The Plot to Further Disrupt Russian Oil Flows Proves That Sanctions Don’t Work

Ukrainian President Volodymyr Zelensky is set to attend a UK Cabinet meeting to discuss strategies aimed at further disrupting Russian oil sales as the ongoing Russia-Ukraine conflict continues to reverberate through global oil markets. While critics of Western sanctions against Russia have argued against their effectiveness, Zelensky's presence at such a high-level meeting speaks to Ukraine's push to weaken Russia's economic foundation, which is heavily reliant on its oil exports.

The timing of this initiative is curious. Russia, in response to Western sanctions, has recently decided to cut its crude oil exports to retain more barrels for domestic refiners as the nation's refineries come back online after maintenance and drone attack repairs. Russia's oil exports are now at the lowest level since January, and will likely stay that way through the warm months, resulting in a fewer barrels offered to Asia, who has been feeding on Russia's cheap crude since the sanctions began after Russia invaded Ukraine.

While Russia sends more of its crude to its own refineries, it appears that the West, led by the UK, is doubling down on its efforts to further strain the Russian economy by targeting its oil sales.

The Battle Over Energy Sanctions

The primary focus of these sanctions is to cut off the financial lifeline that Russia's oil exports provide, thereby diminishing its ability to fund the war effort in Ukraine. Energy sanctions have emerged as a powerful tool in this regard, but their effectiveness and impact are subject to intense debate.

Western nations, particularly the United States and the European Union, have been at the forefront of imposing sanctions on Russian energy exports. These measures were designed to reduce Russia's oil revenue, which accounts for a significant portion of its GDP and federal budget. However, the global nature of the oil market complicates these efforts. While Western nations have cut back on Russian oil imports, countries like China and India have stepped in to fill the gap, purchasing Russian crude at mouthwatering discounted prices.

This realignment has softened the wishful blow to Russia's economy, but it has also exposed the vulnerabilities and limitations of unilateral sanctions. The global oil market's interconnectedness means that sanctions can lead to unintended consequences, such as higher energy prices and supply shortages, affecting global oil prices and economies worldwide.

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Russia's Domestic Maneuvering

Russia's prioritization of its domestic refining is highlighted by its crude oil flows, which Rystad Energy sees limiting out at 2.7 million barrels per day in both July and August, before rebounding in September to 2.9 million bpd. This compares to 3.6-3.7 million bpd that Russia exported just a couple of months ago in April and May.

While this reduction in oil export revenue will put a strain Russia's budget, it will stabilize fuel prices at home, ensuring enough fuel both for civilian and military purposes.  

Global Energy Market Implications

The ramifications of this shift in oil flows are being felt across the global energy market-although perhaps more muted than Western-sanctioners had hoped for. The reduction in Russian oil exports has contributed to increased volatility in oil prices, affecting everything from gasoline prices at the pump to the cost of petrochemical products. For the oil and gas industry, these developments underscore the importance of flexibility and adaptability in an increasingly unpredictable market.

Another ramification of this shift in oil flows is reduced revenue for Russia from oil sales. But perhaps not nearly as much as the sanctions had promised.

Before the war, Russia was raking in about $1.1 billion per day from energy exports. Last month, Russia's energy revenues capped out at $720 million-a reduction indeed, but a far cry from the hope of depleting Russia's war chest, which is replenished largely through oil money.

What is working when it comes to the sanctions and price caps is Russia's nat gas exports via pipelines to Europe, which has shrunk to all but nothing. But its crude oil and refined products exports are alive and well-and the higher crude oil prices are working against the sanctions, offsetting Russia's reduction in exports.

Russia may have a price cap of $60 placed on its crude oil exports, but the price of oil is high enough now that countries like China and India, who don't use Western insurers anyway and are therefore mostly immune to the cap, are paying more than this $60, lining Putin's pockets as he stays in Ukraine. The shadow fleet of tankers available to move Russia's oil to and fro irrespective of price caps is alive and well. It simply cannot be 100% enforced, as many critics had suggested from the outset.

In the end, nearly everyone is happy aside from Ukraine. Western powers get the luxury of boasting that they are tough on Russia, and on paper they are correct: tanker by tanker they are sanctioning some who are involved in transporting Russian crude. Putin gets to claim that the West was unable to strip him of oil revenues and he's mostly correct. Major traders get the benefit of heightened oil volatility as a result of the war and sanctions, on which they are reaping fat profits, and China and India are still getting oil on the cheap. Even the critics who argued that the sanctions would be ineffective have Russia's revenues to point to, to say that they told you so. Investments in alternative energy sources and technologies are also gaining traction, reinvigorated by the specter of oil-related doom as a result of the Russia-Ukraine war. Only Ukraine is unhappy.

The truth is, that Russia's oil revenues are still funding the war, and sanctions and price capping mechanisms have failed to deprive Russia of its revenues. Zelensky's plans to meet with the powers that be to find alternative solutions are a validation of that very truth.

By Julianne Geiger for Oilprice.com

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