Crappy Economics | Stupid War Sanctions
The Oil Sanctions on Russia Don’t Work
In December the West took aim at Russian oil revenues by unleashing the biggest package of energy sanctions ever imposed on a single country. Europe, which had been a big buyer of Russian seaborne crude, banned imports, while it also barred its long-dominant shippers, lenders and insurers from facilitating the sale of Russian crude to other buyers.
The only exception was oil old below $60 a barrel.
Two months in, a second round of European sanctions is due to come into force on February 5th. Unfortunately, it will only make Russia stronger.
The December ban-and-cap policy has not succeeded in curbing sales of Russian crude. After a lull while European firms worked out how to comply with the new price cap, shipments have resumed at pace — directed not to Europe, but to China and India instead. Russia’s exports of unrefined oil averaged 3.7 million barrels a day in the four weeks to January 29th — the highest level since June, and more than in any four-week period in 2021.
An advocate of the price cap would say that this is proof of the scheme’s success. The point, after all, was to ensure that Russian oil continued to flow, keeping the global market stable, but to limit the price of it so that the profits for Russia’s president, Vladimir Putin, were kept in check. The cap, they argue, gives buyers negotiating power; the longer export routes also raise freight costs, for which Russia must compensate customers.
As evidence that the cap is working, many also point to the gap in price that Western agencies report between Brent, the global benchmark, and Russia’s Urals crude. This emerged soon after the invasion of Ukraine, but widened a little after the embargo, to $32 a barrel. Thus Russian oil now trades at a discount of 38%.
The problem, however, is that price-reporting agencies have not adapted their methods to a world in which Russian oil no longer sells through channels they can observe. Whereas European refiners and traders used to share data with price-trackers, Indian ones do not. Agencies also used to rely on publicly available indicators to estimate…