The G7 plan to ban tankers from transporting Russian oil raises the stakes in the West-Moscow economic standoff, but whether governments will increase punishments for those who skirt sanctions is the real question. The West will need to move quickly, as Russian President Vladimir Putin is working hard to consolidate Moscow's alliances with India and China. The European Union and Group of Seven are reportedly discussing plans to ban all maritime services for Russian oil transport, limiting Moscow's ability to access a large fleet of tankers. This initiative could be implemented by the beginning of 2026 and will eliminate the G7 price ceiling introduced in late 2022. This mechanism gives buyers access to Western shipping and insurance if they buy Russian crude under the cap. The goal was to limit the oil revenues that help finance Russia's conflict in Ukraine while maintaining global oil supply.

According to the International Energy Agency, Russia produced 9.3 million barrels of oil per day in October. This is around 9% global production, and more than half of it was exported.

G7 countries appear to be willing to further restrict Russia's oil imports. However, the ban doesn't mean that they will stop. Russian producers have developed ways in recent years to bypass Western financial systems and sanctioned, using primarily "shadow fleet" tanks.

According to the Centre for Research on Energy and Clean Air's (CREA) data, in October only 38% percent of Russian crude oil exports went on tankers that met G7 standards. It is possible to expand the shadow fleet, and replace the capacity lost due to the new G7 regulations. There are many old vessels available for Russia and its partners to purchase from Western shipping companies. The West's response is still a big mystery.

Russian crude oil is a highly concentrated market. According to Kpler, over 90% of Russian crude oil exports to China, India, and Turkey this year totaled around 3.5 millions bpd.

Question is, will these countries continue to buy oil despite the new G7 restrictions?

Answer: Probably yes, but at the right price. Russian sellers will have to offer significant discounts on global oil prices in order to compensate for higher risks and increased logistical complexity of dark fleet tankers. This includes ship-to-ship transfer. This is what happens under the current cap. It is possible that the removal of the price cap would actually reduce the discount Russia has to offer its crude buyers. This is especially true if oil prices increase.

MEASURES WITH A BITE The success of the G7's new proposal depends on Western governments' willingness and ability to enforce these new restrictions.

There is also reason to be skeptical in this case. In recent months, Western governments have increased economic pressure on Russia. In September, several G7 members lowered the crude oil price cap to $47.60 per barrel from $60. The EU also announced plans to prohibit imports of refined oil products from Russia starting next year. On Wednesday, the EU agreed to phase-out Russian gas imports until 2027. In October, Donald Trump imposed harsh sanctions against Russia's largest oil companies Rosneft, and Lukoil. Trump had imposed a tariff of 25% on India for its purchases Russian crude as the two countries struggled to reach a trade agreement.

Indian and Chinese crude imports continued despite this. However, they were at a reduced level. According to Kpler, Indian crude imports are expected to fall to 1,38 million bpd between November and December. This is down from 1.75 million in the first 10 months of the year. China has also seen a similar pattern. According to recent history, the actual sales of Russian crude oil to India, China, and other countries could be much higher. This is because Russian crude is often mixed mid-ocean, rebranded, and then slowly imported.

The right approach will depend on the willingness of Western governments to accept pain. This could be through limiting Russian crude supply, which would increase oil prices, as well as by exposing themselves to retaliatory actions from Russian oil buyers. Isaac Levi, the energy analysis team leader at CREA says the new G7 ban on services "is the right way" because most Russian crude oil has already been sanctioned by the United States, making the price cap moot.

He said that the new rules would only take effect if coastal maritime states, such as those of the Baltic and Nordic region through which Russian oil is mainly shipped, intensified vessel inspections and detained non-compliant tanks.

We don't see enough deterrence or vessel detention. Levi stated that the trade would continue until non-compliant ships were detained. The G7's tightening restrictions on Russia's petroleum industry, which contributes around one-quarter of the federal budget, will undoubtedly complicate the lives of oil producers in the country, and result in lower revenues. The West's influence on this conflict seems to be waning as time passes. Putin and Indian PM Narendra Modi agreed to expand and diversify their trade beyond oil, defence and other sectors on Friday despite Western pressure to New Delhi to cut back its ties to Moscow. In order to truly turn the tables on the U.S., the U.S. government will have to be prepared to accept some financial pain. This could be the final sticking point.

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(source: Reuters)