Keypoints

1. The European Union has halted imports of Russian oil from the sea and banned imports of refined oil products in response to the Ukraine invasion.

2. Russia has shifted crude exports from Europe to other markets, particularly India, China and Turkey.

3. The International Energy Agency estimates that while Russia's crude oil exports in April 2023 increased by about 5 to 10 percent compared to March 2022, its oil revenues declined by 27 percent compared to a year earlier.

4. Countries that are prohibited from obtaining Russian oil products are increasingly obtaining oil through places such as India and Turkey, increasing imports of Russian crude for this purpose.

What are the sanctions against Russia?

In December 2022, the leaders of the G-7 and the European Union introduced a price cap program that domestic shipping and insurance services must adhere to when shipping Russian products, aimed at limiting Russia's revenues from oil exports by keeping oil prices at $60 per barrel. Achieving these goals will make it more difficult for Russia to finance its brutal war in Ukraine while reducing energy costs for consumers and businesses around the world.

The EU has imposed a maritime embargo on almost all Russian crude oil imports. As of February 5, 2023, imports of refined oil products are also included. As a result, the Russian oil trade is changing rapidly.

Russia's oil exports are rebounding

Despite a series of sanctions imposed by the West, Russian oil exports have rebounded to levels seen prior to its invasion of Ukraine.

In its monthly oil report, the International Energy Agency (IEA) said Moscow's crude oil and oil product exports rose in March to their highest level since April 2020, up 600,000 barrels per day, with nearly 80 percent of the crude going to China and India. The increase boosted Russia's oil export revenue to an estimated $12.7 billion last month.

Russian oil exports increased slightly by another 50,000 bpd in April to a post-invasion high of 8.3 million bpd, well above the average levels of 7.7 million bpd and 7.5 million bpd reached in 2022 and 2021, respectively.

The increase in shipments reflects Moscow's success in finding new buyers for its oil, as Europe blocked imports and also managed to find new vessels after its access to Western shipping was restricted. Overall, total refined oil exports have fallen by just 3% since sanctions were imposed compared to January 2023.

Since the West first threatened to impose sanctions on Russia last year, Moscow has been working with a growing number of little-known trading companies and tanker owners to develop new oil transportation systems.

Cheaper oil is driving the flow to Asia

Since President Vladimir Putin ordered troops into Ukraine last February, the West has imposed a series of sanctions on Moscow's energy exports. The most significant are a ban on Russian seaborne crude oil imports to the EU and a ban on refined petroleum products such as diesel fuel entering the EU.

The EU is discussing its 11th sanctions package against Russia since Russia's invasion of Ukraine last year. The EU has sanctioned 1,473 Russian individuals and 207 entities and frozen €21.5 billion in Russian assets.

However, the measures were designed to keep Russian oil flowing to countries outside the EU. The result has been one of the biggest changes in commodity flows, with Moscow moving millions of barrels of oil a day from Europe to Asia in the past 12 months. Russia, the world's second-largest crude exporter, has found willing buyers in China and India to replace its European customers.

Russia's total crude oil exports in April were 5.2 million bpd, the highest since May 2022, including 2.1 million bpd to China and 2 million bpd to India. Total exports of refined petroleum products were 3.0 million bpd.

Higher exports but lower revenues?

Nevertheless, the sanctions have significantly weakened Russia's coffers. The International Energy Agency says revenues are still down 43 percent from a year ago, as Russia is forced to sell its oil to a more limited customer base that can negotiate bigger discounts.

The government said the drop in energy revenues contributed to a $29 billion budget deficit in the first three months of the year. Its overall revenue plunged nearly 21 percent compared with the same period in 2022, partly because of falling global energy prices, Reuters reported.

Although the EU embargo and G7-led price caps on Russian oil and refined petroleum products exports were not implemented until December and February, Russia has had to accept significantly lower prices to maintain export volumes, and Russian oil has been trading below global benchmarks.

However, the International Energy Agency said the discount has begun to narrow as Russia has increased access to non-Western shipping that can operate outside the price cap. The IEA estimates that Moscow earned $15 billion in oil exports in April, up from $13.3 billion in March.

The Facts Behind the Scenes: The Reason Sanctions Are "Not in Effect"

In the oil products sector, any export diversion will be a challenge after the EU embargo, which takes effect on February 5, 2023. Countries that currently dominate Russian crude exports, such as China, India and Turkey, play a much smaller role in oil products, as they all have their own well-developed refining industries.

In fact, countries that ban Russian petroleum products appear to be increasingly obtaining these commodities through places like India and Turkey, increasing imports of Russian crude for this purpose. This does not mean that sanctions can be circumvented, as this effectively deprives the Russian refining industry of profits.

The EU embargo on Russian oil has played a key role in driving significant discounts on Russian oil.

Going forward, it is critical that sanctions be imposed on Russian oil exports, including ensuring compliance with shipping, marine insurance and other service restrictions associated with price caps. This is particularly important because sales to non-sanctioned coalition countries now dominate Russian oil trade.

We further believe that the crude oil price cap should be reduced as soon as possible. While we understand the concerns about market stability and rising oil prices, the post-embargo period suggests that Russia is willing to accept lower prices for some of its cargoes and is unlikely to cut volumes as long as the price cap remains above the cost of production.

You might be interested: India's Imports of Russian Oil hit a Record High in May