One year ago, as the USD 60 per barrel price cap and import ban on Russian crude came into effect on 5 December 2022, Ursula von der Leyen, President of the European Commission, said, “the decision will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine.”

While it is clear that the sanctions have not reduced the Kremlin’s resolve for war one year on, CREA analysis can reveal that the EU oil import ban and G7 price cap have cut the country’s export earnings from oil by 14%, costing them EUR 34 bn in export revenue.

That impact though is far short of what could have been achieved.

CREA analysis shows that the sanctions impacted Russian oil export revenues heavily for the first half of the year — peaking at losses of EUR 180 mn per day in the first quarter of 2023. In January 2023, Russia saw a significant 45% month-on-month decline in overall fossil fuel revenues, with crude oil alone experiencing a 25% decrease.

However, a failure to enforce, strengthen and consistently monitor the price cap has allowed Russia to undo the impact in the second half of the year. Revenue losses shrank to EUR 50 mn per day in the second and third quarters, and then recovered to EUR 90 mn per day in the last quarter of the year.

The effectiveness of the sanctions has fallen due to insufficient monitoring and enforcement of the oil price cap policy that enables Russia to sell its oil at prices above the set cap level. 

Additionally, the “refining loophole” legally enables oil products produced from Russian crude oil to enter countries imposing sanctions and Russia has also capitalised on derogations provided to countries in the EU that import cheap Russian crude and sell their refined products to the EU as well as to other regions globally.

A prime example of this is the Neftochim Burgas refinery in Bulgaria that is owned by Russian company Lukoil. A CREA investigation with partners Global Witness and the Center for the Study of Democracy found that since the implementation of the EU’s import ban on Russian crude oil, Burgas has imported Russian crude oil worth over EUR 1.1 bn in tax revenues to the Kremlin. 

Russia’s increased use of “shadow” tankers to transport its oil also reduces the impact of the price cap and raises the price at which they can export their oil, a further blow to the impact of the sanctions.

Key findings

• The EU ban on Russian oil and the G7 price cap has cost Russia an estimated EUR 34 bn in lost oil export revenue, lowering export earnings by 14% during the first year of the sanctions. The sanctions have worked mainly by lowering Russian oil prices compared to global prices. This discount accounts for EUR 32 bn in lost revenue, while a small reduction in export volumes accounts for EUR 2 bn.
• The price cap has had an impact but has failed to live up to its potential. The price difference on Russian oil and benchmark global oil has declined steadily since early 2023, showing that the effectiveness of the sanctions has fallen. Consequently, the impact of the sanctions largely took place in the first half of 2023, peaking at EUR 180 mn per day in the first quarter of 2023. 
• The declining effect of the sanctions is due to the failure of G7 and EU governments to enforce and strengthen the price cap. This failure has enabled Russia to sell its oil above the price cap level, while increasing export volumes to new willing buyers that are not imposing sanctions. Additionally, oil products refined from Russian crude are legally exported to price cap imposing countries. This “refining loophole” provides an outlet for Putin’s oil exports.
• The G7 and the EU retain a stranglehold on Russia’s oil exports but have baulked at using it. In October 2023, 48% of Russian oil shipments were carried on tankers owned or insured in G7 and EU countries. Given Russia’s ongoing reliance on European tankers and insurance, stronger enforcement and lower price-cap levels can multiply the impact of the sanctions. Measures to close the “refining loophole” and curtail the increase in “shadow” tanker capacity and activities can further enhance the impact.

Recommendations

The most important way to cut Russia’s export revenues further would be to drive down the oil price cap. A price cap of USD 30 per barrel (still well above Russia’s production cost that averages USD 15 per barrel) would have slashed Russia’s revenue by 49% (EUR 59 bn) since the sanctions were imposed until the end of October.

Penalties for sanctions violations could also impose a 90-day ban of vessels from securing maritime services.

Tanker sales by price cap coalition countries to owners registered outside of the oil price cap coalition should be banned to hinder the growth of Russia’s access to “shadow” tankers that are immune to compliance with the policy. Mandatory Protection & Indemnity (P&I) insurance from Western insurance companies should be required as a condition for passage through the Danish Straits, Gibraltar and other maritime choke points.

Price cap coalition countries must also improve monitoring and enforcement of the oil price cap and alter sanctions legislation to tie up loopholes that enable significant funds flowing back to the Kremlin war chest, making them much less effective. The oil price cap should be strengthened such that if a bank processes a payment as part of a transaction that exceeds the cap, it would be registered as a violation. 

Finally, sanction imposing countries should ban the importation of oil products produced from Russian crude oil.