20 July 2023

Executive Summary 

Concerns with Existing Sanctions

Concerns with Existing Sanctions The key channel through which sanctions on Russian oil have impacted export earnings and budget revenues is a wider discount on crude oil export prices in those segments of the market where European buyers have essentially disappeared due to the embargo. But there is reason for concern as the discount has narrowed considerably – from close to $25/barrel to below $19/barrel. Russia appears to have kept export prices stable while global prices declined. For every $10/barrel in higher prices, the country receives additional $18.3 billion in export revenues per year. The price cap should be lowered to $45/barrel to prevent rising export earnings. 

An additional issue is the compelling evidence for widespread violation of the G7/EU price cap. In the first half of this year, 97% of all crude oil exports from Russia’s critical Pacific Ocean port of Kozmino was sold above the $60/barrel threshold. At the same time, 42% of the oil was exported with the participation of G7/EU companies and, thus, should have fallen under the price cap regime. Potential violations affected up to 59 million barrels in H1 2023 – 16% of all crude oil exports that the price cap applied to. Enforcement needs to be steppedup considerably and requires changes to the information available to implementing agencies.

Price caps were also introduced for oil products but they have not had an effect on Russian export prices. Russian oil products prices did not decline vs. benchmark prices after the caps’ taking effect in February. That prices for premium and discounted products have consistently stood below the respective thresholds – $100/barrel and $45/barrel – means that oil products price caps are too high to have an effect. And for every $10/barrel in higher prices, Russia receives $10.5 billion in export revenues per year. Products price cap should be lowered – in line with the crude oil cap for discounted products and by more for premium ones. 

Furthermore, Russian entities may be able to capture arbitrage in the oil market through third-country intermediaries such as shipping companies or oil traders. For instance, elevated spreads between prices of Russian exports to India and Indian imports from Russia point to inflated transportation costs. Through such schemes, large amounts of money may become accessible to Russian oil companies – and to the state. In January-May 2023, the FOB-to-CIF spread in the oil trade with India had a value of $7.0 billion. Capturing of oil market arbitrage by Russian entities should be investigated and the sanctions regime modified to prevent it. 

Going Beyond the Current Approach 

Questions of implementation and enforcement as well as the exact level of the price caps aside, a broader concern is that Russia continues to earn large amounts of money from exports of crude oil and oil products – $425 million per day in 2023 so far. These inflows of foreign exchange play a key role for overall macroeconomic stability. Furthermore, revenues from oil production and exports help Russia to pay for the war. At H1 2023 levels, oil revenues alone essentially pay for military spending. Sanctions coalition countries should consider a more aggressive approach in order to truly erode Russia’s ability to continue its aggression. 

We propose several possible courses of action to step-up pressure on Russia, including i) a return to the original EU embargo which banned EU companies from participating in the trade with Russian oil; ii) sanctions on oil products refined in third countries from Russian crude oil; iii) taxes on imports of Russian oil to ensure that arbitrage is captured by governments of importing countries rather than entities potentially linked to Russia; and iv) setting up of an escrow account for Russian oil export earnings. We recognize that obstacles exist but encourage Ukraine’s allies to explore avenues through which Russia can be deprived of financial resources.