Sanctions Against Russia’s Oil Industry Creating New Problems, Experts Warn

Published: 20 June 2024

Tanker Balt FlotExperts warn that the severe sanctions against Russia’s oil industry have not worked as intended to bankrupt the country out of Ukraine. (Photo: Farid mernissi, Wikimedia, License)

By Henry Pope

Tell enough kids at school they can’t play with you anymore and soon enough you’ll be the one left out.

As Russia gets pushed further and further out of Western markets due to sanctions levied after its invasion of Ukraine, its leaders are strengthening ties with other countries who don’t have to answer to the G7 or the EU, experts warn.

“The moment you impose sanctions on anyone and kick them out of the legitimate marketplace, you potentially lose the opportunity to constrain their behavior further by essentially forcing them into other types of marketplaces,” Ian Ralby, Founder and CEO of I.R. Consilium, an American firm that specializes in maritime law and security, told OCCRP.

“And unfortunately, the scale of the sanctions against Russia, combined with similarly extensive sanctions against other actors, including the likes of Iran, North Korea, Venezuela and beyond, has led to essentially a third global marketplace,” he explained. “And that marketplace is no longer the legitimate or the illicit, it's the sanctioned.”

Just on Thursday, the EU slapped a 14th round of sanctions against Moscow, this time imposing restrictions on its supplies of liquified natural gas.

Russia’s oil and natural gas reserves are amongst the largest on the planet; and where the Kremlin will trade with anyone still willing to fill its war chest, there are plenty of countries seeking to take advantage of Russia’s vast resources and willingness to deal at a discount.

“The oil ban and price cap imposed on Russian oil has led to a major shift in the oil supply chain,” Windward Ltd., an Israeli consultancy firm that specializes in maritime risk management, said in a report.

This is especially true for states similarly sanctioned by the West, who face restricted access to its wealth and markets. But this goes both ways; once they’re locked out, there’s little more the West can do to curtail their behavior.

Since launching its invasion back in 2022, Russia has flaunted international sanctions against its energy sector by making its oil tankers go dark out at sea. Through what is known as Deceptive Shipping Practices (DSPs), vessels can go off the grid, impersonate clean ships, or falsify their manifests to sell what they otherwise wouldn’t be allowed to.

And so, Russia’s ‘Shadow Fleet’ now fuels an economy that the West has little to no part of, to the benefit of other opportunists.

“You had the old days of Iran and Venezuela, and there was a shadow fleet that was relatively small — it would manage the sanctioned barrels,” Ben Luckock, co-head of oil trading giant Trafigura, told Bloomberg in 2023. “This Russian flow is vastly different – it’s huge.”

It is estimated that Russia now has thousands of such vessels running dark, a sizable percentage of the global fleet, that together ship +60 million barrels of crude and oil products per day.

To an extent, the Shadow Fleet is driven by the US$60 per barrel price cap imposed in late 2022 by a coalition of the G7, the EU, and Australia. This extends to their respective shipping companies, which amount to a large portion of the world’s tanker fleet, who are also barred from facilitating any trade with Russia above that price.

To put this into perspective, in February 2022, Russian crude was priced at a little over $91 per barrel. This amounted to a 33 percent knee-capping by some of Russia's largest buyers, before they ultimately stopped putting orders in altogether.

Before the war, the U.S. and U.K. bought more than a million barrels of Russian crude per day, but now they have taken their business elsewhere. And though the EU is more dependent, it nonetheless reduced its 2023 imports to 600,000 bpd, down from 3.3 million bpd in 2021.

And so where Russia’s supply to the West has largely been cut off, demand east of Europe has risen to fill the void.

“We have quite a few enablers and willing participants that play in both or all three of those major markets. And so the likes of China and India are simultaneously trying to safeguard their place in the legitimate market, while at the same time also showing not only a willingness, but in some cases a need to continue the trading with the sanctioned actors, Russia included,” Ralby told OCCRP.

Turkey, for instance, upped its Russian oil imports by 150 percent from 2021 to 2023. In that same timeframe, China, the biggest net importer, has bought an average of 700k more bpd from Russia, from 1.6 million to 2.3 million. And India, the biggest opportunist, bought 1,900 percent more in 2023 than in 2021, from 100k bpd to 1.9 million bpd.

States across Africa, the Middle East, and Latin America have assumed a larger role as buyers in the market as well, now that the supply is there for them to do so.

All in all, Russia has succeeded in mitigating the initial setbacks imposed on its energy sector, with Windward noting that, in April 2024, the country managed to double its year-over-year oil and gas revenue to $14 billion.

“This is due to rising gas prices, and the appeal of discounted Russian oil to those who are not obligated to follow sanctions or those who choose to ignore them,” the Israeli maritime intelligence firm told OCCRP.

And for some, there is the belief that this new dimension of the oil economy, facilitated by the West, not only hasn’t bankrupted Russia out of Ukraine, but has actually made it harder to do so.

“I think there's a little bit of a concern that we may have actually pushed some of the bad actors closer together,” Ralby told OCCRP. “Those that were so bad that we were sanctioning them together with those that were bad enough that they would be willing to work together. And that creates new sets of challenges.”