The Office of Foreign Assets Control (OFAC) hit three more UEA-flagged tankers with sanctions for busting the oil price cap sanctions yesterday night and threatened another 30 companies that operate over 100 ships as it ramps up efforts to enforce the scheme.

This was not how it was supposed to work. If you remember, when the idea was floated more than a year ago, the West was confident it could enforce the $60 price cap on shippers because the West controlled 95% of the global shipping insurance market. It was supposed to be an elegant scheme where the price was set high enough so that the Kremlin would cave in and accept $60 for its oil as it needed the money, while the rest of the market operated as normal.

Looks naïve now, eh? Many people were dubious that the scheme could be made to work from the start (including me). Indeed, Western leaders were dubious, as the scheme took so long to be set up. And all those fears have been borne out: the FT reported earlier this week that barely a single barrel has been sold in recent months at under $60.

Where did it go wrong? We have written extensively about the problems, arguing that it was clear very early on that the scheme is a spent cannon, but the main points are: Russia massively recapitalised its own insurance companies and the West’s share of the business is now about 65%; many of Russia’s partners such as India refused to participate; Russia also built up a huge shadow fleet that operates outside sanctions; and whole bunch of Western countries have just ignored the sanctions and taken the money, as the Peterson Institute for International Economics (PIIE) and Kyiv School of Economics (KSE) and others have thoroughly reported. The sanctions have hit European business hard, but that has hurt Europe more than Russia, and the Pacific business is now a largely sanction-free zone.

I have used the analogy of playing whack-a-mole, but that works even better now; instead of using insurance to elegantly create a market mechanism to enforce the price cap, now the US is figuratively using a hammer of secondary sanctions to clobber individual ships that pop up out of the hole, in the hope that the rest will comply and stay in their holes. That is not going to work. As in the game, you will end up trying to clobber everyone and, if you have played the game, you know that some moles always get away.

Elena Elina Ribakova, non-resident senior fellow at PIIE, wrote an op-ed in the FT this week arguing that it is possible to set up a sanctions regime that works, but made the point that it is a very long and difficult process that could take a decade. The problem is Ukraine doesn’t have a decade; it needs help now. Given the rapid growth of war fatigue in recent months and lack of money – Germany just reported it could have a €60bn hole in its budget this year as it is, like the US, running out of borrowing room – there is a real danger that Ukraine will have to capitulate long before all these sanctions can be made to work.

It seems to me that the West has, once again, overestimated its power. The US keeps making this mistake. It did it in Iraq. It did it in Libya. It did it in Afghanistan. And now it’s doing it again in Ukraine. Washington is too impressed with its, admittedly, awesome military might. As Israel is finding out, you can’t simply bomb people into submission. The West has also underestimated Russia’s importance and interconnectedness with the global market and the sheer number of dodges it can come up with, given the rest of the world is not sold on the idea of US hegemony.

Analysts have spent too many years repeating US Senator John McCain’s “gas station masquerading as a country” trope, so they believe it.

The reality is that Russia is probably too big to sanction, and has already overtaken Germany to become the fifth biggest economy in the world in PPP terms since the war began. Raw nominal GDP in dollar terms ignores Russia’s very large productive power. Western economies are increasingly made up of services. Russia still has all those factories left over from Soviet days. In a war it is manufacturing that counts, not home-delivered pre-prepared meals and streaming movies.

 

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