After 18 months in the war with Ukraine, the effect of Western sanctions is fading on the Russian economy, notably on the federal budget’s oil income.
The country had found ways to circumvent Western sanctions forcing a $60 price cap on a barrel of seaborn Russian Urals oil in the global trade.
Almost none of the shipments of seaborne crude in October were executed below the price cap, the Financial Times reported, citing official EU sources. Official Russian statistics also show that the average price received was above $80 a barrel in October.
“In spite of a 3-5% monthly drop in oil exports from Russia in the last three months, the country’s oil revenues have still increased,“ said economist and energy analyst Osama Rizvi to Euronews Business.
How the price cap works
In order to reduce Russian oil revenues as a response to the country’s aggression against Ukraine, the G7 and allies such as Australia and Norway applied the price cap from 5 December 2022. (In the EU, there is also a complete import ban on Russian seaborne crude oil and petroleum products with the exception of Bulgaria.)
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Companies from these jurisdictions are forbidden from providing shipping or insurance services to facilitate the trade of Russian oil unless the trade is verifiably below the price cap.
However, the market price of Russian Urals crude broke above the $60 price cap in July 2023 and has been set more and more above that in recent months.
How Russia worked its way to turn the market upside down
The country has developed methods that are “making it impossible to police the trade”, said Christopher Weafer, the CEO of business consultancy Macro-Advisory Ltd, to Euronews Business.
Seaborn Russian oil trade has been traditionally handled by major oil firms and commodity houses abiding by Western sanctions.
Over the last year, they gradually got replaced by little-known trading firms with no history in the business, popping up and exporting large volumes of Russian crude exports to Asia and then closing business rapidly.
Graphics by Brussels-based think tank Bruegel show how less than a quarter of the currently used ships are officially sailing under the G7 or Norway’s jurisdiction and therefore must respect the price cap.
A fleet of ‘shadow tankers’ also appeared on the global market, composed of hundreds of small tanker operators, owning one tanker or two only. These are typically aging vessels, posing plenty of safety risks, sailing under the flag of countries such as Liberia or Cameroon.
They regularly carry millions of barrels of oil, and often lack industry-standard insurance or are insured by Indian, Chinese, or Russian firms, even though traditionally 90-95% of the global tanker insurance market is based in London.
Another one of Bruegel’s graphics shows how the origin of insurance for two-thirds of the shipments became unknown by July 2023.
Increasingly, before a ship had even reached its destination, the cargo changed hands at sea, making Russia's oil exports more difficult to track.
“It's an enormous game of hiding tanker traffic, hiding volumes,” said Weafer. “If authorities in Europe identify some company or some tanker violating the sanctions, fairly quickly that company name changes and even the tanker name changes.”
Meanwhile, Russian Urals oil has been offering a discount, currently around $10 a barrel compared to the benchmark Brent crude, but in the spring it was $35-$40 cheaper.
As the Brent crude price has started to rise following the OPEC+ countries' announcement of cutting output, Russian oil could also follow suit from July 2023.
Who is buying the Russian oil and how does it end up in Europe again?
Seaborn Russian oil is almost entirely heading to the Asian markets, India, China and Turkey being the biggest buyers.
However, there is a large amount of oil leaving to undisclosed destinations. “About 1.5 million barrels a day leaves Russian ports with destinations undisclosed,” said Weafer. “And then either they end up in maybe Chinese or Indian ports or sometimes that oil is transferred to another oil tanker, in the ocean. And then, it blends into into the global market.”
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Some of Russia’s oil and crude products have found their way back to Europe, where the import is banned (with the exception of a small amount to Bulgaria).
As winter is approaching, “ Europe will have to buy diesel and other products from India or from the United Arab Emirates. And effectively that's Russian oil that's come all the way around,” says Weafer.
Economist and energy analyst Osama Rizvi also confirmed that the oil sent to Asia finds its way back to Europe. “Based on the figures, Turkey and India have been importing a lot of Russian oil and most of it has been making its way back to Europe in the form of oil products.”
The difference new sanctions could make
Analysts say it has become very hard to police such a fragmented market full of little-known trading companies. “The reality is that the EU is not able to control this market,” said Weafer.
What really made this price cap ineffective is an unprecedented increase in the dark fleet, which is not tracked by the international organisations,” said Rizvi, adding that also untracked oil shipments, for instance, offloaded in Malaysia, are blending in the global trade under another country’s export.
The only way sanctions could be enforced is if the current buyers agreed to abide by the sanctions. “All of the big buyers have made absolutely clear that they have no intentions of doing so,” said Weafer. Previously, India openly confirmed that it saved roughly $2.7 billion by importing discounted Russian oil in the first nine months of 2023.
“The discount on Russian oil prices gives a very significant economic competitiveness over Western consumers that are paying the higher price.”
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The effects of Western sanctions may fade even further in January, when the BRICS group is expanding by six new members, therefore Russia has more opportunities to create new bilateral trade agreements, and financial settlements, including within insurance, transport, and logistics.
As the 12th package of sanctions has just been presented in the EU, “there's a question mark over what is the willingness of the US authorities or European authorities to enforce the price cap and to try and block the export of Russian oil and oil products,” said Weafer.
He pointed out that if Russian oil volumes were to be cut due to more effective policing, that would take millions of barrels of crude and oil products out of the global market, undoubtedly driving up the prices. “A spike in the oil price would be damaging for the global economy.”