For the US and its allies, sanctions seem to be the weapon of choice—especially when they are unable to bomb the offending country

When Russia launched its invasion of Ukraine on 24 February, the USA and its Western allies pondered over their response and finally reacted with “Sanctions, as never seen before.” The Mother of all Sanctions, if you could call it that, were imposed on Russia. These sanctions ranged from the effective, such as the cutting off of Russian banks from the SWIFT global financing system, the blocking of the Nord Stream II gas pipeline, blocking Russia’s $640 billion war chest which was invested largely in US bonds, and preventing imports of semi-conductors and other critical components which were vital to its industry. Others were ridiculous, such as the banning of Russian players from the Wimbledon championships, and a ban on Russian vodka. Russia became the most sanctioned country in the world, with the sanctions designed to cripple its economy and war-making potential.

The sanctions seemed to work—initially. The Russian economy contracted, and the rouble plummeted in value. But the economy recovered soon enough and the rouble actually emerged as the best performing currency in Europe. In spite of the closing down of western businesses and the withdrawal of foreign investments, the Russian economy soon bounced back to pre-war levels. Russia responded by cutting the supply of gas and energy to Europe, stating with immense chutzpah that ‘sanctions made it impossible to maintain the gas pipelines’ and brought about the prospect of a cold winter and looming recession in Europe. Now, in the ninth round of sanctions, the G7, Australia and the European Union, have imposed a price cap on the sale of Russian oil, which came into effect from 05 December.

For the US and its allies, sanctions seem to be the weapon of choice—especially when they are unable to bomb the offending country. But it misses one important point; sanctions rarely work, and can be easily circumvented. Iraq, Venezuela and Iran have lived under sanctions for years, with little effect on their actions. They have no legal binding and unless they are universally agreed upon, are virtually impossible to implement.

The latest round of sanctions seeks to target Russia’s oil exports by imposing a price cap of $60 per barrel. No nation would be able to purchase it above the price. This, they hope, would curb Russian oil revenues to fund the war which costs them an estimated $1 Billion per day; but at the same time, avoid the global oil shock that a complete blockade of Russian oil would entail. The sanctions are only limited to sea-borne Russian oil, Oil flowing into Europe through pipelines are conveniently excluded from this cap. And since European nations are not to purchase any Russian crude, the ban would largely impact non-European importers – mainly China, India and other Asian and African countries.

The very fact that it took the G7 members six months of negotiations to decide upon the cap, shows how divided the community was in the imposition of this latest sanction. For starters, the cap of $60 per barrel is a neither-here-nor-there kind of price. Russian Ural crude is selling at around $62-67 per barrel, and this is unlikely to affect revenues significantly. Zelensky had proposed a $30 cap which was termed as too drastic. A price cap of $50 per barrel could have been more effective since Russia spends around $30 – 40 to extract each barrel of oil, and even this margin would have given it incentive to continue production without having to cap their oil wells.

The other important aspect is that such a cap is virtually impossible to impose. As per the mandate, shipping tankers would be denied berthing facilities if they carried oil sold above the price. Should any ship do so, it would be denied entry in US and European ports for five months after the transgression. Ships carrying this cargo would also be denied insurance. Most shipping and insurance companies are western based, and ipso facto the onus of imposing the ban would lie upon them rather than any institutionalized organization. The price cap is against the norms of free market trading, which the West claims to adhere to, but with the absence of international consensus it would be virtually impossible to impose.

Russia has predictably rejected the ban as “arbitrary and illegal” and Putin signed a decree that bans the sale of oil and petroleum products for a period of five months to any nation that complies with the price cap. They are also building up their own fleet of “shadow tankers”—old and refurbished tankers procured on lease from other nations that would enable them to ship their oil. Russian companies have also agreed to provide the insurance to offset the denial of services by western companies.

But perhaps these contingencies may not be required at all. After all, most of Russia’s major importers—including China, India, Turkey and Indonesia—have refused to go along with the cap, and would continue to procure Russian oil at market rates. Russia has been providing competitive rates and has simply re-routed the oil bound for Europe to Asian and African markets (largely China and India). It has emerged as the second largest oil exporter in the world (after Saudi Arabia), and sanctions or no sanctions, its oil and energy exports have been relatively unaffected.

India has taken the very nuanced decision of refusing to adhere to the cap. After all, Russia is now its largest supplier of oil, and has supplanted traditional suppliers like Saudi and Iraq. It now provides one fifth of its oil imports—up from the miniscule 0.2% before the war. Much of the oil is at heavily discounted rates—almost $10-$12 per barrel less than the prevailing market rates – which “gives the Indian consumer access to the most advantageous terms in the international market”. This leads to a whopping saving on our oil bill, more so since much of the trade is in Rupee-Rouble terms.

While western nations have condemned India’s stance, it is based on national interest and market economics—just the way it should be. They also conveniently forget the fact that the European Union imported six times more oil from Russia than India did, ever since the war began. They also imported around 50% more coal than India, and their gas inflows from Russia continued unabated till the sabotage of the Nord Stream gas pipelines. In fact, in the past year, Europe has imported more energy from Russia than the next ten nations combined. The moralistic stance they use to justify the ban, thus seems shallow and self-serving.

The price cap on Russian oil is a ham-handed sanction that may not have the desired impact. Its announcement did not create so much as a ripple in global oil prices, and none of the OPEC nations have shown any measure of support towards it. It will not hurt the Russian economy significantly but conversely may strengthen it. The oil trade could move away from the dollar towards other currencies like the Yuan, Rupee, Euro and Rouble – which would be a good thing. The manner in which the US has arbitrarily imposed sanctions – such as cutting off Russia from SWIFT and impounding its dollar bonds – has led to fears that USA could do the same to other countries. This has led to the development of alternative banking and financial systems, such as the VOSTRO which facilitates Rupee-Rouble trade and the SPFS, which is a Russian-Chinese alternative to SWIFT. And while the sanctions would hurt Russia, it will be a slow process that would damage others as well. In the era of globalization, these sanctions will impact not just the targeted nation, but the entire global supply chain, and affect the flow of food, energy, semi-conductors, metals, minerals and virtually every other commodity.

As the war drags on in a cold winter in freezing front lines, the West seems to have no answers to stop Russia, but sanctions. And it has been repeatedly seen that sanctions don’t work too well. It would be better to address the root cause of the conflict – get all parties together, and try to hammer out a negotiated peace. That may be difficult, but in the long run, could be the only solution. Else the war will continue and run its long, bloody and interminable course – sanctions or no sanctions.