Executive Summary

1. Effectiveness and credibility of energy sanctions remain on the line. October-November data suggest that Russia’s crude oil exports are increasingly slipping beyond the G7’s reach. First, compliance with the price cap appears to have been virtually zero in recent months. Second, Russia’s reliance on its “shadow fleet” continues, meaning that the cap’s leverage is fading quickly. Recent steps on stepped-up enforcement are encouraging, but more will be needed to impact Russian macroeconomic stability.

2. Higher oil export earnings reduce external pressure. Following a period of low export earnings as wide discounts on Russian oil weighed on prices, we observe a gradual improvement in recent months. The overall current account surplus increased moderately, partially driven by higher goods exports, resulting in higher foreign currency inflows into the Russian economy. Together with the CBR’s interest rate cumulative hike by 850 bps and re-introduction of capital controls, this has helped to stabilize the ruble.

3. Subsiding macroeconomic pressure creates more policy space. On the fiscal side, revenues from oil and gas rebounded strongly due to higher export prices, robust volumes, and the weaker ruble. At the same time, non-O&G receipts are up as Russia’s economy has proven to be resilient and bounced back from the initial shock from the war and sanctions. Russian authorities will likely be able to broadly fulfill the deficit target for this year, leaving macro buffers intact and allowing sharp increase of war spending next year.

4. Bold action is urgently needed to maintain pressure on Russia. Sanctions have put a heavy burden on Russian macroeconomic stability in the first half of the year, but their effect appears to be increasingly in question. In particular, the October-November data confirm that problems with price cap enforcement are much bigger than previously expected. We propose three concrete steps that can quickly and effectively address these challenges—and make sure that Russia’s policy space remains constricted.

(1) G7/EU authorities should ensure that authorities have sufficient information to determine if the price cap is complied with. 

(2) EU coastal states should leverage geographical “choke points” to limit Russia’s ability to use a shadow fleet of tankers. 

(3) Price cap coalition countries should step up penalties on entities that violate the price cap or facilitate such violations.