Sanctions Enforcement Cuts Into Key Markets for Russian Crude

When the G7 imposed a price cap on shipping services for Russian oil in December 2022, Moscow found plenty of Western partners who were willing to help it circumvent the  threshold. By transferring old tanker tonnage to opaque front companies, falsifying or disabling AIS signals, and transferring oil at sea, certain shipping interests continued to facilitate transport for market-rate Russian oil. That is now changing, according to the analysts at Poten & Partners: ramped-up enforcement in the U.S. and the EU is pushing many gray-market facilitators out of the market, raising the cost of doing business with Russian oil exporters, and making Russian oil less competitive on the global market. 

After the invasion in 2022, Russia lost access to its traditional European energy customers, and its biggest new markets for crude oil became China, India and Turkey. Refiners in these nations were unconcerned about sanctions and purchased discounted Russian oil in massive volumes: India alone increased its Russian energy imports 13-fold in two years' time, re-exporting much of the refined product to nations where Russian crude is banned. 

However, the dynamic appears to be changing, according to Poten. As U.S. and EU officials began scrutinizing Western shipping interests' compliance with the price cap, more Western shipowners exited the Russian oil trade. At the same time, the U.S. began applying sanctions to "dark fleet" vessels that are involved in carrying Russian oil outside of the G7 price cap mechanism. In addition, the difficulties created by Yemen's Houthi rebels in the Red Sea have raised ton-mile transport costs for shipments from western Russia to India. These factors have prompted Indian refiners to dial back purchasing and switch back to traditional Middle Eastern suppliers. 

Poten noted that Turkish and Chinese buyers are also showing less interest in Russian crude, though the effects are less pronounced. Sanctions have also made some Turkish interests skittish: earlier this month, Turkish terminal operator GTS told Reuters that it has decided to "cut all possible connections to Russian oil." 

"It will be a challenge to replace the volumes of India and Turkey if these countries decide to cut back their purchases. Much higher discounts may be needed or more Russian crude risks being stranded," predicted Poten. 

It remains to be seen whether these efforts will have an effect on the Kremlin's finances. Overseas crude oil sales drove government tax earnings to a record $320 billion in 2023, and about one-third of that funding went to finance the war in Ukraine, according to CNN. The Russian federal government forecasts that revenue will hit another all-time record ($390 billion) in 2024.