Executive Summary

1. Effectiveness and credibility of energy sanctions on the line. Recent 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 October, likely due to so- called “attestation fraud”, e.g., the provision of falsified pricing information to G7/EU service providers. Second, Russia’s reliance on its “shadow fleet” of vessels not owned and/or insured by G7/EU entities is rising, meaning that the cap’s leverage is fading quickly.

2. Higher oil export earnings contribute to improved external environment. Following a period during which export earnings came under significant pressure as wide discounts on Russian oil weighed on prices, we observe a gradual improvement in recent months. The overall current account surplus is up, partially driven by higher goods exports, resulting in higher foreign currency inflows into the Russian economy. Together with the CBR’s interest rate hikes and re-introduction of capital controls, this has also stabilized the ruble.

3. Macroeconomic pressure is subsiding, will provide 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. A much smaller budget deficit means that macro buffers will remain intact and allows the government to sharply increase spending on the war 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 data suggest that problems with price cap implementation and 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.