Biden and the other G7 leaders are meeting in the Bavarian Alps this week. Apart from proclaiming they’ll never give up supporting Zelensky and Ukraine, G7 leaders announced they were planning two new sanctions on Russia.
Like most of the previous six phases of sanctions the purpose of the latest is to deprive Russia of revenues from exports. So far sanctions haven’t been all that successful in that regard, at least in the shorter term. While the USA has banned Russian oil and gas imports to the USA, those amounts and their respective revenue impact on total Russian export revenue is insignificant. Moreover, the ban on Russian oil exports to Europe do not begin until December 2022, while there’s no ban on Russian natural gas imports whatsoever. So little net impact on Russian energy export revenues from Europe either.
The sanctions on oil & gas Russian exports to Europe have been quite minimal to date. Meanwhile, Russia’s exports to China, India and rest of the world have been rising. As have global energy prices in general. With accelerating global prices for oil and gas, and an increase in Russian energy exports to India, China and elsewhere, Russia’s revenues have been actually rising.
This rising revenue despite sanctions has presented something of a conundrum for Biden and the G7. The whole idea of sanctions is to dramatically reduce Russian revenues, not simply volume of exports! Sanctions thus far have had the opposite effect of what was intended—Russian energy revenues have risen not fallen.
So the G7 in Bavaria have come up with two more schemes to try to reduce Russian export revenues. But the thin mountain air must be affecting their thinking. The two new schemes are among the most desperate and economically absurd sanction ideas spawned thus far.
- Ban Russian Gold Exports to Europe
The first absurd proposal being bandied about in Bavaria is to get Europe to agree to ban Russian gold exports to Europe.
The thinking is Russian revenues from gold constitute Russia’s second largest export revenue source, but at $20 billion a year gold sales revenue is still well below Russia’s oil export revenue of around $90 billion (before sanctions). Most of the Russian gold exports goes to the gold exchange in London where it’s ‘sold’ by Russia in exchange for other currencies. The G7 thinks denying Russia access to the London gold exchange will result in a big dent in its total export revenues and ability to obtain other currencies with which to purchase other needed imports for its economy. But there are problems with the G7’s proposed ban on Russia gold exports.
First, Russia could just as well sell its gold elsewhere in the world. It doesn’t have to sell it to the Europeans at the London exchange. Other major global buyers of Russian gold are Turkey, Qatar, India and other middle eastern markets. Gold prices have been rising globally, as inflation has driven up oil, gas, and other industrial and agricultural commodities. Gold is an asset that tends to rise in price with rising general price levels, which are now accelerating worldwide. With inflation, other countries will more than gladly buy up the Europeans’ share of Russian gold. Some may even then sell the gold back to the Europeans—at a marked up higher price of course.
The Demand for Russian gold will simply shift, from Europe to elsewhere. Russian gold export revenues will thus not fall on net; in fact, may possibly even rise as gold prices continue to rise with inflation–ironically in large part due to other sanctions in general.
Second, gold is an asset that provides a hedge against inflation. It may be that Biden can get the G7 leaders and their governments (and central banks) to boycott buying Russian gold. But what’s to stop individual investors in Europe from buying Russian gold in offshore markets, when it’s presently such an attractive asset? Will Biden extend sanctions on all the individual Europeans who simply shift their purchases of Russian gold from the London Gold Exchange to the gold exchanges in Turkey, Qatar and elsewhere?
- Price Cap Russian Oil Exports to Europe
This is an even sillier proposal. Here’s the logic of how the price cap is supposed to work. Theoretically, Europe would all agree to buy Russian oil exports over the next six months but only at a deeply discounted price that all of Europe would agree on. In other words, set a ‘price cap’ at a level well below world market prices that are currently determined by supply in global oil spot markets. The lower price is supposed to cut Russian revenues from the oil exports to Europe—i.e. reduce revenues, the prime goal of all sanctions. The idea was first suggested by Janet Yellen, the US Secretary of the Treasury. That’s the Janet Yellen who told the world in February 2022 that inflation was temporary, remember!
