Russian Oil Sanctions Demand Persistence

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The potent new U.S. sanctions announced last week against Russian oil interests will likely succeed in the short term by curbing Moscow’s oil export volumes and revenues. To avoid running afoul of the U.S. Department of Treasury, Indian and Chinese buyers will sharply curtail their purchases of Russian crude oil and scramble to secure cargoes from alternative suppliers. But fraudulent schemes to evade the sanctions, making use of physical oil market tools and deceptive trade practices, will eventually mitigate much of the initial impact.
This note describes anticipated market reactions to the new sanctions, including mechanisms that will be used to undermine them. Policymakers will need to wage a medium-term campaign targeting newly emerging entities and technologies to retain the upper hand and keep the squeeze on Kremlin export revenues.
Market Reaction 1: Higher prices for competing crude streams. The sanctioning of 183 oil tanker vessels is the most potent element of the package announced last week. These “shadow fleet” ships that had delivered noncompliant (sold at prices above the $60 price cap) oil cargoes to Indian and Chinese companies will be immediately removed from the trade, as they are no longer permitted in those countries. The greatest beneficiaries will be Middle Eastern crude exporters; prices of their crude grades are already rallying in anticipation of greater buying interest. Alternative crudes from other producers, including those in the Americas and Africa, also stand to gain at Russia’s expense.
Market Reaction 2: Sharp discounts for Russian oil. With the shadow delivery fleet largely shut down, the price for distressed Russian oil grades will drop. But the entire 3.5 million barrels per day of seaborne Russian crude oil exports is not banned by the new measures. According to energy analytics firm Vortexa, approximately 1.5 million barrels per day, or 44 percent of the total in 2024, were carried by the 183 newly sanctioned ships. A second element of last week’s new blocking sanctions on Russian oil-producing companies Gazpromneft and Surgutneftegas—will take even more oil off the market, no matter which ships are transporting them.
This still probably leaves more than 1 million barrels per day of Russian crude produced by other oil companies and transported by other ships that will remain on the market. However, these remaining Russian exports cannot exceed the price cap’s $60 ceiling if transported by Western-insured carriers—causing a hit to Putin’s oil export revenues.
Market Reaction 3: Circumventing sanctions with shady practices. Despite sanctions effectively banning 44 percent of Russian crude supply, loadings may not decline in the coming weeks. Many or most of the sanctioned tankers—along with others—will be reassigned from transport duties to serve as floating storage—the practice of storing oil cargoes aboard ships at sea. This will buy time for various fraudulent oil laundering practices to be arranged, including:
- New Russian shell companies: These will be set up within the opaque, ruble-transacted market to purchase distressed cargoes from sanctioned oil producers Gazpromneft and Surgutneftegas. The shell companies will likely issue certificates attesting to the oil’s physical properties but not its original supplier. This provides a contractual “cutout” between the sanctioned entities and subsequent buyers.
- Ship-to-ship (STS) cargo transfers: Transferring oil cargoes between two ships at sea connected by hoses is routine and in use worldwide for legitimate operations, but its ulterior use case to evade sanctions against Russia and Iran is well documented. There may be a ramp-up in this practice, in this case passing off a contraband cargo from a sanctioned ship to an unsanctioned one, to further obfuscate its true origin.
- Cargo discharge and reload: For yet another layer of obfuscation, a ship receiving contraband cargo may discharge into an onshore storage tank at an oil storage facility. Crude oil from multiple origins is routinely commingled in storage tanks that are segregated only by general chemical and physical oil properties. While cargo-tracking software has gotten increasingly sophisticated in flagging STS transfers—even during (deliberate) interruptions to ship tracking signals—there is no deployed technology solution for differentiating oil molecules comingled in onshore storage tanks. Neither terminal operators nor ships that load cargoes from them could, even with the best of intentions, discern their true origin.
U.S. policymakers should anticipate these foreseeable market reactions and prepare for a game of cat and mouse to maintain pressure on Moscow. This medium-term campaign must target an evolving list of Russian and offshore entities requiring sanctioning and continuously expand the list of banned shadow fleet ships as evidence of their malign involvement develops. The campaign should also consider even more powerful sanctions against other Russian oil companies and their customers, and potentially lowering the price cap. An increasingly tougher approach is feasible given moderate oil prices and ample global spare production capacity.
Clayton Seigle is a senior fellow in the Energy Security and Climate Change Program and holds the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies in Washington, D.C.
