Russia is on course for its first debt default this century. But this has less to do with cash running out than failure to pay creditors due to sanctions. Moscow has so far circumvented the west’s efforts to drain its coffers. Hence comes the urgency of G7 leaders’ efforts to step up the pressure.
The imposition of sanctions on gold exports, Russia’s second largest after energy, is one part of their plan. That, though, is largely symbolic as Russian gold is already taboo in western markets. Potentially more damaging is a proposed price cap on Russian oil sales. A price ceiling established by a buyers’ cartel would hit Moscow’s receipts while dampening energy prices and inflation.
Such an intervention could lessen the costs and improve the effectiveness of the west’s economic retaliation against Moscow. Its impact has so far been limited by Russia’s ability to find new buyers for the fossil fuels shunned by the west.
Even before the EU agreed in May to phase-in a ban on seaborne Russian oil shipment, self-sanctioning by companies caused a sharp decline in shipments. But that was nearly offset by a 503,000 barrel per day increase in imports by Asian refiners to a March-May average of 1.5mn bpd, says Rystad Energy. Russia earned nearly $100bn from oil and gas exports during the first 100 days of the war in Ukraine.
Russia has already been forced to discount its oil. At $34 per barrel, a historically wide negative spread for Russia’s Urals blend to Brent is telling. The G7 price cap proposal would doubtless seek to impose a lower price. Short term, Russia might retaliate by cutting fuel exports, potentially sending prices spiralling higher.
A cut-off of natural gas supplies poses a real threat. Europe has halved its reliance on Russian gas to about 20 per cent of total supplies, according to consultancy ICIS. But it is running out of short-term fixes. Germany is particularly exposed.
In the medium term, energy sanctions should weaken Russia, made worse by an eventual fall in oil and gas prices when an economic recession bites. It will be left with stranded assets in the form of its gas pipelines to Europe, while it could take at least five years to build a new one to China.
In the meantime implementing sanctions will be painful. What started as an economic shock-and-awe campaign is turning into a war of attrition.
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