The Eighth Package of Sanctions - Response to Russian Annexation and Illegal Referendums
Davit Shatakishvili, MPA, Tbilisi State University and German University of Administrative Sciences Speyer
On September 28, the President of the European Commission, Ursula von der Leyen, presented the eighth package of sanctions against Russia. It was approved by all EU member states on October 6. The EU noted that the new package of restrictions is a response to continued Russian escalation, illegal referendums held in the temporarily occupied territories of Ukraine and their annexation, partial military mobilization, and nuclear threats. Since the start of the war, the West has been actively trying to economically isolate Russia from the civilized world. There is no doubt that the sanctions are working, putting the Russian economy in tangible trouble, trouble which will become more visible in the medium to long-term perspective. The country is losing its geopolitical position, financial resources and recovery potential by the day, as sanctions on an unprecedented scale now cover almost all of its industries. The latest, eighth package of restrictions also serves this mission, and aims to exhaust Moscow's war machine so that it not only fails in Ukraine, but is also prevented from implementing its own imperialist intentions in the future. It is interesting to see what the new restrictions include and what impact they might have on both the course of the war and the stability of the Kremlin regime.
What do the New Restrictions include?
The eighth package of sanctions includes a ban on imports from Russia, worth 7 billion Euros to the European Union. This concerns semi-finished products, plastics, textiles, leather, paper, wood, ceramics, chemical products and certain types of metals. In addition, the new restrictions include exports from European countries to Russia on certain categories of goods, which will limit Russia's access to martial, industrial and technological components, and harm its potential to rebuild its military capabilities. This includes metallurgical coal, which is actively used in industry, electronic devices, additional technological components necessary in the aviation industry, and certain types of chemicals.
Sanctions have been extended against individuals and organizations that support the authoritarian regime of Moscow and are exposed to the holding of illegal referendums and the annexation of territories of the temporarily occupied regions of Ukraine - Donetsk, Luhansk, Kherson and Zaporizhia. Moreover, the restrictions apply to both companies operating in the defense industry and to people who support the Russian armed forces in any way, as well as persons involved in spreading Russian disinformation about the war. This list includes decision-makers, oligarchs, military officials and propagandists who are accused of trying to violate the territorial integrity of Ukraine. People and entities that help Moscow to circumvent the sanctions are also subject to the restrictions.
According to the new package, European companies are banned from providing technological, legal, architectural and engineering services to Russian state entities, EU citizens will no longer be able to hold management positions in Russian state companies, and bans have been tightened on crypto assets. Russian citizens will no longer have access to European crypto-wallets and accounts, whereas until now this limit was 10,000 Euros. Along with the above, the new restrictions include one further interesting component – a price cap on Russian oil, which we can discuss in more detail.
The Price Cap on Russian Oil
On September 2, the finance ministers of the G7 countries reached a historic agreement which provides for the setting of an upper limit on the selling price of Russian oil. The proposal was initiated back in June, but a consensus has now been reached, and it will come into effect alongside a new package of EU sanctions, with the US, Canada, the UK and Japan joining the decision independently. They say the mentioned step will help to reduce the income from energy resources in Russia and will lessen the financial damage to economies with low and middle incomes, which has come about due to the increase in energy resource prices. Even before the final decision was made by the leaders of the G7 countries, the Russian side threatened that this step is against the free market principles, and, if a price cap was imposed, that it would completely stop supplying oil to the countries supporting this initiative.
The main source for financing in Russia's war is income from energy resources, from which the country received up to 158 billion US dollars in the first half of this year. The main buyers of Russian oil and gas destined for Europe are now China and India. Russia is also helped by significantly increased prices for energy resources. That is why the Western partners have decided to take a step that will force Russia to sell its own oil so cheaply that it will no longer be able to finance the war. Obviously, this goal is quite difficult to achieve, but it will also help the global economy to cope with high energy prices, which in turn is one of the main factors causing inflation.
This is why the G7 states supported the setting of a price cap on Russian oil for global purchase. As it is known at this stage, the principle of its work will be the following: Third countries that want to buy Russian oil products will be able to access European insurance and financial services to facilitate their own oil purchases only if they adhere to a set price ceiling. The maximum price of petroleum products will be determined as a result of consultation with international partners, and will apply to sea shipments of crude oil and petroleum products. In this regard, the main advantage for the initiator countries is that in case of violation of the established rules, they can block the shipping insurance package, which is an additional headache for third countries. 95% of the world's oil tankers are insured by the British "International Group of P&I Clubs" and several major European companies. Supporters of the idea hope that setting a price cap at a level close to production cost will hit Moscow's revenues the hardest, and, because of Russia's economic hardships, the oil will still reach its destination.
In this regard, the positions of the largest buyers of Russian energy resources, China and India, which have quite close relations with the Kremlin, are interesting. Most likely, they would rather accept inferior Russian insurance than sign up for the above proposal, even if it is offered at an attractive price, as, in not supporting the price cap initiative, they can probably get even more discounts on Russian oil products in return for their not joining. These countries already buy Moscow's energy resources at a much lower price than the market value. The Russian side says that it will not supply oil to countries that join this initiative, and that Russian oil will find alternative markets. They say the country is also setting up a company similar to the British insurance giant to serve its clients. At this stage, it is not known what steps Moscow will take in this regard, although it is likely that they will have to make certain concessions, behind which a completely paralyzed economy will stand.
The ceiling price on Russian oil is still negotiable, although it is assumed that its price will be approximately 60% of the current market value and that it will be determined in the range of 40-60 US dollars per barrel. The U.S. Treasury Department estimates that if the G7 plan is implemented, the total annual energy savings for the 50 emerging markets would be up to 160 billion US dollars, although they did not specify at what ceiling price that figure would be. According to Bloomberg's calculations, Russia's energy revenues this year will reach 320 billion US dollars.
The coordinated steps of the Western partners pose the biggest problems for the Kremlin regime. In general, the period of effectiveness of sanctions is medium to long-term, and expectations of an immediate effect are exaggerated. The West is following step-by-step the plan to financially exhaust Russia, which Moscow will see more clearly after the end of the war. Unfortunately, it still has the power and finances to wage an aggressive war, the main source of which is its energy revenue. The 8th package of EU sanctions is a continuation of the support that the West is showing to Ukraine. Obviously, these restrictions will have their consequences. First of all, restrictions on production components will further impact Russia's technological, industrial and military development capabilities, which will affect both the domestic market and revenues from the countries that consume its products. In addition, the new sanctions will have a negative impact on the sale of Russian products which were sold in the European Union until now. In an already depleted Russian economy, restricting the population's access to crypto-wallets will force even more people to leave the country. The mass exodus of young professionals from the state, which began back in March, will significantly slow down any kind of progress. Thus, one specific restriction has a chain effect and extends in many directions.
The decision of the G7 to impose a price cap on Russian oil, which the European Union joined, still sees differences in opinion. It will come into force at the end of this year, and its effect will become more visible only after that. The 6th package of sanctions adopted in June, which prohibits the transportation of Russian crude oil by sea, comes into force on December 5 of this year, and the restriction on refined petroleum products on February 5, 2023. Given that the world economy will have little time to adapt to these restrictions, this process is likely to lead to a rapid increase in the price of oil. According to the initiators of the project, the potential result of the price limit should be evaluated not only considering the current situation, but also in light of the challenges that are expected after December 5. But sanctions work, and the Moscow regime will see this more clearly when it emerges from the euphoria of a lost war and assesses its own economy from the perspective of recovery in the face of colossal losses.
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