Russian efforts to circumvent Western sanctions on oil exports and the need to close loopholes

Russia has managed to circumvent Western sanctions on its oil exports by redirecting them to India and China.

According to a Reuters data compilation, the EU was the largest importer of Russian crude oil and oil products before Putin’s war against Ukraine, accounting for over 50%.

Currently, Russia exports oil to India and China, which accounted for 90% of Russia’s total crude exports last year, according to Russian Deputy Prime Minister Alexander Novak, speaking on the Russian state network on December 27.

Russia’s claim about its successful sanctions evasion

Russia’s oil sector has adapted to the new reality six months after the European Union placed sanctions on Russian oil and petroleum product exports. With the discovery of new markets, the industry has been able to reduce crude production by only 5% while avoiding a reduction in oil processing. Furthermore, the sale of oil and petroleum products has increased.

The current structure of Russian oil and petroleum product exports exhibits insecurity and a high dependence on sales to two customers, India and China, which constitute up to 80% of total Russian sales.

Europe’s proportion of Russian oil and petroleum exports fell to 4-5% in 2023 from almost 40% in 2021, according to Russia’s deputy prime minister, Alexander Novak, in an interview broadcasted by Russian state propaganda media.

Russia has managed to evade Western sanctions by trading with India and China. As a result, Beijing now accounts for 45-50% of Russian general exports.

For example, India has become the biggest export destination for Russian oil. Before Russia’s full-scale war, there were no oil supplies to India, but now the share of Russian oil supplies to the country rose to 40%. 

India has been able to purchase Russian crude oil at low price, refine it, and sell it to European markets. This was possible since refineries frequently employ crude oil from multiple sources, making it difficult or impossible to determine where the product originated from.

India as a gate to circumvent Western sanctions

India and China have both used Russia’s reliance on them for oil sales to get discounts or preferred supply arrangements. 

Indian refiners use crude from a variety of countries, including Russia, making determining the origin of diesel or petrol difficult. However, just discussing potential consequences of sanctions evasion can have a dissuasive effect.

The Financial Times wrote that if India or other countries believe the EU market will be closed to their refined fuels, they may cease importing Russian crude oil. 

Russia is the world’s second-largest crude oil exporter after Saudi Arabia, and there are already concerns that the global oil market may tighten in 2024, causing prices to rise.

Following India’s government’s recommendation not to utilize the Chinese yuan, Indian state-owned oil refineries undertake oil trade transactions with Russia in UAE dirhams. Due to a lack of other options, private refineries continue to use yuan.

Payments for Sokol crude oil were complicated since Sakhalin-1 LLC, a business participating in the transactions, was unable to open an account with a UAE bank to accept dirham payments.

Sokol crude oil payments are being hit by sanctions, geopolitical concerns, and banking challenges. Western sanctions, UAE issues of sensitivity, and a lack of established banking ties all contribute to an uncertain dirham transfers. Buyers are compelled to seek alternative ways, which complicates and increases the cost of an essential energy flow. 

In November 2023, reports emerged that the Indian route, which has been one of the most profitable for Russian oil exports after Western sanctions implementation, is facing significant obstacles because of non-dollar payment issues.

Western sanctions aim at preventing Russia from selling oil to India

Josep Borrell, the EU’s foreign policy chief, told Reuters that the EU was looking for measures to stop or limit Indian imports of Russian oils.

Any way to halt Russian oil supplies would have to be introduced “by the national authorities,” implying that the EU may target customers of Indian refined fuels believing that they originated from Russian crude.

In the EU 12th package sanctions tightened the G7+ oil price cap, by adopting new measures to more closely monitor the sale of tankers to third countries.

Shipping companies and their insurers are required to declare that they have not paid more than $60 per barrel for their cargo, but there have long been concerns that traders were offering large sums to secure their cargo while claiming to be paying for miscellaneous costs such as transportation. 

The proposed reforms would make it more difficult, but it remains unclear if there would be enough oversight to prevent shady agreements from going through.

Russia’s shadow fleet to transport oil

New measures will help to tackle the ‘shadow fleet’ used by Russia to circumvent the price cap. Russia’s shadow fleet refers to a network of hundreds of aging, often poorly maintained tankers used to bypass international sanctions on its oil exports.  

Chief Executive Officer of Maersk Tankers in Copenhagen, which operates a fleet of 170 ships, Christian Ingerslev said that “if you look at how many ships have been sold in the last six months to unknown buyers, it becomes clear that a fleet is being created to carry these cargoes”, Bloomberg is quoting him as saying.

Shipbroker Braemar estimates that 240 more ships – 102 Aframaxes, 58 Suezmaxes, and 80 very large oil tankers – have been bought to support Russia’s four million barrels a day to the Far East.

Why Western oil sanctions against Russia work?

The recent regulations have exacerbated Russia’s unfavorable developments, such as unlawful fuel sales and price increases.

As a result of the sanctions, from December 2022 to May 2023, the difference in prices between the Western Brent brand and Urals oil reached a record high of over $30 per barrel leaving Moscow a gap for discounts.

It is not sure whether China and India will still be interested in imports from Russia if prices rise due to the expected shortage of crude on the global market. If Russia is not able to attract customers with discounts anymore, the two big buyers can switch to other oil producers, which are not under sanctions, and lower the risks.

Since December 2023, a new clause applies to EU exporters that contractually prohibits the re-exportation of a limited number of goods to Russia and re-exportation for use in Russia when selling, supplying, transferring, or exporting to a third country, except partner countries.

It’s uncertain whether Russia will continue to undervalue its exports due to its reliance on Western insurance companies and shipowners. With oil price spike, the room for possible discounts to attract buyers will shrink. Thus, Russian oil price increase will lower its competitiveness versus other exporters.

Oil sanctions against Russia force India to look for alternatives

The 12th round of EU sanctions tightens compliance standards to assist in the execution of the oil price ceiling and to crack down on circumvention. A stronger information-sharing mechanism will allow for better identification of vessels and entities engaging in deceptive practices, such as ship-to-ship transfers used to conceal the origin or destination of cargo and AIS manipulations while transferring Moscow’s crude oil and petroleum products. Marine traffic services use AIS, an autonomous tracking system that relies on transceivers on ships.

The payment concerns delayed Russian crude oil supplies to the Indian Oil Corporation. This caused India’s largest oil refinery to purchase extra oil from the Middle East, according to reports. IOC is the only state-owned refinery that signed a deal with the Russian oil corporation Rosneft to purchase Russian oil, including Sokol.

Significance of anti-Russian oil sanctions implementation

If, regardless of individual sanctions, circumvention remains significant, the EU will be able to take exceptional, last-resort measures. In this case, the EU Council may unanimously decide to restrict the sale, supply, or export of goods and technology whose export to Russia is already prohibited to third countries where there is a high risk of circumvention.

Reducing Russian profits from oil sales will weaken its military capability, the main goal of the Western economic pressure on Moscow to force it to stop its war of aggression against Ukraine. 

Supporting Putin’s war machine, after all, limits Western efforts to assist Ukraine in repelling the Russian invasion and moves the conflict closer to the EU’s frontiers.

Western governments should investigate such trade booms to identify sanctions violators, as punishment for sanctions evasion is one of the targets of the latest anti-Russian sanctions packages.

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