THE LATEST SANCTION

US Bans Russian Oil Imports Amid Ukraine Crisis

    United States President Joe Biden has imposed an immediate ban on Russian oil and other energy imports in retaliation for Russia’s invasion of Ukraine, while the United Kingdom said it would phase out imports by the end of 2022. The latest sanctions are likely to push up oil prices — resulting in even higher prices at the pump. These moves will further increase crude oil prices, which in turn will stoke inflation across the world—particularly in the US and its allied nations in Europe, which are already reeling from inflation rates that are at their highest in decades. That is because Russia is the world’s second-largest producer of oil as well as the second-largest exporter.

      The ban blocks any new purchases of Russian crude oil, certain petroleum products, liquefied natural gas, and coal, and winds down the deliveries of existing purchases that have already been contracted for. New investments from the US in Russia’s energy sector are also prohibited under the ban. The ban does not, however, impact the ability of other countries to import Russian crude oil or natural gas. 

        Russia is the world’s top exporter of crude and oil products combined, producing about 7 million barrels per day (bpd), or 7 percent of global supply. In 2021, the US imported an average of 209,000 bpd of crude oil and 500,000 bpd of other petroleum products from Russia, according to the American Fuel and Petrochemical Manufacturers trade association. This represented 3 percent of US crude oil imports and 1 percent of the total crude oil processed by US refineries. For Russia, this represented 3 percent of its total exports. Washington will be disrupting only about 5% of Russian crude oil exports. As for the impact on the US, 8% of its imports of oil and petroleum products originate in Russia. According to analysts, the ban is something that the US can afford to do.

        European countries will need more time to wean themselves off Russian energy, and the US ban will lack the punch of a concerted embargo. But keeping energy outside the western economic blockade has had the perverse effect of making Russian supplies more lucrative. To be effective, the sanctions need to cover energy. Asia can bypass the blockade and access Russian oil and gas. But the switch will not happen overnight and will most certainly be expensive. The Indian import basket is a blend of crude predominated by supply from West Asia. Its gas imports will find new competition from a Europe pivoting away from Russian supply.

         Experts noted that as long as Russian crude oil supplies continue, there would not be a major impact on crude oil prices which are already near 14 year highs. Brent crude was trading at $130.8 per barrel on Wednesday (10.30 am IST), up 34 per cent since Putin announced military operations in Ukraine. Economic sanctions imposed by the US and Europe have already had some impact on exports of Russian crude oil. Analysts have noted that cargoes of Russian crude oil are struggling to find buyers with many concerned about the reputational damage from buying Russian crude which is now being offered at steep discounts due to sanctions.

         The sharp uptick in crude oil prices comes as Indian consumers have been enjoying a four month reprieve from rising fuel prices with oil marketing companies (OMCs) having kept the price of petrol and diesel constant since early November. With elections in Uttar Pradesh, Punjab, Uttarakhand, Manipur, and Goa having come to a close, consumers are expected to see a consistent increase in fuel prices starting this week as OMCs look to bring prices in line with international benchmarks and recoup losses. The price of petrol and diesel have to be hiked by about 52 paise for every dollar increase in the price of crude oil for OMC marketing margins to remain constant. The price of crude oil has risen by about $50 per barrel since the price of petrol and diesel was last revised in November. Petrol is currently retailing at Rs 95.41 per litre in the national capital while diesel is retailing at Rs 86.67 per litre. 

     While the US and Europe have, so far, been together in slapping sanctions against Russia, there is an unintended impact being felt due to western businesses holding back from engaging with Russian companies of their own accord. There is a surge in energy and commodity prices along with possibilities of supply chain disruptions. These factors will lead to inflationary pressures and may affect growth in many countries, including India, watchers warn. From a global perspective, while intended to punish Russia for its action in Ukraine, sanctions are endangering fragile global recovery, and may further strengthen Russia-China strategic alliance economically. If the sanctions against Russia are enlarged, investors will seek a bigger risk premium for crude oil and natural gas as the world adjusts to new supply arrangements. Slippery times ahead.