Russian Oil Hits the Wall
India and China stop new orders
On January 10th, 2024, the US administration under President Biden sanctioned 183 oil tankers that Russia used to ship oil globally, exceeding the $60 per barrel price cap imposed by the West.
In the hours following the sanctions announcement, ports in China and India requested the sanctioned oil tankers not to enter. Some were anchored a few kilometers from the port, while others returned to their origins. Mass confusion ensued. Subsequently, a brief waiver was issued, allowing these sanctioned vessels loaded with oil to offload their barrels by February 27th. All related financial transactions needed to be completed by March 12th.
This move allowed the oil markets to adjust to the new reality. Millions of barrels of Russian oil were not pulled from the market; the tankers transporting them above the western price cap were. However, 183 vessels represent a significant portion of the global tanker capacity — 10%. This increased the demand for non-sanctioned vessels, which, in turn, raised the price of these tankers and subsequently the price of crude oil. We are witnessing a price increase in the oil market due to higher demand for non-sanctioned oil tankers.
It appears that the Russians have still not decided whether to ship crude oil below the price cap. If they had, there would be no reason for China and India not to receive any offers from Russian sellers for the month of March.
There’s very little chance Russia will choose to halt its crude oil supply and trigger an energy crisis, as even before such a crisis could unfold, the Russian economy would likely implode. The Russian economy now heavily relies on daily oil revenue for sustenance, and the supply will resume. The question is: Will they play it safe by using tankers with proper insurance papers, sticking to the oil price cap, or will Putin continue to circumvent sanctions by employing the remaining ships in the dark sea fleet?
This is likely what the Kremlin is furiously discussing at the moment. They are trying to decide which path to take. I think Putin will start shipping some oil at the price cap and some above it, gradually testing the response from the Trump administration.
Europe shouldn’t wait for the Kremlin to decide. Nor should it wait for the US Treasury to move. This pause won’t halt the flow of oil money into Russia. Orders will soon be placed and payments will resume, but when they do, Europe should ensure it happens at or below the price cap they’ve imposed.
There are multiple strategies for enforcement. After this pause, when Russian oil shipments resume, any ship identified as part of the dark sea fleet should be sanctioned again. Continuously target the dark sea fleet, reducing its capacity bit by bit. If possible, stop ships crossing NATO waters to check their insurance papers and impose penalties if necessary.
Let India and China know that purchasing Russian oil above the price cap through the dark sea fleet will result in sanctions against their entities. While this might be tricky with China, it’s certainly feasible with India. Forcing Putin to adhere to the price cap could slash his daily oil revenue by over 20%.
Sanctions remain a potent weapon against the Russian regime. Corporate bankruptcies in Russia are at a record high, and it is only getting started.
The Russian economy is facing the prospect of a huge rise in corporate bankruptcies as firms are driven to the edge by a record key interest rate.
The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), which is close to the Russian government, said that one in five manufacturing enterprises must pay two-thirds of pretax profits to service debt. This shows that the key interest rate of 21 percent imposed by Russia’s Central Bank (CBR) to cool the economy is taking its toll.
Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, told Newsweek that there was “realistic danger” Russia faces a big rise in bankruptcies. — Newsweek
- The only way Putin can address the rising tide of bankruptcies is by lowering interest rates (21%), which he can only do if he manages to reduce or stabilize inflation.
- He is unable to contain inflation because he must draw more than 1,600 workers daily from his labor pool to support his war efforts, steadily depleting the workforce. This depletion leads to increased wages and, consequently, higher inflation.
- The task for the Western world is to restrict the daily cash flow into Russia’s inflation-stricken economy. If the West can intervene and reduce his oil revenue, even by just 10%, anything could happen.
Any time.
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