Is The G7 Price Cap On Russian Energy Exports Causing Countries To Rethink Future Industrial Policies?

It was reported this week that Russian fuel exports are going up despite U.S. and EU sanctions and the G7’s price cap on energy exports from Russia. Not only are the exports of key Russian energy shipments rising, but the price per barrel of crude oil, diesel and naphtha are are not meeting the $100 price cap target set by the EU and Australia last year.

The EU courageously announced that it was formulating a Market Correction Mechanism on 22 November 2022. Since November, the proposal to set a price cap on natural gas prices via the Title Transer Facility (TTF) gas price benchmark has been one of the hotly contested issues within the EU.

The Agency for the Cooperation of Energy Regulators (ACER) is responsible for monitoring the price correction mechanism and any safeguards that would be put in place against price and market volatility.

It was finally announced on 19 December 2022 that the natural gas price cap would go into effect in Feburary 2023. Euronews said that the price cap on natural gas “is aimed at curbing energy prices as the bloc reels from a crisis exacerbated by Russia’s decision to stop supplying the EU with fossil fuels to retaliate against sanctions over its war in Ukraine.”

The price cap aims to halt prices from going above €180 per megawatt-hour during at least three consecutive trading days.

After finalizing the legislation, Jozef Sikela, the Czech minister of Industry and Trade, said: “We have succeeded in finding an important agreement that will shield citizens from skyrocketing energy prices…from risks to security of supply and financial markets stability.”

The agreement was met according to the EU’s “qualified majority” rule, by which 55% voted in favor of the natural gas price cap.

Criticism has not only come from EU countries such as Hungary, but also from the American trading exchange platform Intercontinenal Exchange (ICE), which voiced its opposition to the EU’s gas price cap on the grounds that: “Our customer outreach and internal risk assessment suggest that the mere presence of a cap, significantly increases the probability of the cap being triggered.”

That’s where the safeguards come into play. According to the European Commission (EC), market regulators have the authority to suspend the price cap mechanism in the event of high-risk market volatility in energy prices and supplies.

Proponents of the ICE’s arguments against the gas price cap probably have not taken into consideration what is happening beyond the European continent. The Black Sea has been a major focus during the Russia-Ukraine conflict. Oil supplies from the Caspian Pipeline Consortium (CPC) were disrupted by Russia to the detriment of Kazakhstan’s oil export revenues. And of course, the Nord Stream 2 pipeline, which serves as a classic example of a new era of adversarial geopolitics — where maritime areas are at the focal point of geopolitical trends.

These geopolitical trends haven’t caused the EU to stop cooperating with other countries for pipeline infrastructure and renewable energy projects.

A memoradum of understanding (MOU) was signed by Hungary, Romania, Azerbaijan and Georgia, to potentially develop a new source of energy for the EU. It’s a project that will send natural gas from Azerbaijan to Romania via an undersea electricity connector in the Black Sea.

EU President von der Leyen stated that this project was directly tied to Europe’s shift away from its dependency on Russia’s oil and gas supplies.

“Since the beginning of Russia’s war, we have decided to turn our back on Russian fossil fuels and to diversify towards reliable energy partners, like the partners here around the table. And it is working. The European Union has been able to compensate the cuts in Russian pipeline gas.”

In these cases, sanctions on Russia have caused divergent and convergent scenarios for global commodities during the Russia-Ukraine war.

Commodities are global in nature. The only attention being truly paid to regional development is about large investments in infrastructure — these investments do not seek to enhance regional connectivity, but give an advantage to a producing country so that it can more efficiently transport raw materials to markets far away from the original source.

This is the essence of the Arctic Strategy, Belt and Road Initiative (BRI) and Indo-Pacific Strategy: all of them revolve around the maritime areas.

Any future issue in maritime areas will also have a cyberseurity dimesion while countries are re-thinking industrial policies. This emphasizes the need for new security measures to industrial assets as a result of nascent, unpredictable cyber threats from adversaries.

An adversary, or group of adversaries, can target an industrial asset because it has immediate results, and which the perpetrator can determine the trajectory of action on the cyberattack. Governments, multi-national corporations or even individuals, could be consumed in a cyberattack that effectively shuts down an industrial asset or network which it is operating on.

It’s very important to undertand this phenomenon of cyber attacks in the context of sanctions on Russia and China. Under the backdrop of a resurgence in global commodities, the legal aspects of Russia’s sanctions include industrial asset seizures and targeted oil and gas mergers with Russia’s national companies. Both of these aspects have a cybersecurity dimension

What this means at a political level is that Russia intends to transform its industrial policies in a way that favors the “anti-West” rhetoric; from a geographical point of view, raw materials are located in vulnerable areas where supply chains are being disrupted by sanctions. This is why Russia must expand its “sovereignty” over global commodities.

This is Russia’s geopolitical objective within the context of global commodities, hence the critical nature of the China-Russia relationship. China basically has the same geopolitical objective within the context of global commodities, which is why the two countries could seek to dominate raw materials in some of the world’s most vulnerable areas.

If you ask me, it seems like the world is still desperate for the commodities that have been lambasted as a tool of influence for adversarial governments, bringing in some key questions about the effects of foreign policy goals in the future: For which commodities? Against Whom?

In this scenario of the world, it’s a pretty scary place to live in, since the demand for raw materials and energy are producing effects in the foreign policy area of many countries today — just look at the case of Brazil’s and Russia fertilizer diplomacy to understand the critical shift take place in emerging markets.

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