Toasts Ring Out in the Kremlin: Israel's War in Iran Saves Putin's Bacon
Iran-Israel conflict offers Putin a strategic opportunity
Taking a break from his usual antics, Donald Trump had a poignant message for the G7 summit in Canada: "Don't forget that sanctions cost us a pretty penny," he said, referring to the economic pain caused by the sanctions against Russia. The industrial nations' plans to further squeeze Russia's war chest by capping the price of Russian oil were doomed to fail.
Originally, major EU countries, Britain, and Canada were united in their desire to lower the $60 price cap even further. However, the timing could not have been worse. With oil prices at an all-time low, Russia's revenues were beginning to dwindle, and the OPEC+ cartel was divided. Russia, desperate for revenue to fund its ongoing war in Ukraine, wasn't adhering to the agreed-upon production cuts to keep prices high, resulting in Saudi Arabia entering an oil price war against Moscow. This seemed like the perfect opportunity to tighten the screws on the Kremlin and bring an end to its war of aggression against Ukraine.
But then came Benjamin Netanyahu's attack on Iran. The Middle East war has thrown a wrench in the works. Alongside the nuclear deal, the planned sanctions against Russia are the most important diplomatic casualties of the bombing attacks. Vladimir Putin is the primary beneficiary of the attack on Tehran: it not only distracts the world from the daily terrorist attacks of his own air force on Ukrainian cities, but also drives up oil prices and fills the gaps in his war chest. And it gives Donald Trump yet another reason to keep the money flowing to Moscow.
Champagne Corks Pop in the Kremlin
Even before Israel's attack, Trump showed little appetite for confronting Putin over his aggression in Ukraine. Despite growing calls for harsher sanctions from Congressional Republicans, he opted for a cozy approach with Moscow. Now, with the war against Iran as a new distraction, Washington has more important matters to address than threatening Putin's economic foundations.
The Iran conflict has sent oil prices soaring, driving a wedge between the price cap coalition. The cap, intended to artificially lower Russian oil prices to weaken Putin's war chest, could send prices even higher in the volatile situation. And with inflation already skyrocketing in the US due to Trump's trade war and spending spree, he has no interest in higher oil prices.
Russia Rakes in the Benefits of War
Moscow is more than happy to reap the benefits of this war. With the start of the bombing, the price of Russian Ural oil jumped by 15% in just a few days, according to the Moscow Times. The Kremlin needs these unexpected profits. Even with the increased prices, they are still far below the level that Putin's finance ministry had budgeted for the year. Moscow's budget deficit is set to more than triple this year, with oil and gas revenues plummeting by more than half in May compared to the previous month.
Leaky, Ineffective, and Full of Holes: The Price Cap
Unfortunately for those hoping to dry up Putin's main source of capital, the price cap has serious flaws. It's riddled with loopholes and isn't a true embargo; it merely represent a weak compromise to curb Russian oil sales. It's intended to restrict shippers from transporting Russian oil, prevent traders from buying it for more than $60, and discourage banks and insurers from backing oil deals above that limit. However, countries like Europe aren't enforcing these rules, and there are few investigations or fines. And beyond Western shores, few shippers, traders, and insurers are following the rules. Most deliveries are now being handled without Western insurance, and cheaper smuggled Russian oil is becoming increasingly attractive for customers like India and China.
Can the Europeans Go It Alone?
With Trump's departure from the price cap coalition, the question on everyone's mind is: will the Europeans muster the courage to go it alone? Before the G7 summit, EU foreign policy chief Kaja Kallas emphasized that the EU could lower the price cap unilaterally if necessary. However, the wind seems to have gone out of the sails since Trump's exit from the G7. According to Bloomberg, EU countries are now hesitant to go it alone without the US, fearing that without Trump, support among EU countries may waver. Putin is already gloating.
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- The failure of the industrial nations' plan to lower the $60 price cap on Russian oil was due, in part, to the ongoing conflicts in the oil-and-gas industry, specifically the war between Israel and Iran.
- The escalating Middle East war has caused a surge in oil prices, creating a rift within the price cap coalition and potentially driving prices even higher. The increase in oil prices, coupled with inflation due to finance and trade issues, is not in the interest of the current U.S. administration.
- The Russian government is benefiting from the conflict, with the price of Russian Ural oil increasing by 15% following the bombing attacks on Iran. Despite these gains, Russia's budget deficit is still significant, as oil and gas revenues have plummeted.
- The price cap, intended to restrict Russian oil sales, is riddled with loopholes and is not an effective embargo. Without strict enforcement, the cap is ineffective, with deliveries being handled without Western insurance and cheaper smuggled Russian oil becoming increasingly attractive for customers like India and China.
- With Trump's departure from the price cap coalition, the European Union is left to decide whether they can stand alone in enforcing the cap. The EU has expressed the possibility of lowering the price cap unilaterally, but the wind seems to have gone out of the sails since Trump's exit, with EU countries hesitant to act without the U.S. support. This uncertainty provides an opportunity for Putin to celebrate.
