Russian Invasion of Ukraine: Global Implications

Price cap on Russia’s Oil and India’s contextual response

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From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Price cap on Russia's Oil and its implications on global oil supply chain, India's response and bilateral trade

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Context

  • Recently, G7 proposal to impose a price cap on Russian oil came into effect. The proposal, which took months to fructify, seeks to achieve a delicate balance how to starve the Russian state of oil revenues so as to financially cripple its war against Ukraine, but without causing supply disruptions in the global oil market which would cause prices to spiral. The move, however, risks fracturing the global crude oil market.

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What is Price cap on Russian oil?

  • The $60 per barrel and denial of infrastructure services to Russian oil: The $60 per barrel cap is intended to cut Russia’s oil revenues while keeping Russian crude on the market by denying insurance, maritime services, and finance provided by the Western allies for tanker cargoes priced above a fixed dollar-per-barrel cap.
  • Aim to hurt Russia’s oil revenue and create a pressure: The US-proposed cap aims to hurt Moscow’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
  • Impact on shipping: Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.

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Russian response to the price cap

  • Russia refused to abide by the measure: Russia has said it will not observe a cap and will halt deliveries to countries that do.
  • Retaliate by shutting off the shipments: It could retaliate by shutting off shipments in hopes of profiting from a sharply higher global oil price on whatever it can sell around the sanctions.
  • Russia said price cap will not hurt financing the war: Russia recently said that the cap would not hurt the financing of its “special military operation” in Ukraine.
  • Others buyers may bypass the restrictions putting countries interests first: Buyers in China and India might not go along with the cap, while Russia or China could try to set up their own insurance providers to replace those barred by US, UK and Europe. It is also possible that these countries will find creative ways to bypass the restrictions imposed by the G7.

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How impacts global oil supply chain?

  • Russian oil can now only be shipped using G7 countries infrastructure: Broadly speaking, Russian oil can now be shipped across the world using the infrastructure of the G7 countries tankers, insurers, etc only if it is sold at a price of $60 per barrel or less.
  • Higher price for buying oil from Russia: This makes buying oil from Russia at a higher price in the week prior to this announcement, Urals crude was trading in the mid-$60s range  a difficult proposition as most of the companies that offer shipping and insurance services are located in these G7 nations.
  • Countries wish to buy are at disadvantage but still not higher than brent crude oil: While Russia has refused to abide by this measure, and the cap will place countries that do opt for buying oil from Russia at a price higher than $60 at a disadvantage, it will still be at a considerable discount compared to Brent crude oil which is currently trading at around $81 per barrel.
  • Countries that continued trade despite of objections: So far, despite objections from western nations, countries like India and China have continued to trade with Russia.

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India’s response and the bilateral trade with Russia

  • India’s bilateral trade with Russia has surged to an all-time high: In fact, as reported in this paper, India’s bilateral trade with Russia has surged to an all-time high in the first five months of the year (April-August).
  • India putting its interests first and taking advantage of discounted price: Putting its interests first, India has raised its oil imports from Russia, taking advantage of the discounts being offered the country which used to import less than 1 per cent of its import requirement from Russia, now imports around a fifth from it.
  • As India is an oil importer, the trade at discounted price will give some relief in current account deficit and economic stability: After all, for an oil importer like India, which meets an overwhelming share of its requirements through imports, lower crude oil prices will moderate the price pressures in the economy and bring relief to the current account deficit, easing risks to macroeconomic stability.
  • India rejected the so-called moral duty: India has rejected any “moral” duty to join the price cap coalition.

Conclusion

  • Attempts to use trade as a weapon will only distort the global market and hurt energy-poor consumers not responsible for the war. India’s response so far to the West’s retaliation against Russia for the war in Ukraine has been guided by its sovereign interests. This must continue to be the guiding principle.

Mains Question

Q. G7 recently imposed a price cap on Russian oil driven by US and west. In light of this Discuss how it disrupt the global oil supply chain and how India is responding?

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