By K Raveendran
Notwithstanding the symbolism of President Joe Biden’s unannounced visit to Ukraine, the fact remains that America’s claim to be the world policeman has suffered serious drubbing as the world marks the first anniversary of Russia’s Ukraine war this week. Ukraine has put to test the US resolve, raising fundamental questions about its role in European security and defence. That is as far as geopolitics goes. But in terms of economic impact, West’s Ukraine war-related sanctions have caused serious disruption to the established order in energy, oil, logistics and insurance sectors. Most significantly, it is the US-led western powers that have been more at the receiving end of these cataclysmic changes than Russia.
Biden’s gambit in enforcing sanctions against Russia was to damage the Russian economy by cutting off its energy revenues, which were vital for Moscow to manage the economy. Biden’s plan banned the Russian rouble from the global SWIFT system, the network that facilitates banking transactions, hoping it will squeeze Putin’s currency out of the global financial system. Squeeze it did, but Putin upstaged the plan by insisting that Europe will have to pay for its energy in roubles and showing his willingness to withhold supplies of vital natural gas to EU countries that refused to meet payment demands. It was then left for the European nations to devise methods in which to pay Russian companies in their own currency without appearing to violate the sanctions. This ensured that some of the Russian supplies continued to flow through the pipelines.
On another front, Russian oil found new destinations that kept its exports surprisingly resilient. The new markets were in Asia, and particularly India. in the face of Western sanctions as Russian oil expands its market share in key growth markets such as Asia and India. While India and China picked up most of the embargoed Urals crude, the volume of cargo with unknown destinations also jumped. Russian oil, once easy to track, is now being moved through more shadow channels.
The picture that emerges after two months of the European Union (EU) embargo and G7 price cap on Russian crude is that the effect of sanctions on the volume of Russian crude oil exports has devastated Moscow as the western powers had hoped. In fact, Russian crude oil exports by sea rose to 3.2 million bpd in the second week of January and reached a 10-week high. Current estimates suggest flows have rebounded after dropping to 2.6 million bpd in December. The resilience is attributed to the build-up of a fleet of tankers by Russia.
Bloomberg recently reported the emergence of a new fleet of oil tankers to help Russia beat back the sanctions. According to the agency, hundreds of fuel vessels are sailing without showing any hints of where they’re going. More than 300 mid-range ships were recently seen sailing without cargo or destination compared to an average of 14 at any given time prior to this year. This shift may be a sign that vessels are forming a ‘dark fleet’ to haul Russian fuel under the radar after the European Union banned it.
An investigation by The Economist revealed, much to the West’s chagrin and Russia’s relief the emergence of a ‘shadow’ shipping and financing infrastructure, which is both robust and extensive. Rather than fade away, the grey market stands ready to expand when the next set of sanctions is enforced, it said. Interestingly, these are perfectly legal as the ban applies only to Russian ships making use of the West’s logistics and insurance firms only if their cargo is priced below $60 a barrel.
Upset by the failure of the sanctions to achieve the desired results, the US has tried to enforce a price cap on Russian oil by manipulating the insurance rates. But this also did not materialise. Russian firms have stepped in to provide cargo and vessel insurance, along with some coverage offered by the Russian state. It is believed that some ports serving countries consuming Russian crude may have lowered the level of coverage to ease insurance terms. Some trade still uses the same Greek shippers, British insurers, and Dutch and Japanese banks that have long ruled the industry. This channel survives, taking cover under the price cap enforced by the West in December.
According to The Economist, most of Russia’s crude runs through grey networks which do not recognise the price cap but are not illegal, because they use non-Western logistics and deliver to countries that are not part of the blockade. These opaque, dispersed operations rely on three main pillars: a novel cast of traders, a vast and growing tanker fleet, and new sources of finance.
New intermediaries have emerged in the oil market, which facilitates the flow of Russian crude. Russian crude exports had initially taken a hit after Europe’s salvo in December, but two months on, they have recovered to levels last seen in June. The volume of oil on water, which climbs when the market jams up, is back to normal, according to The Economist, which reported sighting of several huge tankers formerly anchored in the Gulf taking cargo from smaller Russian ships off Gibraltar. For instance, Oman and the United Arab Emirates imported more Russian oil in the first ten months of 2022 than in the previous three years combined. The practice is to blend the Russian cargoes and re-sell to Europe and other destinations. It was found, for instance, that Malaysia was exporting twice as much crude to China as it can produce. It has been reported that more than 30 Russian trading outfits have set up shop in Dubai since the war started, selling to India, Sri Lanka, Turkey and others. Some of these could be fronts for Russian state companies, but their operation is perfectly legal. All this means that Russia is still able to sell oil and products to much of the world legally.
European Union has been caught in a situation of being placed between the rock and a hard place when it came to petroleum products imports from Russia ahead of the February 5 deadline for enforcing an embargo. Most countries of the continent have been in a rush to increase diesel stocks due to fear of uncertainty over Russian supplies. Europe has been desperate to secure higher supplies from the rest of the world, but there has been a problem with available supplies.
According to Rystad Energy, Europe is bracing itself for the long haul with higher diesel prices, and there is no easy solution in sight. Any change in pricing will come from cuts to demand as a result of high prices, rather than the supply side which will remain tight. Overall, the high diesel price distortion is going to continue and remains a key driver for inflation across all sectors including energy, transport, food and construction.
The Ukraine has had such far-reaching impact on the global economy, dimming prospects of a post-pandemic economic recovery for emerging and developing economies in the Europe and Central Asia region, according to the World Bank’s Economic Update. Activity in the euro area, the largest economic partner for emerging and developing economies of Europe and Central Asia, has deteriorated markedly in the second half of 2022, due to distressed supply chains, increased financial strains and declines in consumer and business confidence. The most damaging effects of the invasion, however, have been the surging energy prices amid large reductions in Russian energy supply. (IPA Service)
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