The latest big idea coming out of the G7 talks on how to sanction Russia is to enforce a price cap on Russian oil of about ⅕ the current market rate.
The idea here is to use the threat of sanctions against the rest of the world, because only the G7 nations can process payments and provide shipping insurance.
Given the current effect of sanctions, the Ruble has risen more than any other currency on earth since the start of the war in the Ukraine, this seems to be a highly dubious proposition, particularly since oil is pretty fungible, and to the degree that it is not, Russian oil plays an outsize role in refining to diesel fuel, so any switch would require retooling of the refineries.
This is the act of a group trying to show people that they are doing something, not actually doing something:
G7 leaders meeting for a summit in the Bavarian Alps are seeking a deal to impose a “price cap” on Russian oil as the group works to curb Moscow’s ability to finance its war in Ukraine.
Talks were set to continue on Monday, having begun on Sunday in the luxury resort of Schloss Elmau, where leaders want to enlist a range of countries beyond the G7 to put a ceiling on the price paid for Russian oil.
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On Monday, the caps will be debated by a broader group when the leaders of Germany, the US, UK, France, Italy, Japan and Canada are joined by “partner” countries invited to the summit. These include India, which has become a big buyer of discounted Russian oil since the invasion of Ukraine, as well as Argentina, South Africa, Senegal and Indonesia.
I'm thinking that there is a sovereign bond case where a crazy federal judge in New York has Argentina over a barrel (pun intended) that might come up for review as a result.
Charles Michel, president of the European Council, said the EU was ready to decide with its partners on a price cap but stressed the need for a “clear vision” and awareness of possible knock-on effects. “We want to make sure the goal is to target Russia and not to make our life more difficult and more complex.”
Which means that you cannot make it work.
Existing sanctions have already hit the west, in particular the EU harder than Russia. See the example of the reductions of flow through the Nord Stream 1 pipeline, because sanctions have prevented maintenance on the line.
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Host Olaf Scholz, Germany’s chancellor, said all the G7 states were worried about the “crises we currently face”. But he said he was convinced the group would send a “very clear signal of unity and decisive action”.
This is an acknowledgement that the sanctions are not working.
The leaders are also targeting China. Biden said the G7 had built on a deal first announced in Cornwall a year ago to offer infrastructure funding to poor countries as an alternative to China’s Belt and Road Initiative.
The alternative being offered is small subsidies, with massive public-private-partnerships, which as I have noted before, are a way to throw massive subsidies at corrupt private businesses, and then require governments to cover any potential losses.
It's an even bigger sucker bet than China's Belt and Road Initiative.
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The idea of an oil price cap comes as the high price of crude means Russia’s revenues from oil exports have not necessarily declined despite western restrictions on Russian oil imports.
Concern is also mounting that attempts to ban ships carrying Russian oil from accessing western insurance markets this year could drive global oil prices to unprecedented levels. The International Energy Agency warns it could contribute to the shutdown of more than a quarter of Russia’s pre-invasion production.
Under the price-capping scheme, Europe would limit the availability of shipping and insurance services that enable the worldwide transport of Russian oil, mandating that the services would only be available if the price ceiling was observed by the importer. A similar restriction on the availability of US financial services could give the scheme added impact.
So, China, and India, and Brazil, and Iran, etc. cannot do business without using US dominated payments systems (False), and cannot operate without insurance supplied by the UK by Lloyd's of London and other British firms. (False)
This might make it difficult to deliver oil to the US, but no oil is going directly from Russia to the US right now anyway.
Attempting to extend sanctions Russia like this, whose costs primarily fall on the EU and non-aligned nations, seems to me a recipe for destroying the, "Very clear signal of unity and decisive action," that Olaf Scholz is so deeply enamored of.
H/t Naked Capitalism.
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