We use high-frequency data on Russian oil exports to evaluate the impact of international sanctions on Russian energy exports in the first quarter of 2023. Specifically, we focus on the effects of two focal measures: the European Union’s (EU) embargoes on Russian seaborne crude oil, in force since December 5, 2022, and Russian oil products, in force since February 5, 2023—as well as the corresponding Group of Seven (G7) price cap mechanisms. Data for 2023Q1 allows us to analyze an extensive post-sanctions period—and, thus, draw conclusions with regard to some of the questions that remained unanswered in our previous research, including with regard to export prices, discounts on Russian oil, the effectiveness of the price cap regime, and potential sanctions violations.
Our key findings are as follows:
• The sanctions coalition’s strategy to keep Russian crude oil on the global market, while restricting the country’s export receipts and fiscal revenues is showing results. For 2023Q1, the Bank of Russia (CBR) reported total goods exports of $100.8 billion—down 28% compared to 2022Q4 ($140.6 billion). We find that crude oil and oil product exports alone fell by $15.6 billion—thus, making up 40% of the total decline—and estimate contributions of $6.1 billion from smaller volumes, $4.2 billion from lower global prices, as well as $5.2 billion from wider discounts on Russian exports. At the same time, Ministry of Finance data for 2023Q1 shows that oil and gas revenues came in 47% below 2022Q4 levels (-45% vs, 2022Q1) and were partially responsible for a sharply wider deficit.
• Even so, export prices for Russian crude oil in 2023Q1 point to sanctions violations and underscore the urgent need for more rigorous enforcement. We find that prices at the critical Pacific Ocean port Kozmino stood at around $73/barrel in the first three months of the year—consistent with ESPO numbers estimated by market intelligence providers. Moreover, the distribution of prices is rather homogeneous—more than 95% of the total export volume at Kozmino was sold at a price above the $60/barrel threshold. As the tracking of individual voyages shows continued and substantial involvement of G7/EU shipping service providers, sanctions violations likely occurred and require further investigation.
• Russian crude oil largely remained on the global market after the taking-effect of the EU embargo on December 5, 2022—and global oil prices did not increase. A surge in prices in the event of Russian oil’s exiting from the market had been a key concern of sanctions coalition countries. To address this issue, the G7/EU established the oil price cap regime, while also rolling back some elements of the EU’s sixth sanction package. Namely, shipping service providers from EU countries were permitted to remain involved in the Russian oil trade if transactions take place below a certain threshold—ultimately set at $60/barrel.
• The market for Russian crude oil exports has undergone a fundamental transformation since the start of the full-scale invasion of Ukraine on February 24, 2022. European countries, previously the largest buyers, now play a negligible role and have been replaced almost entirely by China and India, with the latter appearing as the key “new” buyer over the past twelve months. In 2023Q1, the two countries together accounted for close to 75% of total Russian crude oil exports. As the country’s oil infrastructure is geared towards exports to the West, this redirection has led to significantly longer shipping routes.
• Most importantly, the EU embargo has triggered a fragmentation of the market—with different segments characterized by diverging demand conditions and, thus, price dynamics. Where European demand had played a key role in the past and has now essentially disappeared—namely exports via Druzhba as well as from Baltic Sea and Black Sea ports—, prices for Russian crude oil fell by $20-25/barrel in the post-embargo period (vs. November), a $10-15/barrel wider discount vs. Brent. But where demand conditions did not change materially—namely exports from Pacific Ocean ports and via pipeline to China—prices dropped by only ~$10/barrel, reflecting a largely unchanged discount.
Our policy recommendations are as follows:
• We believe that stepped-up enforcement of existing sanctions is essential. Our finding of crude oil export prices significantly above the $60/barrel price cap threshold at Kozmino—together with evidence regarding the continued involvement of Western companies in a substantial share of the shipments—demonstrates that investigating compliance with existing sanctions should be front and center.
• We propose a number of specific steps to address the issue of potential sanctions circumvention: (1) risk-based audits of attestations regarding price cap compliance, i.e., a focus on areas that pose relatively high risks of sanctions evasion; (2) strengthening of price cap coalition countries’ enforcement stance and alignment of such efforts across jurisdictions; (3) measures to increase the transparency of transactions that do not involve Western shipping service providers, e.g., a focus on the largely UAE and Hong Kong-based trading firms involved in exports to China and India; and (4) development of additional administrative capacities for sanctions enforcement, including in the EU.
• Lower price caps for crude oil and oil products are of critical importance for a continued weakening of Russian export earnings and fiscal revenues—especially as prices are set to rise again. Up to now, the sanctions coalition’s efforts were helped by moderating global oil prices, which—together with widening discounts—led to sharply lower export prices for Russian crude oil. With OPEC’s decision to cut production by 1.15 million barrels/day, oil prices have begun to rise again, which, even under the assumption of constant discounts, will benefit Russia. For each $1/barrel increase in the price of crude oil, the country could receive $2.7 billion in additional export earnings.