Since the invasion of Ukraine began, Western countries have sought to use financial means, as well as covert military ones, to degrade the war machine being unleashed against Ukraine.
On Monday, one of the most far-reaching experiments began, an attempt to wield a financial weapon that would strike at the heart of Russia’s war chest.
The West is attempting to set a price cap for Russia’s oil, demanding that no country buy Russian oil for more than the price they set. Europe has also banned seaborne oil imports from Russia. To enforce the price cap, European and British insurance companies – which dominate the field of insuring oil tankers – will not insure vessels that transport oil sold at higher prices.
Already the cap is having an impact. In the hours immediately after, there were queues of tankers coming from the Black Sea outside Istanbul’s Bosphorus Strait, as Turkish authorities demanded that they prove their ships were insured before transiting the straits. Like many other countries, Turkey will not want uninsured oil tankers passing through its territory, lest there is an accidental spill – and no insurance company willing to stump up the millions required to clean it up.
More than any recent conflict, the Ukraine war has demonstrated the interconnectivity of the global financial system – its tilt towards the cities and institutions of the West, certainly, but also the careful calibration Western governments need to make in order to use these weapons.
Thus far, attempts to hit Russia’s oil exporting capacity have had a limited impact. The West’s various sanctions against Russia have only resulted in a 5 percent drop in oil exports compared to pre-war levels. Other countries have happily stepped in to buy the oil.
The oil price cap is an attempt to reverse that. But it requires care. Turn the screws too far in one direction and the pain may be unbearable for the West itself or its allies; turn it too far in another direction and Russia may seek ways out of the global system that would eventually undermine the power of the West.
Take for instance the decision about where to set the price cap. For weeks, the G7 and the European Union have been locked in talks. The price decided was $60 per barrel, a price roughly similar to where Russian oil is trading.
The Ukrainians wanted the cap set much lower, perhaps as low as $30. That would severely dent the amount of money received by Russia, with a concomitant impact on its ability to wage war for a long period.
But the Western countries were concerned that setting such a low price would mean it wouldn’t make financial sense for Russia to pump oil at all – leading to less oil on the market, a global shortage, a massive price spike for the commodity, and rampant inflation in the West.
Instead, the price had to be calibrated to a level where it impacted Russia’s ability to fill its financial coffers, but not so low that it stopped the Russians pumping oil. That’s why Ukraine’s president called the cap “weak.”
The number chosen appears to be straightforwardly political. By choosing a figure close to the market price, it means Russia will rail against being held to ransom by the West – naturally – but may not feel there is sufficient reason to respond forcefully immediately, in a way that would critically hurt western economies. But later, with the principle established, the West could gradually lower the oil price cap, squeezing Russia’s war chest.
That gamble may just pay off. Russia’s immediate response to the oil price cap was to suggest it would implement an oil price “floor,” a gentler response then, for example, cutting oil production, something that would hurt Western economies.
But there is a broader problem with the West’s new oil weapon, and it is one that will be watched most closely in the Middle East.
The majority of countries in OPEC – the 13 states that produce much of the world’s oil and have the vast majority of its proven reserves – are Arab and African, including countries like Libya, Iraq and Iran, which haven’t always had the warmest relations with the West. If this new oil weapon works and manages to stifle Russia’s profits, there is every possibility that it will be used again, most likely against OPEC members.
That is something the group will be seeking to assess closely and react carefully. On Sunday, the group met and could have decided to slow production, a decision that would almost certainly have spiked prices, frustrating Western economies. Instead, they agreed not to change things.
Like most of the world, they will be watching for the response from the major non-Western purchasers of Russian oil, China and India. The two Asian giants could decide to oppose the West, on the basis that they would not like to be similarly pressured in the future (in China’s case over, for example, Taiwan) – or they could seize an opportunity to negotiate a better price for oil. Either would have consequences.
What everyone will be watching now are the consequences. For the West, whether the careful calibration of the oil weapon is enough to hurt Russia without impacting their own economies; for oil consumers, whether the possibility of lower prices is enough to compensate for bowing to Western pressure; and for oil producers, especially in the Middle East and Africa, whether hoping for the failure of the new oil weapon is enough – or whether it is sufficiently dangerous for them to prepare counter-measures in case it is turned on them in the future.
Faisal Al Yafai is currently writing a book on the Middle East and is a frequent commentator on international TV news networks. He has worked for news outlets such as The Guardian and the BBC, and reported on the Middle East, Eastern