Executive Summary

1. Sanctions targeting Russian energy exports are showing results. Ukraine’s allies succeeded at keeping Russian oil on the global market—and, thus, prevent rising prices—after the embargo’s taking effect by allowing G7/EU service providers to remain engaged in the trade with Russian oil—if it is sold at or below the price cap. At the same time, the loss of the European market forced Russia to accept sharply lower prices to maintain volumes, which weighed on export earnings and budget revenues.

2. Evidence for potentially widespread price cap violations is emerging. Despite these encouraging signs, an analysis by KSE Institute shows that export prices remained significantly above the price cap in certain segments of the Russian oil market, while G7/EU service providers were involved in a substantial share of shipments—clear evidence for price cap violations. In addition, there are signs that Russian entities may attempt to capture oil trade arbitrage through more complex schemes. 

3. Stepped-up enforcement is critical for effectiveness of sanctions. Given these developments, we believe that the enforcement of energy sanctions, in particular the price caps, needs to be tightened significantly. This includes efforts to strengthen the attestations regime through risk-based audits, expanded reporting requirements, and higher penalties. Financial sector sanctions can also play a key role in improving transparency by limiting channels through which energy-related transactions can take place. 

4. Budget remains key area of macroeconomic concern. Russia’s federal government deficit reached 3.4 trillion rubles in January- April with a 1 trillion gap emerging in April following the small March surplus. This is already 17% more than had been planned for the entirety of 2023. Revenues, especially those from oil and gas, continue to underperform while the war drives up expenditures. The fiscal outturn is in line with our projection of a deficit of around 12 trillion rubles this year (or ~7-8% of GDP). 

5. Higher deficits will put significant pressure on financing. Both withdrawals from the NWF as well as OFZ issuance—the two most important financing channels—were quite muted in recent months as Russia benefitted from “overfinancing” towards the end of last year. At the same time, MinFin is likely running up arrears. Going forward, we expect that reliance on the NWF as well as domestic borrowing will need to pick up again. This will use up macro buffers and put a heavy burden on domestic banks.