Russian Crude Oil Continuous Financing War in Ukraine

Ongoing Financing of the War in Ukraine Through Russian Crude Oil

There is much talk in Europe about Russia’s ability to wage a prolonged war in Ukraine. In this context, it is worth considering to what extent Western sanctions are proving to be effective in limiting the Kremlin’s financial resources allocated to military efforts. Selling crude oil plays a central part in financing the war in Ukraine. Russia’s oil exports are typically worth more than twice as much as its gas exports. Based on the collected data, it appears that regardless of multiple rounds of sanctions, the Kremlin has and will have sufficient resources to continue the war, at least in the near future.

Russia not only retained financial gains but also increased money from energy export and has brought in more cash collected in the shadows of the oil trade. For all of 2022, Russia managed to increase its oil output by 2% and boost oil export earnings by 20 % to nearly €200 billion, according to estimates from the International Energy Agency, a group representing the world’s main energy consumers.

To date, the restrictions have also not had a major impact on Russian crude oil production volumes. Russian crude oil is still being shipped onto global markets and is finding its way to Europe’s market through the “back door”. Since the introduction of sanctions, Russian crude oil has been rerouted to China, India and predominantly Turkey exploiting its access to oil ports on three different seas, extensive pipelines, a large fleet of tankers and a sizable domestic capital market that is shielded from Western sanctions. Because of these measures, the current export volumes remain steady (negligible drop in total crude oil exports by 3% in March 2023 compared to the pre-sanction volumes).

Russia has also been able to offset the reduction in imports by the European Union (EU) member states by further increasing exports to Africa and other undisclosed destinations. These undisclosed destinations suggest the possibility that Russian oil is still being sold to the EU and Western nations via so-called “middlemen”.

An Attempt to Cut Off Russia’s Revenue From Fossil Fuels

On the 5th of December 2022, the EU banned the seaborne imports of crude oil from Russia, followed by the embargo on refined oil products as of 5 February 2023. In tandem with the EU embargoes, the G7, and other partner countries (like Australia) have also prohibited the provision of maritime services for Russian crude oil shipments and oil products, unless the oil is purchased at or below a capped price. The oil price cap for Russian crude oil was set at $60 per barrel, which is currently above the market selling price for most Russian crude oil exports. Two price cap levels were imposed on refined products: one at $100 per barrel for petroleum products traded at a premium to crude oil, such as diesel, kerosene, and gasoline; and one at $45 per barrel for petroleum products traded at a discount to crude oil, such as fuel oil and naphtha.

The countries also barred support services for Russian crude oil shipments above the price cap including trading and commodities brokering, financing, shipping, insurance as well as protection and indemnity, flagging, and customs brokering. The cap aimed to let countries like India and China purchase Russian crude oil but stop Moscow from making significant profits from it. The idea was to avoid oil shortages on global markets that could force prices up.

At the urging of EU states (especially Poland and Estonia), it was also agreed to review the price cap every two months. Policymakers aimed to set the cap at least 5% below the average market price for Russian oil and petroleum products, calculated on data provided by the International Energy Agency. Each subsequent change to the price cap introduces an adjustment period of 90 days.

The price cap is applied to tankers owned or insured in the EU, the UK, other G7 countries and Australia. To circumvent the price cap, Russian exporters were forced to tap a significant volume of additional tanker capacity not covered by the policy. In theory, this by far was the biggest attempt to date to cut off the fossil fuel export revenue that is funding Russia’s invasion of Ukraine.

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