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The Complexities of Clamping Down on Russian Sanctions

Around a year after the U.S. and Europe introduced sanctions on Russian energy, following the Russian invasion of Ukraine early in 2022, some countries and actors are circumventing sanctions and continuing to buy Russian energy products. In recent months, Russia has appeared to shrug off the sanctions as it continues to sell energy to several major consumers, such as China and India, to keep its economy ticking over. But now, the EU is planning to introduce stricter measures that could hit Russia hard and make it more difficult to evade sanctions.

Despite the ongoing U.S. sanctions on Russian oil and gas, the country’s crude appears to be making its way to the U.S., with 500,000 barrels of fuel derived from Russian crude found in New Harbor in October. The Stop Russian Oil Campaign at Global Witness, an international NGO that tracks shipments of fuel produced using Russian crude, exposed the situation. From January to September this year, the NGO found that around 30 million barrels of fuel were imported from refineries using Russian crude. This fuel was imported by BP, Sunoco, and Shell, among others, and made its way to at least seven different U.S. states.

Siberia, which holds most of Russia’s crude reserves, produces around 9.6 million bpd of oil. It continues to sell this energy to several countries outside of Europe and the U.S., including China, the UAE, Turkey, and India. Much of this oil is refined in India, and blended with other foreign oil to produce gasoline, diesel, and other products, before making its way back onto the market. These products can be legally bought by companies that are upholding sanctions on Russian energy, demonstrating the existence of a major loophole in the existing sanctions.

The amount of oil being processed at India’s Jamnagar refinery has increased significantly since the beginning of the war on Ukraine, as Russia reduced its crude prices to encourage alternative buyers to make big purchases. Despite India and the U.S. announcing they were strengthening ties earlier in the year, following the G20 summit held in Delhi, Prime Minister Modi made it clear that India plans to continue benefitting from Russia’s discounted crude. In 2022, India’s imports of Russian crude increased tenfold, a trend that has continued this year.

K.C. Ramesh, the Executive Director of India’s Oil and Natural Gas Corporation (ONGC), explained, “By importing from Russia, India also has helped the global economy in the sense that [we] freed up some oil on the Gulf for other countries to source, particularly Europe. So, it was kind of a win-win situation.” He added, ?[It has] a very huge impact on our economy, in terms of helping the [Indian] economy grow … the price being very reasonable that we get from Russia.”

This month, the U.S. Department of the Treasury’s Office of Foreign Assets Control exposed three vessels and shipping companies that imported Russian oil despite sanctions, resulting in penalties. The Treasury has since launched an investigation of around 30 ship management companies, covering 100 vessels, that are suspected of violating the price cap on Russian oil. The Deputy Secretary of the Treasury, Wally Adeyemo, stated, “Shipping companies and vessels participating in the Russian oil trade while using Price Cap Coalition service providers should fully understand that we will hold them accountable for compliance.” Adeyemo added, “We are committed to maintaining market stability in spite of Russia’s war against Ukraine while cutting into the profits the Kremlin is using to fund its illegal war and remaining unyielding in our pursuit of those facilitating evasion of the price cap.”

This revelation has shown the complexities of the sanctions on Russian energy and the difficulties in tracking shipments. Around 30 percent of Russian exports are thought to still be using commercial shipping. Dark fleets of ships that are 20 years old or more, many of which have been used to transport Venezuelan and Iranian crude, are being more widely used. Some of these vessels have been turning off their automatic identification system to avoid detection. The lead analyst of freight at marine intelligence firm Kpler, Matthew Wright, explained, “Most vessels have been sold by owners based in Europe to owners who were not previously active in the tanker market… The owners are based mainly in Hong Kong, China, India, and the UAE.”

As Russia’s conflict with Ukraine continues, the European Commission announced this month that it is considering the introduction of a 12th round of sanctions on Moscow. Included in the sanctions could be new prohibitions on the sale of second-hand tankers, aimed at stopping buyers who are attempting to evade sanctions by concealing the origin or destination of cargo.

As several countries boost their imports of discounted Russian crude to process it and mask it in other products, it is getting harder to track on the international market. This challenge is exacerbated by companies continuing to purchase these products and the shipping companies that make it possible for them to do so. However, a crackdown on the sale of second-hand tankers could help close the loophole, making it more difficult to circumvent the sanctions.

By Felicity Bradstock for Oilprice.com