02.03.23 Review

Burning Daylight: Sanctions against Russian oil are ineffective due to a lack of effective compliance and control mechanisms

Recent analysis of classified data from the Russian customs service by a group of economists has confirmed that the sanctions imposed on Russian oil have thus far failed to achieve their stated aims. According to their findings, when Russian oil is shipped from ports in the Baltic Sea, which formerly served European buyers, it is sold at prices well below the price cap. In contrast, China, India, and Turkey, who rely on alternative supply routes, pay a significantly higher fee. This has resulted in an average price of $74 per barrel of Urals crude from December 5 to 31, far above the $50.47 per barrel reported by the Russian government. To ensure the effectiveness of the price cap, those countries that have implemented it must prioritise the implementation of robust control and compliance mechanisms over further adjustments.

Economists Tatyana Babina (Columbia), Benjamin Hilgenstock (KSE), Oleg Itskhoki (UCLA), Maxim Mironov (IEU), and Elena Rybakova (IIF) have jointly published a paper revealing that, following the introduction of the price cap, which was intended to keep the price of RUssian oil trading below $60 per barrel, the average price of a barrel of Russian oil skyrocketed to $74. Unsurprisingly, this contradicts the claims made by the Russian government, for example the Ministry of Finance's report of a price of $50.47 per barrel of Urals in December. While independent oil and gas market analyst Sergey Vakulenko first explored this situation for Re: Russia here, most analysts had been using indirect evidence to draw their conclusions. This new study is the first to draw its conclusions from detailed Russian customs data spanning from 2019 to 2022. Additionally, the economists compared this data with information from alternative sources. It is worth noting that, following Russia’s full-scale invasion of Ukraine and the ensuing sanctions, the Russian customs service ceased publishing their statistics, however the authors were able to gain access to this data for their study. 

Post-Embargo Exports of Russian Crude Oil

Before the imposition of sanctions, the primary export route for Russian oil was through ports in the Baltic Sea. However, betweenDecember 5 to 31, the average price for a barrel of oil shipped via this route fell to just $59.86 per barrel, just below the price cap. As a result, China and India replaced the EU as the primary purchasers of Russian oil; together with Turkey, they now purchase two-thirds of Russian oil exports, which are sent through alternative channels. In December, a barrel of Urals shipped from Pacific ports cost China $84.28, while India paid $69.62 for a barrel. Meanwhile, data shows that the pipeline oil transported to China cost $80.91 per barrel.

Approximately 50% of Russian oil is transported via Sovcomflot's shadow fleet, which remains exempt from sanctions. However, the other half of Russian oil has continued to be sold at prices above the price cap as a result of weak regulation and implementation, according to the authors of the report. Currently, European shipping and insurance companies are not required to provide documentation to demonstrate compliance with sanctions by their Asian partners, unless they are specifically asked to do so. A further issue is the lack of regular checks to ensure countries observe sanctions; the authors recommend a reassessment of current practices to strengthen and improve overall compliance.

Simply adjusting the price cap mechanism is not enough to address the issue outlined above; it is crucial to determine who will oversee the system itself and ensure compliance. While the US and UK have established the necessary infrastructure in order to oversee the implementation of their sanctions, the authors warn that the EU lacks a unified control body. In the US, this function is entrusted to the Office of Foreign Assets Control (OFAC), and in the UK, to the Treasury. According to the authors of this report, the EU needs to establish a common control body, which will ensure that all countries comply with sanctions in full. Generally speaking, the implementation, or lack thereof, of Western sanctions against Russia is a broad and systemic issue. Re: Russia has previously reported that as a result of the current weak coordination between EU member states, high-tech dual-use products are continuing to be supplied to Moscow, not only by China and Iran, but also by countries such as Germany, the Netherlands, and Estonia. 

The authors emphasise that the redirection of oil product exports is a significantly more challenging process. This is likely to magnify the impact of the recent sanctions imposed on February 5th, which will further deplete Russia's export earnings and adversely affect its budget. Nonetheless, the authors advocate for enhancing and increasing the effectiveness of the implementation of current sanctions over increasing their severity. They do, however, support a further decrease of the price cap to $35 per barrel.