Getting all of the G7 to agree to a price cap still requires getting the rest of Europe as well as Japan, So. Korea and others to agree to that price capt as well. But isn’t Europe supposed to stop buying all Russian oil imports by end of 2022 per previous sanctions they’ve agreed to? Who believes the Europeans can agree to a price cap on Russian oil and implement that cap in three months (July-September)–and then for just three months more (October-December)? Europe can’t do anything in three months, or even six. Maybe the US and EU aren’t all that confident they can implement a full ban on Russian oil exports by December?
But even this isn’t the most absurd aspect of the ‘price cap’ proposal.
Assuming Biden could get all the G7 to convince all of Europe’s 27 nations on a super discounted price, there’s still the ‘small problem’ of what Russia’s response might be to all that. The G7’s faulty logic is the deep discounted price Europe is only willing to pay for the oil would be at a price much lower than even the 30% discount that Russia is now selling oil to India, China and elsewhere. The G7 presumably would offer to buy Russian oil only at a 50% discount off current world prices maybe? That would put pressure, as the G7 argument goes, on Russian oil sales to India etc. The Indians would then demand Russia oil prices at the G7 lower 50% discount price. Russia would realize further reduced revenues from oil lower prices to India, China, the rest of the world as well as to G7 and Europe.
This is a proposal so ridiculous it’s almost embarrassing. The problem with the G7 ‘price cap’ idea is there’s no reason why Russia would want to sell any oil whatsoever to Europe at the G7’s deeply discounted price cap level.
First, why should it when Europe says it plans to phase out all Russian oil by December anyway? Second, Russia has shown it is not concerned with reducing natural gas export revenues to Europe. It’s already cut cubic gas exports to Europe by one-third as part of its own economic response to Europe’s agreement with US sanctions on Russia and it’s warned Europe of another third soon. Economic warfare cuts both ways. So what’s to stop Russia from just cutting off all oil exports to Europe—and well before December? Third, Russia would have to be pretty dumb to agree to sell oil to Europe at the latter’s ‘price cap’ level which would be well below Russia’s already 30% discount oil price sales to India? It knows the likely knock on effect that would follow. India as a long term oil customer is far more important to Russia than Europe which says it’s ending as a customer in just six months. Finally, Russia knows if it cuts off all oil exports to Europe, it would just change the market flow of global oil, not reduce it. Russia would sell more to other countries, which might then just re-export it back to Europe in turn.
In short, the error with the G7 price cap idea is it assumes that buyers (Europe) can set the price for oil in what is a global sellers market! G7 may think they can stand market fundamentals on their head and make it work, but they are wrong. No amount of G7 wishful thinking can make Demand determine Supply in today’s global energy markets, where broken and restructuring supply chains, sanctions, and war are the main determinants of price.
Both the proposal to ban Russian gold exports to Europe and the proposal to manipulate oil demand to reduce its global market price—and thereby deprive Russia of revenues—are ideas that reflect more the desperation of the US and G7 to find some way to make sanctions on Russia work in the short run when thus far they aren’t working very well, if at all.
The short run objective of sanctions–i.e. to reduce Russian export revenues–has not been working but the two latest desperate ideas won’t work any better.
Historians will wonder years from now why the US and its most dependent allies in tow—the G7 countries—embarked upon a scope of sanctions on Russia so soon after Covid’s deep negative impacts on global supply chains and domestic product and labor markets. Global markets, trade and financial flows were seriously disrupted by the Covid experience of 2020-21. And they had not recovered by January 2022 when US sanctions on Russia were escalated. Before global supply chains could heal, the US and its G7 allies embarked on sanctions that further disrupted and restructured those same supply chains while simultaneously setting off chronic global inflation that ravaged their domestic economies as well. History will show, it was all not well thought out.
Even less thought out, however, are the more recent G7 proposals to ban Russian gold and engineer a price cap on global oil—the latter in effect a fantasy that by somehow manipulating a region’s (Europe) oil Demand it could set global oil prices in general and thus over-ride Supply as the driver of oil price and revenues.
It makes one wonder about the qualifications of the current generation of world leaders (led by Biden and the US) playing with the geopolitical world order. And wonder even more about their even less understanding of the consequences of their economic actions on the world economy.