The US has imposed a fresh round of sanctions on Russia’s energy sector in a bid to cut its oil revenue. The crucial question remains: Will these measures be effective
On January 10, 2024, the outgoing Biden administration of the United States of America (USA) made public its latest round of sanctions on Russia aimed at cutting the latter’s income from energy sales. These sanctions seek to target two large producers, as well as insurers, traders and more than 180 vessels carrying Russian oil. The US Office of Foreign Assets Control – the agency tasked with enforcement of the sanctions – has set a deadline of February 27, 2024, for the delivery of all crude cargoes that were loaded on sanctioned vessels before January 10, 2024. Besides, the European Union (EU) bloc countries are contemplating phase-out import of Russian Liquefied Natural Gas (LNG).
Will these sanctions work?
Before that, we need to ask whether sanctions worked in the past. In a bid to punish Russia for its military action against Ukraine, in June 2022, leaders of G7 viz., the United States, Germany, France, Britain, Italy, Canada and Japan had vowed to explore the feasibility of measures to bar imports of Russian oil at a price above a certain level. In September 2022, their finance ministers (FMs) said, “We confirm our joint political intention to finalize and implement a comprehensive prohibition of services, which enable maritime transportation of Russian-origin crude oil and petroleum products globally. Providing those services would only be allowed if the oil and petroleum products are purchased at or below a price (the price cap) determined by the broad coalition of countries adhering to and implementing the price cap.”
On December 5, 2022, they set the price ceiling at US$60 per barrel. It was meant to weaken Russia financially by undermining its ability to generate revenue from the export of petroleum products while ensuring that supplies to them (read: G7/EU) are not impacted. There was an inherent contradiction in this approach. Russia is the third-largest producer of crude oil with over 12 per cent share in global crude production and the second-largest exporter. In the case of natural gas (NG), it is the world’s second-largest producer with a share of 10 per cent. In world export, its contribution is even higher at 25 per cent. When it comes to EU countries, their dependence on Russia is even higher, drawing 40 per cent of their NG supplies and 25 per cent of crude from it. Some countries in the bloc viz. Germany, Netherlands, and Poland source a much higher percentage of their requirements from Russia.
Despite depending heavily on Russia for their energy needs, the G7 countries wanted those supplies should continue but they wouldn’t pay a price more than what they deemed fit. Curiously, that price would be determined by ‘how much revenue they would wish Russia to earn from those sales’ not by global demand–supply forces. One is reminded of the famous adage ‘if wishes were horses, beggars would ride’. As expected, things didn’t pan out as per their wish.
Even as the group members were busy forging a coalition and deliberating on ‘what should be the cap’, the imposition of sanctions led to disruption in supplies leading to a steep increase in the price of both crude oil and NG. The EU countries were forced to buy all their requirements at ‘elevated’ prices as during that period, the price cap wasn’t in force. This led to a huge increase in their import bill. According to the Centre for Research on Energy and Clean Air, Russia received about 158 billion euros in revenue for the sale of oil, NG and coal from February to August 2022, more than half of which – some 85 billion euros worth – was from the EU.
Russia’s revenue increased even as overall export volumes dropped by 18 per cent compared with the corresponding period before the invasion of Ukraine. Put simply, Russia earned more by selling fewer volumes. On December 5, 2 022, the G7 bloc announced a ceiling price of US$60 per barrel of crude. This achieved little in restricting Russia’s earnings. As it is, fixing the cap at US$60 per barrel is laughable considering that the cost of producing oil is substantially lower, in fact, a fraction of this number. Even if exports were made at this price (between December 2022 and June 2023, most of Russia’s crude was selling at less than this price implying no violation), it would still be generating a lot of surpluses to keep its war machinery well-oiled. Since, July 2023, the price has been above the cap, courtesy, of reduced availability of oil worldwide as a result of Saudi Arabia and Russia cutting production by one million barrels per day (mbd) and 0.3 Mbps respectively over and above the cut agreed to in the meeting of OPEC + in April 2023.
Russia has been able to benefit from this as well. For instance, according to S&P Global Platts, its key export grade crude sold at around US$75 per barrel enabling it to garner oil income of US$211 million a day during September 2023. The sanctions didn’t work. The G7 wanted to enforce it by requiring buyers of Russian petroleum to make “attestations” to providers of services including insurance, finance, brokering, and navigation to oil cargoes, saying ‘they bought at or below the cap’.
What if the buyer gives a fudged document mentioning a price less than the cap? Still, the G7 countries can’t take any action as per their agreement: ‘services’ providers can’t be held liable for false pricing information provided by buyers and sellers.
It is also possible to circumvent the cap by setting the price as oil leaves a Russian port, not what’s paid by a refinery in, say, India. While the former can stay well within the $60 per barrel level, transportation costs and margins of trading companies (albeit Russian-affiliated) in countries not participating in sanctions are inflated to yield the desired net back in Russian hands.
It is then no surprise that there are numerous instances of ‘loading Russian oil at all ports within Russia’ by vessels owned or insured by Western nations, with little sign of enforcement action initiated by the G7 authorities. Apart from this, there are umpteen parallel fleets and insurance companies – under non-Western ownership – that are being used for handling, shipping, and insuring Russian oil.
In case of NG, on December 19, 2022, the EU energy ministers had agreed to a price cap linked to the existing price of liquefied natural gas (LNG). Since, LNG prices are prone to fluctuations, the NG price cap would also fluctuate. It goes against the very idea of a ceiling price.
Besides, even this so called cap could be suspended if the EU faces a gas supply shortage, or if the cap causes a drop in trading volumes, a jump in gas use and so on. So, it was a non-starter.
Meanwhile, Russia has cut off most of its pipeline gas deliveries to EU forcing the latter to import record volumes of LNG from none other than Russia in 2024. In this backdrop, for EU to now proclaim that it will phase-out import of Russian LNG is plain rhetoric.
Thus far, the US/EU have roared like a toothless tiger. The latest sanctions announced by Biden don’t change its basic character. They need to get adjusted to the realities of global demand-supply for energy and not let military objectives to dictate terms.
(The writer is a policy analyst; views are personal)
https://www.dailypioneer.com/2025/columnists/us-sanctions–a-bold-move-or-another-futile-attempt.html