Will the G7 countries be affected by the limitation of Russian oil?

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Shortly after the Russian invasion of Ukraine on February 24, the United States and Europe imposed severe sanctions on the Russian energy sector, as the Russian economy is highly dependent on energy production, which makes it extremely vulnerable to disturbances.

At the end of February, the G7 countries and the European Commission announced sanctions against the Russian central bank to prevent it from accessing its foreign currency assets of 609.4 billion dollars, and consequently, for the first time in a century, Russia has defaulted on its sovereign foreign currency debt worth $100 million, according to media reports.

Countries like the United States, United Kingdom, Canada and Germany have removed some Russian banks from the SWIFT network, the world’s main international payments network, in an attempt to deal a blow to Russia’s international trade .

In addition, these countries have banned imports of Russian oil. Later, the EU joined the line and on May 30, as part of the sixth sanctions package, the EU agreed to ban 90% of Russian crude oil imports by the end of the year.

However, none of these actions or sanctions compelled Russia to withdraw from Ukraine. Instead, the Russian Deputy Prime Minister said that “Russia is ready to send any supplies rejected by European countries to other regions such as Asia.

After sanctions were imposed by the West, Russia turned to India and offered huge discounts on its rough. It also provided rupee-ruble payments using SPFS, which is the Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia.

In just a few months, Russia’s share of India’s oil purchases hit a record 6%, or around 277,000 barrels in April, from around 66,000 BPD in March. In April, Russia became India’s fourth largest oil supplier, up from its 10th position. At the end of June, according to the PTI report, Russia overtook Saudi Arabia to become India’s second largest oil supplier behind Iraq. At one point, Russia’s Rosneft suspended signing new crude oil deals with Indian refiners as demand for discounted crude surged.

Moscow managed to continue exporting its oil despite Western sanctions to stifle Moscow’s revenue. The Washington Post reported, citing the Center for Research on Energy and Clean Air, that Russia earned nearly $100 billion from the export of fossil fuels in the first 100 days of the war in Ukraine. Following the imposition of sanctions, energy prices soared, helping money flow into Moscow’s coffers.

In addition, energy export revenues are expected to hit $337.5 billion this year, a 38% increase from 2021, according to an economy ministry document seen by Reuters.

The jump in income, if it materializes, will help support the Russian economy in the face of waves of Western sanctions. The report said it would provide President Vladimir Putin with cash to fund military spending or raise salaries and pensions at a time when the economy has fallen into recession and inflation is eroding living standards.

New proposal from G7 nations – Will this backfire?

As the sanctions of Western countries had little impact on the Russian economy, on September 02, the G7 countries took another big decision. G7 leaders have agreed to put in place a price cap on oil imports from Russia in a bid to cut off a major source of funding for Moscow’s military action in Ukraine.

Hours after the G7 announcement, Russian President Vladimir Putin threatened to cut off energy supplies. “We won’t supply gas, oil, coal, fuel oil, we won’t supply anything” if that happens, he said.

Following the imposition of sanctions against Russia, food and energy prices soared, leading to record inflation. Inflation in major economies has reached its highest level in ten years and central banks in developed economies have already hiked interest rates three to four times in 2022.

The US inflation rate recently hit 8.3% in August 2022, raising the possibility of further rate hikes from the FED. Analysts now expect another 75 basis point (bp) hike in the fed funds rate at the next monetary policy meeting later this month. When U.S. inflation figures were released, major U.S. indices suffered their biggest one-day percentage loss on September 14 since June 2020.

Likewise, the UK economy is struggling with high inflation, which has driven the cost of living to record highs as food and energy prices soar. On the other hand, inflation in the EU zone reached a record 9.1% in August, against 8.9% in July. The ECB raised its 3 key rates by 50 basis points at its July 2022 meeting, the first hike since 2011, ending eight years of negative rates.

The EU27 region is almost entirely dependent on gas imports, SBI Research said in its latest report, with more than 90% of the gas consumed in the eurozone being imported. Unlike petroleum products, gas is the main source of energy most consumed in the industrial sector and represents a significant share of final household consumption.

On September 05, Dutch TTF futures jumped 35% after G7 countries agreed to impose a price cap on Russian oil.

The gas supply through the Nord Stream 1 gas pipeline – which transports natural gas from Russia to Europe – has been completely interrupted, citing maintenance work.

On September 02, Russian energy giant Gazprom said it would not resume flows in the pipeline as planned after it detected an oil leak at its compressor station in Portovaya, news of the extended shutdown comes on the same day that the biggest Western economies agreed to impose a price cap on Russian oil.

“Until the problems regarding the operation of the equipment are resolved, the gas supply to the Nord Stream pipeline has been completely stopped,” Gazprom said in a statement.

After the flow halted, Dutch TTF futures rose 35% on September 5. Since June, Gazprom has reduced flows via Nord Stream 1 to just 20% of capacity, citing maintenance issues and a dispute over a missing turbine caught in Western export sanctions, according to media reports.

If Russia prolongs supply cuts, natural gas prices will soon rise in the coming days. According to data from Bloomberg, natural gas prices have jumped more than 300% this year. High gas prices will certainly add more inflation to the EU and the UK, which have already suffered from high inflation for several decades. However, many European countries source from Norway, the Netherlands and Qatar.

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of MintGenie.

Stock performance of Indian markets during and after the wars

Stock performance of Indian markets during and after the wars

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