Indranil Banerjie | Russian oil sanctions and the Great Global Divide

On December 5 this year, the Western powers slammed the gates shut on sea-borne Russian oil exports and imposed punitive sanctions on its sale to other countries. Any country buying oil from Russia below an arbitrarily set cap of $60 per barrel would be penalised, the concerned companies sanctioned and tankers carrying Russian crude denied insurance and finance. The idea is to squeeze Russia’s revenues from hydrocarbon sales while at the same time ensuring that its oil does not altogether stop so that prices do not spiral out of control and precipitate a global catastrophe.

On the face of it, these sanctions do not appear to be earth-shattering. After all, the Western powers have a long history of punishing nations deemed recalcitrant or troublesome. The West has used sanctions of one sort or the other against several countries in recent times, including Iran (for not ending its nuclear weapons programme), Venezuela (for its hostility to the United States) and now Russia for invading Ukraine.

Several other countries and entities have been sanctioned from time to time. China has been targeted time and again and in the latest round, US companies have been banned from supplying advanced semiconductors to China. Last week, even a director of an Indian company was sanctioned by Washington for “material support” to a North Korean animation studio. Bangladesh’s Rapid Action Battalion (RAB) continues to be under US sanctions for “gross human rights abuses”. The list is long and sanctions a favoured tool.

This time, however, the sanctions imposed on Russia could presage a tectonic shift in global geopolitics. It is because this move vastly exacerbates several existing and growing fault lines across the globe. This is the first cause of serious strain on the existing global order.

The nine set of sanctions on Russia, including the freezing of over $300 billion worth of Russian foreign currency and gold assets by Western governments in February this year, the clampdown on technology and other exports, have effectively cut off Russia from the rest of Europe, perhaps from all of the West. It is as if a second Iron Curtain has descended across Europe 33 years after the last one was torn down.

One result of this is the coalescing of Russian and Chinese interests. China too has been bristling against the Western moves, particularly by the United States, which has challenged Chinese expansionism in Asia, its attempts to build a high technology economy by stealing Western technology and open aim of bringing down America’s world dominance.

Increasingly cut off from Europe, with which Russia has been trying to integrate ever since the disintegration of the Soviet Union, Moscow is now looking to life with new allies and the creation of a new geopolitical power bloc. At the time of the dissolution of the Soviet Union, Russia had been promised by the Western powers that the Cold War was genuinely over and that Nato would not expand eastward at the cost of Russian strategic interests. That promise was never kept and one nation after another in Eastern Europe was gradually swallowed up by Nato, which by the beginning of this year had reached Ukraine, the last stop before Russia itself. This was the last nail in the coffin of Russo-European trust.

Pushed to the wall, Russia believes it is fighting a war of survival in Ukraine and has been forced to strengthen its anti-Western associations. The result is the emergence of the Russia-China combine, which today constitutes the nucleus of a nascent world power bloc. How this new power centre will evolve and what its consequences could be is not clear at this juncture but geopolitically speaking, it is back to the future, and a not very bright one at that.

A second set of strains on the global order have emerged due to the impact of recent Western decisions on the rest of the world. As the West gets tougher and tougher in the pursuit of its strategic goals, the rest of the world suffers. Most countries, the emerging economies in particular, have been badly singed by Western financial actions in recent years.

Western sanctions on three of the world’s top oil producers -- Russia, Iran and Venezuela -- have steadily pushed oil prices to extreme levels, hurting the balance of payments of most countries and stunting their growth as well. Not surprisingly, the latest sanctions on Russian oil have seen many non-Western nations rushing to Russia to buy oil on offer at discounted prices. India and China, two of the world’s largest oil importers badly scalded by the huge rise in oil prices in 2022, have been buying Russian oil in never before quantities. Several European nations too continue to buy oil from Russia even after the sanctions.

Moreover, the tight monetary policy by the US Federal Bank has pushed up the value of the dollar, causing huge problems for the rest of the world as their currencies have fallen. Imports, including oil and food, have suddenly become more expensive and external debt servicing costs have risen to unbearable levels.

Russia, as a result, instead of being isolated, has found new supporters the world over, even if most are in no mood to take sides yet or to jump onto the Russia-China bandwagon that has just got going.

What is certain however is that most countries will keep their options open especially when it comes to business. For instance, a recent Nikkei report said that the Asean members have actually increased exports to Russia after the Western sanctions kicked in. The same is true of a major economy like India.

Not surprisingly, Russia continues to rake in foreign exchange. One report said Russia’s current account surplus more than doubled to $225.7 billion in January-November, up from $108.6 billion in the same period last year. The oil sanctions are unlikely to work as more and more countries are lining up for cheaper Russian oil. This trend will intensify as the world’s economic condition worsens.

The Western sanctions on Russia sparked by the Ukraine war signal a turning point in the global geopolitical order. It could also be the start of desperate times. For, history suggests punitive actions by the Western powers have often backfired. One notable example is the Treaty of Versailles, which was forced down Germany’s throat after its defeat in the First World War. The harsh terms of that treaty devastated Germany, stripped German pride, and paved the way for the rise of Adolf Hitler and his Nazi Germany.