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The writer is an adjunct senior research scholar at the Center on Global Energy Policy, Columbia University, and on the advisory board of Crystol Energy
At the beginning of the year, the outgoing US administration issued its final sanctions package against Russia, imposing layers of new restrictions on the country’s oil sector. The new administration, in contrast, frames possible negotiations between Russia and Ukraine as based purely on military might and territorial gain. In this narrative, Russia has the upper hand, as its forces slowly grind their way towards self-declared new borders. There is, however, a way to approach negotiations without denying that this war is about much more. To see it, one needs to connect two disparate theatres: Russia’s economy and Opec’s oil policy.
Russia’s economy stands on clay feet. Smaller than Italy’s, it is fuelled by military production, state procurement and directed credits. Inflation runs at 9.5 per cent and the central bank’s policy rate at above 20 per cent, while the rouble hovers near historic lows. It is held together by competence (and a reasonably free hand) in the Ministry of Finance and the central bank, but what really keeps it going are foreign currency earnings.
In this respect, western economic warfare has failed. Russia escapes the economic impact of sanctions on oil. Each step towards building an effective sanctions regime — banning direct oil imports, restricting shipping and financial services, and even the imposition of a price cap — came with escape routes wide open.
We know why this happened. The “collective west”, as Moscow calls it, wants to curtail Russia’s revenues but needs its oil in global markets to avoid high prices from damaging their own economies. It wants to have its cake and eat it too. This is not a case of stringent sanctions having failed, but of sanctions not being stringent enough to damage Russia’s war economy.
Meanwhile, Opec leaders are in a tight spot. They have slashed oil production several times since 2022 to keep prices at acceptable levels. As a result, spare capacity limits export revenues. Their problem is how to unwind these cuts without bringing prices down. Historically, rising demand was the answer but this has slowed in recent years. Supply growth from non-Opec production is strong and set to become stronger still: for the foreseeable future, it will accommodate global demand on its own. Opec is trapped: increasing production will lower prices, but not doing so will lower the cartel’s market share.
Enter Donald Trump. The new US president could call on Opec. He can pledge to ratchet up oil sanctions on Russia to the point where their impact becomes more acute: these would target not only producers, but refiners, ports, insurers and the shadow fleet. He can also apply more political pressure on China, India and Turkey to support compliance.
The effect on Russia’s export earnings would be devastating — as would the market disruption. The president would therefore ask whether Opec is prepared to step up and play its traditional role of market stabiliser. Opec’s spare capacity today is around 5.5mn barrels a day, whereas Russian seaborne exports are about 3.5mn b/d of crude and 2mn b/d of oil products. These flows would need to be synchronised for one to substitute the other.
Could it work? It most certainly can. Opec might balk. After all, the deal endangers Opec+, the wider producer association. But Opec is the senior partner, holding 90 per cent of global spare capacity. The political benefits of supporting the ambitious domestic and external agenda of the leading Gulf economies will help; loyalty is unlikely to change their calculus.
China may resist sanctions, but even this would be part of a bigger game. On the technical side, refining capacity is available worldwide, crude quality differentials between Russia and the Middle East are manageable, and ramping up production would help Opec out of its impasse. The switch would be possible.
It would placate the right candidates too. The western alliance would continue to benefit from well-supplied oil markets and stable prices; Opec would get a leg-up to manoeuvre out of the cul-de-sac it finds itself in. With increased pressure on inflation and the exchange rate, Russia would be on the brink of financial disorder. If it is true that President Vladimir Putin is afraid of political unrest at home, then this approach is more likely to get him to the negotiating table than anything that has been tried before.
The new US administration should tighten Joe Biden’s farewell sanctions and run with the idea. They may just reap the success no one is expecting any more.
