Russia’s economy has found ways to function under Western sanctions for over two years into the invasion of Ukraine and in the face of trade restrictions, prompting the Western nations to close the loopholes.
The main source of income for Russia is crude oil export. Russia is able to keep up with its exports by “shadow fleet” crude oil and shifting to new markets such as India and China.
Lack of harsher sanctions against Moscow and its ways to evade them resulted in more Russian missile strikes on Ukrainian cities, increasing the risk of conflict spreading further to the EU countries. Providing more effective sanctions, their monitoring and enforcement can close Russia’s loopholes and penalize those involved in the schemes.
As an example of sanctions effectiveness, secondary US sanctions impede the process of sanction evasion, focusing on trade restrictions designed to prevent third parties outside the United States or the European Union from conducting business with Russia.
As a consequence, Russian oil companies are facing delays of several months in payments for oil and fuel as banks in China, Turkey, and the United Arab Emirates (UAE) become more cautious.
“Shadow fleet” of Russian crude oil to Europe
According to Black Sea Group monitoring, 94 tankers transported Russian oil to EU ports between December 5th, 2023, and February 29th, 2024, which affected Russia’s exports of 82.9 million barrels of oil to the EU despite imposed sanctions.
In December-February, 68.8% of Russian oil exported to the EU via Black Sea ports was delivered to the major transshipment facility in the Gulf of Laconia near Greece’s coast. This transshipment occurs within Greece’s exclusive marine economic zone, which is governed solely by Greek officials. Despite restrictions prohibiting them, they supplied the remaining 31.2% directly to EU ports.
52 belong to Greek firms, 11 to Turkish companies, 4 to Russian companies registered in Dubai, and 4 to Russian companies registered in India, with the remainder belonging to corporations from Moldova, Cyprus, China, Denmark, Malta, the United Kingdom, Latvia, Indonesia, and Malaysia.
Data on total Russian crude oil and petroleum product exports through Black Sea ports show that, despite Western sanctions, these exports remain stable, reaching 4.2 million tons of crude oil and 3.9 million tons of petroleum products in February 2024.
China as a top importer of Russian crude oil
In February 2024, China became the top importer of Sokol crude oil after supplies to India decreased due to payment and delivery issues created by Western sanctions against Russia.
The oil tanker NS Century, which is subject to US sanctions, arrived at the Chinese port of Qingdao late on March 14 to offload its cargo of Russian crude oil, according to LSEG shipping statistics, AlArabiya reported.
The Russian-flagged tanker is operated by a Dubai-based unit of the Russian shipping business Sovcomflot, and it transports approximately 700,000 barrels of Russian Sokol oil.
China imports Russian crude oil and exports gasoline and jet fuel to Europe.
At the end of 2023, Russian Deputy Prime Minister Alexander Novak stated that China accounted for 45–50 percent of Russian oil exports, while India’s share had increased from nearly nil to 40 percent in two years. According to Novak, by 2023, Russia’s oil shipments to Europe will fall from 40–45 percent to 4-5 percent of the overall supply.
At the same time, European countries buy oil products from India, indirectly paying for fuel in Moscow, despite the EU’s embargo on Russian oil supply due to the latter’s invasion of Ukraine.
In early January, the British newspaper Independent reported that in 2023, the EU’s imports of petroleum products from India increased by 115 percent to 231,800 barrels per day, the highest level in seven years.
According to the publication, India supplied oil products made from sanctioned Russian oil to 20 of the 27 EU countries. The leader in such purchases was the Netherlands, which accounted for a quarter of the EU’s fuel imports from India. France purchases another 23 percent of petroleum products.
Germany also imports petroleum products from India: gasoline, jet fuel, and diesel fuel. Germany accounts for 7 percent of total fuel supplies from India to the EU.
Russia’s new markets face difficulties
As a sign of oil sanctions efficiency, Governor of the Bank of Russia, Elvira Nabiullina, stated on March 22 that the West’s tightening of sanctions against Russia is reducing the country’s oil export revenues.
As reported by local Russian media, some Chinese banking giants have already stopped making payments to sanctioned Russian financial institutions.
Other worldwide banks that Russia was using to avoid sanctions are now refusing to do business with the country for fear of Western retaliation.
Indian buyers of Russian oil face difficulties. Indian oil refiners, Russia’s second-largest customer after China since the 2022 invasion of Ukraine, will no longer take tankers operated by state-run Sovcomflot PJSC, fearing secondary sanctions and limiting shipments.
Payment delays reduce the Kremlin’s revenues and make them unstable, allowing Washington to achieve dual sanctions goals: to prevent the flow of funds to Russia to punish it for the war in Ukraine while not interrupting global energy flows.
Several banks in China, the UAE, and Turkey have tightened their sanctions compliance requirements in recent weeks, resulting in delays or even denials of money transfers to Russia. Global crude oil prices are up more than 10% this year.
Nabiullina hinted that Russia will be doubling down on sanctions violations.
Ukraine’s drone attacks on Russian oil facilities impact oil exports
In response to insufficient sanctions to reduce Russia’s petroleum earnings used to finance Putin’s war, Ukraine has launched a campaign of long-range strikes against Russian oil refineries.
More than ten major Russian refineries sustained damage between January and March. Russia has only 32 big oil refineries, and it has already restricted the export of petroleum to meet its internal needs.
Ukraine’s ongoing drone strikes are reducing Russia’s crude refining capabilities. Goldman Sachs analysts reported that the attacks have put approximately 900,000 barrels per day of capacity out of operation, possibly for weeks or even permanently.
Following the Ukrainian drone strike on March 23, Russian oil firm Rosneft shut down a 70,000-bpd unit at its Samara-based Kuibyshev refinery.
At the same time, Western secondary sanctions are already showing a significant impact on the Russian economy, so it is necessary to continue to put pressure on Russian banks and companies as they are looking for new ways to make payments with other countries.
Sanctions enforced to cut Russia’s oil revenues will help exhaust its funding for Putin’s war against Ukraine. Lack of measures against Moscow led to more deadly strikes on Ukrainian cities, increasing the threat of conflict spreading further to EU nations.
