. On the other hand, they hurted countries such as India that sourced crude oil from there.

So, a price ceiling on Russia’s oil exports is unlikely to work. India should act in its national interest and procure more oil from Russia when prices are cheap.