In the six months since Russian forces began bombarding Ukrainian cities with artillery and missile strikes, the United States and its European allies have adopted a two-pronged strategy against Russia: provide Kyiv with the military equipment it needs to block and potentially overthrow the Russian military. makes progress on the ground and enacts a series of punitive economic sanctions to degrade Russian President Vladimir Putin’s war machine. Several sanctions packages have been adopted in Washington and Brussels, the latest being a measure taken on July 21 by the European Union banning the import of Russian gold.
Russia is now the most sanctioned country on the planet – half of its foreign exchange reserves are inaccessible, more than 1,000 companies have ceased operations or left the Russian market entirely, and export bans have shaken the chain of Russian defense industrial supply.
Yet the West is learning that these same sanctions are not without risk, neither for itself nor for the countries that have chosen to adopt a position of neutrality in the war. There is a key lesson to be learned, which we ignore at our peril: no tool, no matter how justified its use to punish an abuser, is free.
The West’s sanctions campaign against Russia’s oil sector is a perfect case study. In March, President Joe Biden signed an executive order banning the import of Russian crude oil into the United States, in addition to other Russian energy sources such as coal and natural gas. More than two months later, the EU, which imported 2.2 million barrels of Russian oil a day in 2021, enacted a ban on oil deliveries by sea from Russia, which must be completed by end of the year. (Pipeline oil was exempted due to opposition from Hungary.) European officials immediately hailed the decision as an example of EU unity of purpose at a time when neighboring Ukraine was hammered by Russian missile and artillery attacks.
The market, however, adapted quickly, as it often does. By seeking to remove Russian barrels from commission, Western sanctions have unwittingly tightened a global oil market that was already struggling to keep pace with strong demand. Although Brent crude oil prices are about the same as those seen in early March, prices climbed to $123 a barrel about a week after the EU enacted its phased oil embargo. Predictably, this had a terrible impact on consumers, who were forced to shell out $5 for a gallon of gasoline at a time when inflation was already at its highest in decades.
Russia, meanwhile, has taken full advantage of these high oil prices. Oil shipments to Europe have increasingly been diverted to Asian buyers. China and India have gladly taken advantage of the situation. The price of oil was so high that Russia was able to generate significant revenues, even though it offered discounts of $20-$30 a barrel, more than offsetting the closure of the European market.
Western policymakers now face potential calamity, much of their own making. Energy experts warn oil prices could soar as high as $200 a barrel once a European insurance ban on Russian tankers comes into effect in December.
Washington, in coordination with its G-7 colleagues, is now trying to solve a problem that they have, in part, encouraged. Treasury Secretary Janet Yellen is pushing intensely for a Russian oil price cap, which would ideally keep Russian barrels on the market, preventing a price hike, while reducing the amount of revenue Moscow would receive from those barrels. exports.
Delving into the details of the latest oil price regime, however, misses the forest for the trees. The moral of the story is simpler and more disturbing: it took a willful worsening of global energy markets for policymakers in Washington and Brussels to remember the rules of supply and demand.
Even the West’s control over the international financial system, an important lever, can backfire if policies are not properly thought through. This is a finding worth acknowledging early in the process. The alternative is the one we are witnessing today.
Daniel R. DePetris is a member of Defense Priorities and a foreign affairs columnist who has also written for Newsweek and the Spectator.