The strategy by Ukraine’s allies to keep Russian oil on the global market – and, thus, prevent price increases — , while restricting the country’s export receipts and fiscal revenues is showing results. Russia’s crude oil and oil products exports fell by close to 30% in 2023Q1 vs. 2022Q4–and budget revenues from hydrocarbons by 47% over the same period of time. Markedly wider discounts for Russian oil due to the EU embargo played a key role here.

Even so, evidence for potential sanctions violations, specifically circumvention of the G7 price cap regime, is emerging. Export prices for Russian crude oil stood at $73/barrel at the critical Pacific Ocean port of Kozmino in 2023Q1, while Western shipping service providers appear to remain involved in the trade to a significant extent. These findings were revealed in a recent study «Russian Oil Exports Under International Sanctions» by KSE Institute.

The market for Russian crude oil has undergone a fundamental transformation since the start of the full-scale invasion of Ukraine. 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 12 months. In 2023Q1, the two countries accounted for close to 75% of crude oil exports, while the EU’s share fell to 19%.

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—exports to the West—, prices for Russian crude oil fell by $20-25/barrel, a $10-15/barrel wider discount vs. Brent. But where demand conditions did not change materially—exports to the East—prices dropped by only ~$10/barrel, in line with Brent.

The study finds that almost all oil exported from Kozmino in 2023Q1 (96%) was sold above the $60/barrel price cap threshold. At the same time, ship tracking indicates that a large share of voyages were undertaken with the participation of Western ships or maritime insurance companies. This points to potential widespread circumvention of the price cap regime–and emphasizes the need for robust sanctions enforcement.

The study’s authors are calling on Ukraine’s allies to strengthen existing sanctions through the following measures:

1. Conduct audits of transactions to identify violators of the price cap.

2. Take measures to increase the transparency of transactions in which Western shipping survive providers do not participate.

3. Improve administrative capacities to monitor compliance with sanctions.

While enforcement of existing sanctions is critical, lowering the price caps on crude oil and oil products is also warranted, especially as OPEC’s decision to reduce crude oil production has led to higher global oil prices–and will increase Russia’s export revenues and budget revenues if not addressed.