Soon after the Russian invasion of Ukraine on February 24, the US and Europe imposed severe sanctions on Russia's energy sector, as the Russian economy is heavily reliant on energy production, making it extremely vulnerable to disruption.
Will the G7 countries be hurt by limiting Russian oil?
In late February, G7 nations and the European Commission announced sanctions on Russia's central bank to block it from accessing its foreign exchange holdings of $609.4bn, and as a result, for the first time in a century, Russia defaulted on its foreign-currency sovereign debt worth $ 100 million, as per media reports.
Countries including the US, UK, Canada, and Germany have removed selected Russian banks from the SWIFT network—the world’s key international payments network, in a bid to give a blow to Russia’s international trade.
Furthermore, these countries have banned Russian oil imports. Later, the EU joined the line, and on May 30, as part of the sixth package of sanctions, the EU agreed to ban 90% of Russian crude oil imports by the end of the year.
However, none of these actions or sanctions compelled Russia to retreat from Ukraine. Instead, the Russian Deputy Prime minister said that "Russia is prepared to send any supplies rejected by European countries to other regions such as Asia.
After sanctions were imposed by the west, Russia turned to India and offered huge discounts on its crude. It also provided Rupee-Ruble payments using SPFS, which is the Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia.
Within just months, Russia's share of India's oil purchases rose to a record 6%, about 277,000 barrels in April, up from about 66,000 BPD in March. In April, Russia became the fourth-largest oil supplier to India, up from its 10th position. By the end of June, as per the PTI report, Russia overtook Saudi Arabia to become India's second-biggest supplier of oil behind Iraq. At some point, Russia's Rosneft paused signing new crude oil deals with Indian refiners as demand for discounted crude rose.
Moscow successfully managed to keep exporting its oil despite Western sanctions to choke Moscow's revenue. The Washington Post reported, citing the Center for Research on Energy and Clean Air, that Russia earned nearly 100 billion dollars from the export of fossil fuels during the first 100 days of the Ukraine war. Following the imposition of sanctions, energy prices skyrocketed, helping money to flow into Moscow's coffers.
Further, the earnings from energy exports are expected to touch $337.5 billion this year, a 38% rise from 2021, according to an economy ministry document seen by Reuters.
The jump in revenues, if it materializes, will help shore up Russia's economy in the face of waves of Western sanctions. The report said it would provide President Vladimir Putin with cash to fund military spending or boost wages and pensions at a time when the economy has fallen into recession and inflation is eroding living standards.
G7 Nations New Proposal - Will it Backfire?
As sanctions from western nations showed little impact on the Russian economy, On September 02, the G7 nations took another big decision. The G7 leaders agreed to implement a price cap on oil imports from Russia in a bid to cut off a major source of funding for Moscow's military action in Ukraine.
Within hours of the G7 announcement, Russian President Vladimir Putin threatened to cut off energy supplies. "We will not supply gas, oil, coal, heating oil—we will not supply anything" if that occurs, he said.
Following the imposition of sanctions on Russia, food and energy prices skyrocketed, resulting in record-high inflation. Inflation in major economies are at a decade high, and central banks in developed economies have already raised interest rates three to four times in 2022.
The US inflation rate recently reached 8.3% in August 2022, raising the possibility of further FED rate hikes. Analysts now anticipate another 75 basis point (bps) increase in the federal funds rate at the next monetary policy meeting later this month. Upon the release of the US inflation figures, US Major indices suffered their largest one-day percentage loss on September 14 since June 2020.
Similarly, the UK economy is struggling with high inflation, which has driven up the cost of living to record high levels as food and energy prices soar. On the other hand, inflation in the EU area reached a record of 9.1 percent in August, compared to 8.9 percent in July. The ECB raised its 3 key interest rates by 50bps during its July 2022 meeting, the first increase since 2011, ending eight years of negative rates.
The EU27 region is almost fully dependent on gas imports, said SBI Research in its latest report, with more than 90% of the gas consumed in the euro area being imported. Unlike petroleum products, gas is the primary energy source most consumed in the industrial sector and accounts for a high proportion of household final consumption.
The gas supplies through Nord Stream 1 pipeline - which transports natural gas from Russia to Europe, have been completely halted, citing maintenance work.
On September 02, Russian state energy giant Gazprom said it would not resume flows through the pipeline as planned because it had detected an oil leak at its Portovaya compressor station, news of the extended shutdown comes on the same day as the West’s biggest economies agreed to impose a price cap on Russian oil.
"Until the issues concerning the operation of the equipment are resolved, gas supplies to the Nord Stream gas pipeline have been completely stopped," Gazprom said in a statement.
After the flows were stopped, the Dutch TTF futures increased by 35% on September 5. Since June, Gazprom has slashed flows through Nord Stream 1 to just 20% of its capacity, citing maintenance issues and a dispute over a missing turbine caught up in Western export sanctions, according to media reports.
If Russia extended the supply cuts, the natural gas prices will soon rise in the coming days. According to Bloomberg data, natural gas prices have surged more than 300% this year. The high gas prices will certainly add more inflation to the EU and UK which already suffering from multi-decade high inflation. However, Many European countries are getting alternative supplies from Norway, Netherlands, and Qatar.
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