Almost two years since Russia launched its invasion of Ukraine, the US and European Union appear to have failed in their efforts to strangle its economy with sanctions. Contrary to the expectations of many Western analysts, the International Monetary Fund now predicts that Russia’s gross domestic product will rise by 2.6% this year, albeit driven by a rise in military spending that was last seen in Soviet times. Some of Russia’s largest energy companies, including state-backed oil giant Rosneft and independent gas producer Novatek, have raked in bumper profits despite being cut off from the Western financial system. And Russian oil exporters have found workarounds to the EU embargoes and other sanctions, allowing crude and products to keep flowing at close to prewar levels.
Despite the resilience of the Russian economy, it would be wrong to say that energy sanctions have not had any impact. The EU crude and refined product embargoes, combined with the G7’s price cap on Russian oil exports, have forced Russian exporters to sell their oil via a “shadow” network of shippers and traders — mostly domiciled in the United Arab Emirates — that have little or no access to Western insurance or banking. This has driven up the costs and risks of getting Russian oil to market, and forced traders to receive payment in a variety of non-dollar or -euro currencies, including the Chinese yuan and UAE dirham. Those higher costs and marketing challenges translate into steeper discounts for Urals crude, currently around $16 per barrel for Baltic Sea loadings versus roughly $2 prewar, according to Energy Intelligence estimates.
The new marketing system is opaque, but insiders say the big Russian producers are getting paid for their oil upfront in rubles by the traders, which then allocate the barrels to groups of satellite companies. “It’s all coordinated by a small group of people who know each other and have the right connections,” says a source familiar with the trade. “Everything is done on trust.”
A chief objective of the price cap was to keep Russian oil flowing in the face of the embargoes, avoiding a price spike that could damage Western economies. The idea was to allow Western shipping companies to remain involved, on the assumption that they would adhere to the rules. However, the opposite seems to be happening: Recent US-led efforts to tighten enforcement of the cap have scared off the big Greek shippers that were handling about 25% of Russia’s crude exports from the Baltic and Black Sea ports last year. More Russian barrels are now being transported by the shadow fleet — hundreds of tankers, registered in countries such as Gabon and Palau, that are typically over 15 years old and lack Western insurance.
Dubai Trading Hub
The US Treasury’s Office for Foreign Assets Control has blacklisted a handful of obscure trading and shipping firms suspected of violating the cap. This will likely change little, as there are dozens more of these entities in operation, and new ones can be incorporated in Dubai and other jurisdictions with ease. What may be more effective, but difficult to achieve, industry sources say, would be to target the groups of individuals behind these companies. There could also be tougher Western pressure on Dubai and the wider UAE to clamp down on this trading and shipping nexus, and restrict the flow of funds through local banks. Dubai could argue, however, that it is doing nothing illegal by supporting the Russian oil trade — especially as the price cap aimed to keep this flowing.
Dubai has emerged as the new hub for Russian oil trade because Switzerland, and the rest of Europe, are off limits — and likely to remain so for considerable time. The EU cut the umbilical cord with Russia first by outlawing any transactions with state-controlled companies like Rosneft and shipping firm Sovcomflot, and then by imposing the embargo on Russian oil imports and products. This resulted in a seismic shift in oil export patterns, forcing Russia to sell even more barrels to India and China. According to data provided by consultancy Kpler, India and China imported close to 3 million barrels per day of Russian crude shipped by sea last year, or around 84% of its seaborne volumes. Turkey came in a distant third, with the UAE, Singapore and Ghana making up most of the rest. With products, mostly low-sulfur gas oil, Russia found a willing new market in Brazil, which is taking several cargoes a month from the Baltic port of Primorsk and rivaling Turkey as the single largest importer.
New Supply Picture
Europe, meanwhile, has replaced all the lost Russian barrels with crude from a variety of sources: the US, West…
Read More: Russia Weathers Western Oil Sanctions