The author of The Diplomat, Mercy Kuo, regularly engages subject matter experts, policy professionals, and strategic thinkers from around the world to elicit their diverse views on US policy in Asia. This conversation with Dr. Craig Kennedy, energy historian and commentator at the Davis Center for Russian and Eurasian Studies at Harvard University, former international finance executive at Morgan Stanley and Bank of America Merrill Lynch, and author of Substack “Navigating Russia” – is 331 in “The Trans-Pacific View Insight Series”.
Examine the effectiveness of US efforts to cap Russian crude export prices and the EU plan to prevent ships from loading Russian crude.
EU oil sanctions, agreed in June, will only come into effect this December, and the price cap initiative is still being negotiated, so their potential effectiveness cannot be judged by Russia’s current oil exports. Once in force, the EU sanctions will ban the import of most Russian oil to Europe and bar EU tanker fleets and marine insurance services from helping Russia ship oil to other markets.
These maritime sanctions could represent a major challenge for Moscow. About 80 percent of Russia’s oil exports travel by sea, mostly in Western-owned tankers. And virtually all of those vessels carry critical spill liability insurance provided by a complex consortium known as the International Group, or “IG.” European companies play an outsized role in IG, which insures 95 percent of the world’s tankers.
In December, Russia could lose access not only to Western fleets, but also to any vessel whose owner wants to keep IG insurance. This could lead to a collapse in available tanker capacity, leaving up to 4 million barrels a day of Moscow’s oil (half of its total exports) stranded on Russian shores.
The US price cap initiative is a complement to EU sanctions and aims to slash Moscow’s oil revenue, while reducing the risk of an oil supply shock. It would allow ships to continue carrying Russian oil after December and still keep their IG insurance, as long as the oil was sold at deeply discounted prices. However, for it to work, it needs the buy-in of both Moscow and the big Asian oil importers, such as India and China.
What would be the impact of both plans in China and India?
The sanctions will affect China and India differently. Both are major importers of Russian oil, second only to the EU. But China’s supply routes are far less vulnerable to sanctions than India’s. Nearly all Russian imports from China flow through the East Siberian pipeline, now at full capacity, some directly, others by ship from Russian Pacific ports. Because these ports are close together, this short-sea shipping trade in the Pacific requires modest tanker capacity. Under the sanctions, China may find it worthwhile to provide that capability by spinning off a portion of its fleet and self-insurance.
However, if China wanted to increase imports from Russia, it would have to bring those extra barrels from Russia’s western ports on the Baltic and Black Seas, a three-month round trip. The distance, complexity and risk of sanctions would likely deter China from dedicating a large number of its tankers to this long-distance Western route. Furthermore, even sending China’s entire fleet would cover only a fraction of Russia’s tanker capacity needs.
India may have a harder time keeping Russian imports under sanctions. Since March, Russia has diverted a large part of its Western exports to India, all by sea. However, in December, this trend could quickly reverse. Constrained tanker capacity may lead Russia to prioritize customers in less distant markets, such as Turkey or the commercial hub of Fujairah. And India itself, which relies on foreign vessels for 90 percent of its imports, does not have enough tankers to support current Russian imports.
Analyze the calculus of Beijing and New Delhi in deciding whether to cooperate with Western measures against Russian crude exports and shipments.
To keep Russian imports flowing today, Beijing will not need to cooperate. And with a glut of oil stranded in Russia, China will be in a strong position to negotiate deep discounts with Moscow. But if China wants to increase cheap Russian imports (at OPEC’s expense), it might consider cooperating to manage its own tanker capacity.
For New Delhi, by contrast, cooperation may be the only way it can safeguard existing Russian imports. And cooperating would keep more Russian barrels on the market, reducing the risk of a price shock that could hurt all importers.
What are the consequences for European countries if China and India do not cooperate with the cap?
Russian oil exports could fall significantly. Europe will be able to get the oil it needs from elsewhere, such as the Middle East, but the resulting supply squeeze could push up prices around the world, at least for a while.
Assess how Moscow might retaliate against a Western cap on Russian crude and how China and India would benefit.
Indications are that Moscow is trying to assemble an Iran-style shadow fleet made up of Russia’s own tankers and a network of aging gray-market vessels, with opaque ownership and dubious documentation. If successful, it could keep Russian oil flowing to India and allow China to increase Russian imports.
But securing that much tonnage will be a very heavy job. To maintain current export levels, Russia will need many times more tankers than Iran uses. But lead times for new builds are long, and markets for used tanker sales and gray-market rentals are limited.
The Kremlin now seems to recognize the challenges of the shadow fleet strategy. In parallel, expect him to chase two others. First, despite public statements to the contrary, they will want to have an option to sell under a price cap.
Second, expect Moscow to step up efforts to break Western resolve on oil sanctions. This could include unilateral reduction of exports previous to December to precipitate a supply crisis, just as Moscow is doing today with gas.
But if the West stands firm, markets will eventually adjust and the Kremlin will end up the real loser. Russian hydrocarbon sales to Europe date back 140 years. Today, they constitute the world’s largest single-commodity bilateral trade. They are essential to the vitality of the Putin regime and entail not only access to EU clients and capital, but also a heavy reliance on advanced Western energy technologies and services not available anywhere else. Through aggression, brutality, and miscalculations, Putin has single-handedly dismantled this critical relationship. His arrogance will cost Russia dearly.