(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Hugo Dixon
BERLIN, Oct 13 (Reuters Breakingviews) – The Group of Seven says it wants to “maximise pressure on Russia’s oil exports”. If the rich industrialised nations are serious, they could slash Moscow’s income from overseas crude by up to $80 billion a year. That would deliver a big blow to the Kremlin’s flagging economy and might even get President Vladimir Putin to stop his war in Ukraine. G7 finance ministers, who will gather at the International Monetary Fund and World Bank meetings in Washington on Wednesday, already have a shopping list of ideas to empty Putin’s war chest. These include imposing additional tariffs on countries that buy Russian oil, as the United States has on India.
But the G7 is missing a trick. Squeezing Russian oil exports is counterproductive unless other producers make up the shortfall. Otherwise, supply restrictions will push up the global crude price, hurting Western economies. Moscow’s revenues might not even suffer, as higher prices could compensate for the lost output.
A better plan therefore depends on persuading other producers, especially in the Gulf, to pump more oil. At the same time, the G7 will need to convince some of Moscow’s main customers, particularly India, to buy less Russian crude and more from the likes of Saudi Arabia.
To make this two-pronged plan work, the G7 needs to make it worthwhile for all the players. As well as using sticks, it should offer carrots. One would be to slash the price cap the G7 imposes on Russian oil exports. A well-crafted deal along these lines could generate billions of dollars of extra profits for Saudi Arabia and the United Arab Emirates, and large savings for India. Here is how it could work.
THE GULF DEAL The starting point is to show Riyadh and Abu Dhabi they can make more money by pumping extra crude. Both have spare capacity: Saudi Arabia could increase production by 2.43 million barrels a day (mbd), while UAE has 0.85 mbd, according to the International Energy Agency. The Gulf kingdoms want to increase production. Their costs are low and their reserves could last for decades – well after the world switches to cleaner fuels. Meanwhile, Riyadh has expensive non-oil projects that have pushed its budget into deficit. So it makes sense to grab market share now while demand for oil lasts. This is why Saudi Arabia has been pushing the OPEC+ cartel to boost production quotas.
The problem is that a big increase in supply would put pressure on the crude price. The Gulf kingdoms might then lose more than they gain from higher volumes. The G7 therefore needs to persuade them that the oil price will not crater. The way to achieve that is to remove as much Russian oil from the world market as Saudi Arabia and UAE put onto it.
Assume that Riyadh and Abu Dhabi release 70% of their spare capacity. That would be an extra 1.7 mbd for Saudi Arabia and 0.6 mbd for UAE – or 2.3 mbd in total. At the current price of $65 for a barrel of Brent crude, Riyadh would make an extra $40 billion a year in revenues while Abu Dhabi would take in an extra $14 billion. Given their low costs of production, the lion’s share of that would be profit.
THE INDIA-TURKEY DEAL
However, the “Gulf deal” will only work if there’s a matching “India-Turkey deal”. China is the biggest customer for Russian oil. But given the strong alliance between Beijing and Moscow, it is futile for the G7 to try to stop this trade. Far more promising is to work on New Delhi and Ankara. India has been importing about 1.9 mbd of crude and oil products from Russia in recent months, while Turkey has been importing 0.9 mbd, according to Ukraine’s KSE Institute. Again, the G7 needs to show these countries that they can make money by buying less from Moscow and more from the Gulf – and the way to do that is to ensure that they get Russian oil at a bigger discount. The G7’s price cap is currently $60 a barrel. While the European Union and the United Kingdom have cut their own caps to $47.60, they have had little impact because Russia uses a shadow fleet to bypass it. But the United States has much greater capacity to sanction these tankers. If it decided to lower the cap, the measures would bite. The G7 might even be able to drive down the price of Russian oil to $40 per barrel. India is currently paying a discount of up to $2.50 a barrel for Russian oil when shipping costs are taken into account. That works out as savings of $1.7 billion a year. Now imagine India cuts its Russian imports by 75% but can get a discount of $20 a barrel because of the lower price cap. That would double its savings to $3.5 billion a year. Turkey would enjoy similar benefits. India would also heal its trade dispute with the United States, which is affecting $50 billion a year of exports. If New Delhi cuts back on Russian oil purchases, Washington would presumably be willing to cut U.S. tariffs from their current penal level of 50%.
At the same time, the European Union should stop the remaining 0.2 mbd that it still imports from Russia. Add that to 75% reductions from India and Turkey and Russian exports would drop by 2.3 mbd – exactly matching the extra crude from the Gulf.
Pulling off such a complex deal would not be easy. The Gulf kingdoms, India and Turkey would face some difficult conversations with Russia. What’s more, New Delhi would have to agree to do what Washington wants. But there is a world of difference between receiving a big financial inducement to do something and caving into threats. Indian Prime Minister Narendra Modi could portray it as a victory. Most importantly, the deal would be terrible for Russia. It exported 7.3 mbd at a price of around $56 in August. If it could only sell 5 mbd at $40, it would lose half its export revenue. Over the course of a year, the hit would add up to $76 billion.
This is also the sort of pact that might appeal to Trump. The U.S. president loves multibillion-dollar deals. Squeezing Russia’s oil revenue would deliver that in spades. Follow @Hugodixon on X
(Editing by Peter Thal Larsen; Production by Shrabani Chakraborty)