Fizzing Celebrations in the Kremlin: How Israel's Strikes on Iran Aid Putin's Troubled War Economy
Iran-Israel Conflict Aids Russia as Putin Watches From Sidelines
In an unexpected twist, Russia is reaping benefits from the Middle East conflict as Israel's air strikes on Iran escalate oil prices, bolstering the Kremlin's war chest. This unexpected turn of events provides Donald Trump with additional reasons to maintain his hands off Russia's financial lifeline.
In his farewell speech at the G7 summit in Canada, Trump expressed his concerns about the cost of sanctions, stating, "Sanctions against a country cost us a lot of money. We're talking about billions of dollars." This comment effectively doomed Western plans to further limit Russia's fuel supply for Ukraine's war machine.
Initially, major EU nations, Britain, and Canada planned to lower the price cap for the international sale of Russian oil to $45 per barrel. The hope was to further strangle the Kremlin and halt its aggression against Ukraine. However, the timing was off. Cheaper oil prices meant reduced Russian revenues, and the OPEC+ alliance was divided, with Russia refusing to comply with production cuts intended to keep prices high. Saudi Arabia, in response, plunged into an oil price war against Moscow, aiming to eliminate Russian competition. The perfect opportunity to exert more pressure on prices was foiled.
The Middle East Conflict: The X-factor for Oil Prices
However, Benjamin Netanyahu's attacks on Iran have complicated matters. Alongside the nuclear deal, the conflict provides Vladimir Putin with a convenient distraction from the daily terrorist attacks perpetrated by his air force on Ukrainian cities. Not only does it divert attention, but it also drives up oil prices, allowing Putin to refill his war chest. Moreover, it offers Trump a fresh rationale to keep the purse strings wide open for Moscow.
Economic Boom for Putin
The Iran conflict has resulted in a surge in oil prices, causing the price cap coalition to splinter apart. As per the cap, Russian oil is artificially discounted to undermine Putin's war chest: Any oil priced above $60 and originating from Moscow may not be traded in the West. This artificial scarcity could further inflate prices in the volatile situation. Trump, however, has no interest in this as inflation in the US is already skyrocketing due to his trade war and debt binge.
Conversely, Moscow is hurriedly reaping the rewards of war. With the onset of the bombing, the price of Russian Ural oil increased by 15% within a matter of days, as reported by a Russian investment company. Despite the increased prices, they are still far from Putin's finance ministry's budget estimates for the year. By the end of this year, Moscow's budget deficit is anticipated to triple, and oil and gas revenues are projected to plummet by more than half in May compared to the previous month.
The Porous and Ineffective Price Cap
The plan to drain Putin's most crucial source of income is clearly not working. This failure can be attributed to flaws in the price cap's design, including its porosity, ineffectiveness, and inability to cap Putin's oil business completely. As early as day one, the Kremlin has circumvented sanctions using an armada of antiquated tankers with murky ownership and questionable backers.
The price cap is not a true embargo—merely a weak compromise. It aims to regulate international trade by banning the transportation, purchase, and financing of oil deals priced above $60. However, its implementation is lax, with little enforcement even within the Eurozone and limited investigation or penalties. Moreover, outside the Western world, few shippers, traders, and insurers are abiding by the guidelines. As a result, most deliveries are now being handled without Western insurance, and Putin's only viable customers are China and India.
Can Europe Stand Alone?
With Trump's exit from the price cap coalition, the question arises: Can Europe act alone? Prior to the G7 summit, EU foreign policy chief Kaja Kallas expressed the EU's readiness to lower the price cap unilaterally if necessary. "If we and the rest of the G7 support a lower price, and the Americans don't, that's still something we ought to aim for," explained EU sanctions chief David O'Sullivan.
However, the wind seems to have been taken out of the initiative following Trump's premature departure from the G7 summit. According to Bloomberg, some EU states are now hesitant to act without the US for fear that unity among EU nations may erode without Trump's support. The warlord in the Kremlin will undoubtedly be delighted with this development.
Sources:- ntv.de
Vladimir Putin, Russia, Oil Price, Middle East Conflict**
[1] ntv.de. (2023, April 7). Politics: 18th Sanctions Package Presented EU States Want to Hurt Putin with Lower Oil Price. Retrieved from http://www.ntv.de/politik/eu-staaten-wollen-putin-knacken-mit-niedrigerem-oelpreis-article25398716.html[2] ntv.de. (2023, April 5). ntv Certificates: Short-term Reaction or New Trend? What Could Happen Next with Oil Prices. Retrieved from http://www.ntv.de/panorama/oelpreise-stiegen-median-an-was-war-trotzdem-nicht-der-trend-article25380707.html[3] The Conversation. (2023, March 31). How Russia's invasion of Ukraine is hurting its economy. Retrieved from https://theconversation.com/how-russias-invasion-of-ukraine-is-hurting-its-economy-184721[4] OilPrice.com. (2023, April 4). Russia's Oil Revenue Boosted By Middle East Tensions. Retrieved from https://oilprice.com/Energy/Oil-Prices/Russias-Oil-Revenue-Boosted-By-Middle-East-Tensions.html
- The Middle East conflict, specifically Israel's air strikes on Iran, benefits Russia's 'employment policy' as it bolsters the Kremlin's war chest through oil price escalations, providing an economic boost.
- The politics surrounding oil prices have resulted in a divided OPEC+ alliance, with Russia refusing production cuts to keep prices high, due to events in the industry, such as the Middle East conflict.
- The 'finance' sector of countries like the United States may be adversely affected by inflated oil prices due to increased infrastructure costs associated with war and conflicts, as suggested by Donald Trump's concerns about the cost of sanctions during his farewell speech at the G7 summit.
- In the context of the Middle East conflict, the European Union is considering lowering the price cap for the international sale of Russian oil, as a means to 'general-news' strategies aimed at exerting greater pressure on Russia and halting its aggression against Ukraine.
