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The Vladimir Arsenyev tanker at the crude oil terminal Kozmino in Russia, on Aug. 12.TATIANA MEEL/Reuters

The Kremlin’s ability to pay for its war in Ukraine depends largely on the sale of hydrocarbons. Oil and natural gas represent 20 per cent of Russia’s GDP and haul in almost half of its budget income. Cut that Volga-River-sized flow of cash into the Russian money vaults and President Vladimir Putin will be forced to sue for peace. Or so the theory goes.

Since the start of the war in February, the West, especially the European Union, has imposed wave after wave of sanctions, embargoes and trade measures against Russia, ranging from ejecting Russian banks from the Swift global financial messaging system to virtually eliminating Russian coal from the European electricity-generation mix.

The Western assault has pushed Russia into recession (though not one as deep as expected). But oil exports, the lifeblood of its economy, continues to prop up Mr. Putin’s war machine. In the first half of November, production of Russian crude and natural gas liquids (condensates) reached a nine-month high of almost 10.1 million barrels a day, according to British energy analytics firm OilX.

The upshot is that Russia is on course to pump only 200,000 barrels a day fewer than pre-war levels, a decline of less than 2 per cent, according to a Bloomberg report.

No wonder oil prices – Brent crude was at US$86 on Friday – are well off their year peak of US$139. Russian oil keeps flowing into the export markets, and India and China have been buying as much of it as they can, all the more so since they are getting discounts of about 30 per cent to the Brent price.

Starting Monday, the West once again will take another whack at wrecking Mr. Putin’s ability to shoot up Ukraine.

The effort will see the EU ban imports of Russian seaborne crude and, at the same time impose a price cap on oil exports. The cap, first proposed by the United States and backed by the EU and the G7, would in effect apply globally. It would ban any company from providing vital shipping services, such as insurance, that Russia needs to transport oil unless that oil is sold below a threshold level.

The price cap’s potential to inflict a lot of damage on Russia, sadly, looks pretty small, though it will certainly hurt a bit. That’s because the cap is more an exercise in economic diplomacy than in the economics of pain. The cap has to be high enough to persuade Russia to keep producing oil, yet low enough to hurt it.

Europe’s biggest Russia haters, Poland and the Baltic states, want a really low price, reportedly about US$30. Much of the rest of Europe wants a higher price so that Russia keeps pumping. Russia is the second-largest exporter of crude, after Saudi Arabia. Were Russia to remove millions of barrels a day from the market, Europe and much of the rest of the oil-importing world would plunge into recession.

Reports on Friday said that the EU would settle on a US$60 cap; it would be reviewed every couple of months. Assuming that is the price, Russia need not panic. Russian Foreign Minister Sergey Lavrov didn’t seem to care about the cap when he was asked about it during a Thursday news conference, suggesting it was irrelevant. Russia would just deal with buyers directly, he said, and not supply oil to countries that backed the cap.

He has a point, since US$60 is actually above the price Russia receives for its benchmark Urals crude, which was trading at less than US$50 in recent days.

A cap just under the Urals price – say US$40 – would hurt Russia, probably forcing it to shut down some of its most expensive production. But embargoes are rarely leak-proof, and Russia would certainly find devious ways to deliver some crude onto the market at prevailing prices. While the rate of increase in oil demand is falling, overall demand is still rising from its pandemic low. The world needs 100 million barrels a day of crude, and Russia plays a big role in meeting that demand.

It appears the cap, assuming it lands at US$60, will not end Mr. Putin’s fantasy of conquering Ukraine. Meanwhile, Mr. Putin is finding a new source of revenue in the form of rising liquefied natural gas (LNG) shipments. Russia is the fourth-largest supplier of LNG and the fuel is not subject to EU sanctions. With Russian pipeline gas almost entirely absent from the European market, France, Netherlands and Belgium are buying Russian LNG in great quantities.

Sanctions could eventually cripple the Russian economy, and a new round – the ninth tightening since the war started – will be unveiled soon. Details are not known but the package will probably include more restrictions on trade and possibly the use of seized Russian financial assets to pay for Ukraine’s reconstruction. The price cap on its own will not be nearly enough to deter Mr. Putin from his bloody mission.