In December The West targeted Russia’s oil revenues and imposed the largest package of energy sanctions ever imposed on a single country. Europe, which was a major buyer of Russian crude oil, banned the import of these materials. It also barred long-dominant shippers, lenders and insurers from facilitating the sale of Russian crude to other buyers unless the oil is sold below a price ceiling of $60 a barrel, set by Western powers.
Two months later, many people seem to think the hat is a huge success. The second round of European sanctions, on diesel and other refined products, is set to take effect on February 5. Unfortunately, our reports show that this plan doesn’t catch.
The ban and restriction policy of December has not limited the sale of Russian crude oil. After a lull while European companies worked out how to meet the new price cap, shipments resumed quickly — not to Europe, but to China and India. Russian crude oil exports, excl cpcA Kazakh blend shipped from Russia averaged 3.7 million bpd in the four weeks to Jan. 29. That’s the highest level since June and more than any four-week period in 2021.
One supporter of the price cap says that this is the reason for the plan’s success. After all, the goal was to ensure that Russian oil would continue to flow and keep the world market stable, but would cap the price to control profits for Russian President Vladimir Putin. They argue that the cap gives buyers bargaining power. Longer export routes also increase shipping costs, which Russia must compensate customers for.
As evidence that the cap is working, many point to the price gap that Western agencies report between Brent, the global benchmark, and Russia’s Urals crude. This price appeared immediately after the attack on Ukraine, but after the sanctions it expanded slightly and reached $32 per barrel. So Russian oil is now trading at a 38% discount. On January 10, US Treasury Secretary Janet Yellen, the architect of the price ceiling, said the plan was making progress toward its goals.
But the problem is that price reporting agencies haven’t adapted their methods to a world where Russian oil is no longer sold through channels they can see. While European refiners and traders used to share data with price trackers, Indian refiners do not. The agencies also relied on publicly available indices to estimate shipping costs between Russia’s western ports and European oil terminals. On the other hand, the oil transportation rate from Russia to Asia is determined privately.
The result is that the discounts cited by Western officials are inaccurate and often exaggerated. Customs data from India and China show they paid more for their Urals oil this winter than previously thought. Another reason it is difficult to assess the true price is that everyone likes to pretend that prices are low. Russian oil companies are keen to minimize their tax bills and Indian refiners want to squeeze other suppliers.
Even more remarkable is the extent to which Russia’s export machine has become less dependent on Western financing and transport infrastructure and thus has escaped the scope of sanctions. As we report this week, the shadow business that uses the parallel system is booming. Before December, more than half of Russia’s western crude was handled by a European shipping or financing company. This share has since decreased to 36%.
Could the next batch of sanctions, on refined oil, do more damage? At first glance, it seems that they can limit the export of diesel and other Russian products in the short term. From February 5, Europe will no longer buy such fuels and will make the use of transport and insurance companies subject to compliance with the price ceiling. Russia will not easily find buyers to compensate for the loss of demand European Union: Both China and India have their refineries. And Europe’s refined oil tankers will be hard to replace. Therefore, part of Russia’s refined products, which make up a third of the country’s oil export earnings, could go unsold and raise world prices.
However, these effects are likely to fade over time. Unable to sell refined oil, Russia is likely to increase its capacity to export more crude oil instead, fueling the shadow trade. Europeans may turn to China and India for diesel, but it is increasingly produced from Russian crude oil. As more Russian oil flows outside Western control, blockades will become even less effective. For the West, the lesson is that sanctions are no substitute for sending more money and weapons to Ukraine. Avoiding Russian oil will not win the war. ■
