Could India, US be on a collision course over Russian oil?

Crude oil

Indian Market
by 5paisa Research Team Last Updated: 2022-09-21T11:26:11+05:30

India and the US may be headed for a face-off if the Biden administration gives in to pressure from a bipartisan pair of senators who are pressing it to use secondary sanctions to enforce a cap on the price of Russian oil.

According to international news reports, the push comes as the US and the Group of Seven nations seek to limit Russian President Vladimir Putin’s ability to fund his war in Ukraine.

Who are the two US senators working on the legislation and what do they want the Biden administration to do?

Senators Chris Van Hollen, a Maryland Democrat, and Pennsylvania Republican Pat Toomey are working on legislation that would impose secondary sanctions on foreign firms that facilitate the trade of Russian oil and on countries that increase their purchases of the commodity.

“We want a uniform international standard and we want it to have teeth,” Van Hollen said Tuesday on Bloomberg Television’s “Balance of Power with David Westin.” “A price cap only works if everyone in the world complies with it. We do not want any loopholes. We don’t want leaks.”

So, why should India be bothered?

India has been buying cheaper Russian oil ever since international sanctions were imposed on the Putin regime in the wake of the Ukraine invasion in February this year. So, this would directly affect India, which has been looking to cut down on its current account deficit that has ballooned to record levels as oil prices have remained sky high in the last eight months. 

But is the Biden administration for the proposed sanctions?

Not really. The new legislation sets up a clash with the Biden administration, which has previously rejected secondary sanctions as a way to enforce the oil price cap. Biden’s team argues that the economic incentives of a cap are sufficient to induce cooperation and that secondary sanctions would create tensions with nations such as India, which continue to buy Russian oil.

So, can the senators still push the Biden administration?

Well, they seem to be lobbying hard, at the very least. 

Van Hollen said he and Toomey have been in communication with the Biden administration about their proposal and that it’s intended to reinforce the plan that has been developed by the Treasury Department. 

Michael Kikukawa, a spokesperson for the department, said Treasury officials look forward to reviewing the bill text when it’s released but added that the agency “has sufficient authorities to implement a price cap and is well-equipped to advance the policy.”

In fact, the US Congress has repeatedly steered the administration toward harder-line policies on Russia since its Feb. 24 invasion. The most prominent example was when the administration, under pressure from lawmakers, reversed its opposition to cutting off some Russian banks from the SWIFT financial messaging system.

Okay, but what does the proposal actually say?

Under the two senators’ proposal, the US and its allies would be required to impose a cap on the price of Russian seaborne oil by March 2023. 

The cap would then be reduced by one-third every year until it reaches the break-even price within three years, depriving Putin of any revenue above the price of production. 

The president can waive the price reduction if the administration determines it would cause the global price of oil to spike.

How would the cap be enforced?

The cap would be enforced by secondary sanctions on any firms involved in the sale or transportation of Russian oil, including banks, insurance and re-insurance companies and brokerages.

The legislation, which hasn’t yet been introduced, would also penalize countries found to be importing Russian oil, oil products, gas and coal above their pre-war levels.

What more have the two senators said?

Van Hollen and Toomey said secondary sanctions would give the administration the tools it needs to “hold accountable the financial institutions supporting those countries involved in rampant war profiteering from Russian exports.”

Apart from India, which other major countries would be impacted?

If passed, the legislation could provoke a major fight with countries such as India and China, which have ramped up their purchases of Russian oil and have reacted coolly to the idea of a price cap. 

The US has been careful in its interactions with India on the price cap, pitching it as a way to negotiate lower prices from Russia but steering clear of threatening penalties for failing to join the scheme.

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