KSE Institute, in partnership with the German Council on Foreign Relations (DGAP), is proud to unveil a new study titled “Toughening Financial Sanctions on Russia: Enforcing Energy Sanctions and Reducing Shadow Reserves Effectively“. The research by Ben Hilgenstock and Elina Ribakova from KSE Institute, and Dr. Guntram Wolff from DGAP outlines the critical role of financial sanctions in enforcing restrictions on Russian energy exports, specifically within the G7/EU oil price cap regime, and in keeping foreign assets out of reach of the Russian regime.

Despite the fact that Western sanctions on Russian energy exports show some results, evidence for potentially widespread violations of the G7/EU oil price caps is emerging. In particular, it appears that considerable volumes of crude oil are exported from the critical Pacific Ocean port of Kozmino with the involvement of G7/EU service providers while being priced significantly above the price cap level of $60/barrel. In addition, Russian companies may be involved in schemes that attempt to circumvent the price cap regime and capture some of the oil trade arbitrage via inflated transport costs

This links to the broader issue of the accumulation of significant foreign assets by Russian entities. Before the full-scale invasion of Ukraine, Russia possessed international reserves of over USD 640 billion but international sanctions immobilized approximately USD 320 billion. However, while this addressed the issue of reserve stocks, it did not change reserve flows. Driven by a record-high current account surplus, Russian banks, and corporates gained close to $150 billion in funds abroad. It is critical that this money is kept out of reach of the Russian state.

The study proposes several measures to patch loopholes in the sanctions regime, including:

1. Empowering central banks and supervisory authorities to identify Russian foreign assets and prevent these funds from widening Russia’s monetary and fiscal policy scope.

2. Restricting channels for energy-related transactions to enhance transparency.

3. Strengthening documentation requirements within the price cap regime for more efficient implementation and enforcement.

4. Leveraging the international financial system to penalize sanctions violators.

5. Addressing sanctions loopholes, potentially through strategic and limited use of secondary sanctions.

The study advocates for a targeted approach to disrupt Russia’s ability to sell oil above the price cap and make use of its assets abroad, rather than limiting financial transactions altogether. It also acknowledges the potential repercussions of stricter sanctions, highlighting Russia’s efforts to develop domestic systems for financial transactions such as the SPFS (the Russian alternative to “SWIFT,” and strengthening links with China’s CIPS.

The full study, “Toughening Financial Sanctions on Russia: Enforcing Energy Sanctions and Reducing Shadow Reserves Effectively”, is available here: https://bit.ly/3WdGlOT