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Russia has successfully evaded G7 sanctions on the majority of its oil exports, resulting in a shift in trade patterns that will increase the Kremlin’s revenues as crude prices approach $100 per barrel.
An analysis of shipping and insurance records by the Financial Times shows that nearly three-quarters of all seaborne Russian crude flows in August were made without western insurance. This mechanism is used to enforce the G7’s $60-a-barrel oil price cap.
This is an increase from around 50% in the spring, according to data from freight analytics company Kpler and insurance firms. The rise suggests that Moscow is becoming more skilled at bypassing the cap, allowing it to sell more of its oil at prices closer to international market rates.
The Kyiv School of Economics (KSE) estimates that due to the steady increase in crude prices since July, along with Russia’s success in reducing the discount on its own oil, the country’s oil revenues for 2023 are likely to be at least $15bn higher than they would have been.
This shift represents a double blow to western attempts to limit Russia’s oil revenue, which forms the largest part of the Kremlin’s budget, following its full-scale invasion of Ukraine.
Not only is a larger proportion of Russian oil being sold outside the price cap, but Moscow’s increasing independence as a seller has coincided with a strong rally in oil prices, which surpassed $95 a barrel this week for the first time in 13 months.
While Russia’s oil sector still faces significant challenges, such as alleged shortages in its domestic refined fuels market and a decrease in overall export volumes, the figures suggest that more oil revenues will flow into the Kremlin’s war chest.
Ben Hilgenstock, an economist at the KSE, stated, “Given these shifts in how Russia ships its oil, it may be very difficult to meaningfully enforce the price cap in the future. And that makes it even more regrettable that we did not do more to properly enforce it when we had more leverage.”
This week, Russia imposed a ban on the export of diesel and other fuels, a significant move from one of the largest global sellers of diesel. This has raised concerns that Russian president Vladimir Putin is attempting to disrupt the oil market, as he did with natural gas, sparking last year’s energy crisis.
While the EU and US have largely prohibited imports of Russian oil, the G7 price cap was intended to ensure that Russian oil continued to flow into global markets. The goal was to prevent supply shortages and a financially and politically damaging surge in prices.
Under the price cap, the provision of western services such as shipping or insurance is allowed, but only if Russia’s oil is sold for less than $60 a barrel. At the time the G7 price cap was implemented in December last year, Russia’s oil initially fell to a significant discount compared to international prices, reaching as much as $40 a barrel. Moscow had to offer these discounts as it rushed to redirect millions of barrels previously destined for Europe to new customers in Asia, all while still heavily relying on western shipping services.
According to the KSE, sanctions, restrictions, and withdrawals from Russia have resulted in a $100bn loss in oil export revenues since February 2022.
However, Russia has built up a “dark fleet” of oil tankers capable of operating without western insurance or other services.
This has enabled Moscow to secure higher prices for its oil as the global market tightens. The average price of Russia’s main export grade, Urals, has exceeded $60 a barrel since July.
Part of the decline in western-supported shipping is likely due to caution on the part of shipowners and insurers, even if they receive “attestations” that the oil they are transporting has been sold for less than $60 a barrel.
In May, Russia was exporting approximately 3 million barrels per day of Urals and ESPO crude by sea using a combination of vessels with western and non-western insurance.
By August, this total had fallen to around 2.5 million barrels per day, with the decline mainly resulting from western-insured ships, which only carried 626,000 barrels per day that month—less than half the volume they transported in May.
The diesel export ban announced on Thursday may have a temporary impact on Russia’s revenues, but it could lead to higher prices for lower volumes.
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