While Russia deals with increasing losses on the battlefield, gradually increasing sanctions have created their own pressure since the invasion of Ukraine began on February 24 of this year. Led by the United States and European Union, sanctions on Russia’s massive energy sector have forced the Russian economy to replace losses from the European market with both legal and illicit energy sales.
In the US, President Joe Biden issued an executive order prohibiting the import of Russian petroleum products, liquid natural gas (LNG), and coal products as of March 8, 2022. The European Union, a far larger market for Russian energy, will cease importing most Russian crude oil in December, and will stop importing refined Russian petroleum products two months later.
Overall, crude oil exports via cargo vessel trended downward in May, June, and July, with China, India, and Italy the top destinations for Russian crude oil, according to data from vessel trade analysis firm KPLER. During the first half of September, seaborne shipments of Russian crude oil continued to fall, by 314,000 barrels per day from the previous month, putting exports via ship at the lowest levels since the start of the war, according to S&P Global Insights.
However, petroleum isn’t the only energy source Russia produces, and the US and EU aren’t the only markets for those products. Petroleum shipments are still relatively stable for Russia, as nations like China and India have picked up some slack from EU countries weaning themselves off oil, and Russia still has LNG, coal, and nuclear energy to help the economy float, too.
In order to make petroleum products more appealing to customers like India and Indonesia, Russia has offered fairly steep discounts — an average of $30 per barrel — against Brent crude oil, which has also been a benefit for Sri Lanka, Pakistan, Bangladesh, and Cuba, all emerging economies struggling with inflation, as Business Insider reported. Although according to S&P the discounts on Russian crude oil are decreasing, some analysts believe they’ll persist, making Russian crude oil imports highly palatable for poorer countries.
“The first two Russian shipments arrived [to Sri Lanka] from Primorsk and Novorossiysk, ports located in the Baltic Sea and Black Sea, respectively,” Thanh-Long Huynh, chief executive of the data analytics firm QuantCube, told the Financial Times. “Since these ports historically served European ports, they indicate the development of new trade routes for Russian energy.”
Countries like China, India, and Turkey are proving eager partners for the Russian fuel industry, with Turkey doubling Russian oil imports this year and vying to become a hub for Russian LNG transfers into Europe after damage to the Nord Stream pipelines.
Between April and July, China — the world’s top energy consumer and biggest customer for crude oil — had purchased 17 percent more Russian crude oil than it had during the same period in 2021, according to Reuters. And despite major discounts, the price of oil is still much higher than it was in 2020, pre-coronavirus, allowing Russia to bring in more money from oil exports even though production is down, according to research by Frank Umbach for the Liechtenstein-based think tank Geopolitical Intelligence Services.
The Russian energy market is bigger than just oil
EU countries have struggled to disentangle themselves from Russian fuel overall, not just oil. Russian natural gas, pumped through avenues like the Nord Stream 1 pipeline which was damaged in September, provided about 40 percent of Europe’s natural gas prior to the invasion, according to Reuters. But even as Europe tries to turn away from Russian gas flows, investing in Norwegian fuel instead, Russian LNG is finding its way into European markets via cargo vessel, as Javier Blas wrote in Bloomberg earlier this week.
Even with the Nord Stream 1 pipeline out of commission — and setting aside the transfers to China, now Russia’s biggest natural gas buyer — European countries are importing record amounts of Russian LNG at market prices, according to Bloomberg. France has purchased about 6 percent more Russian LNG between January and September of this year than it did all of last year; Spain has already broken its record for Russian LNG imports this year, and Belgium is on track to do the same.
The stakes for natural gas imports are somewhat different than they are for Russian petroleum, in a number of different ways; for one, the EU hasn’t imposed sanctions against it as it has against petroleum products, though the bloc does intend to eliminate its reliance on Russian fossil fuels by 2027. Second, Russia has already used Europe‘s reliance on its natural gas as a weapon; Russia cut access to many European countries which refused to pay for LNG in rubles, and cut total output to Europe by 60 percent in June and by 80 percent in July, Reuters reported last month.
Asian markets, too, are in on the game; by July of this year, China’s Russian energy imports overall had grown 7 percent over 2019, according to Chinese customs data analyzed by Reuters. Between April and July, China purchased 50 percent more LNG and 6 percent more coal from Russia than it had during the same period in 2021, lured at least in part by lower prices. That mutual benefit appears set to continue; in a deal negotiated in February, China will get a new natural gas pipeline from Russia.
India, also, has become a major buyer of Russian energy, particularly oil, though in prior years it rarely imported Russian crude. Low Russian crude oil prices drove Indian purchases to a peak of 950,000 barrels per day in June, but price increases have since pushed that number down to about 477,000 barrels per day in September. India also picked up slack for Russia’s coal exports after an EU ban on Russian coal took effect on August 10. That ban halted all coal shipments to the bloc after a four-month tapering period, and also prevents EU-based insurers and financial firms from working with Russian coal exports, as Bloomberg reported at the time. That makes exporting Russian coal extremely difficult, since most financial institutions and insurance companies involved in global shipping are based in the EU, the UK, and Switzerland.
Though Russia is one of the world’s major coal exporters, with about 17 percent of the market share, coal exports account for only about one percent of Russia’s economy. Even though customers like India and China are importing large amounts at high prices, coal exports simply can’t make a significant dent in Russia’s economy.
Overall, Russia’s earned about 158 billion euros from fossil fuel sales from February to September, according to a report from the Center for Research on Energy and Clean Air; half of that, about 85 billion euros, came from EU purchases. By the end of September, that amount had surpassed 100 billion euros — about 260 million euros per day — although CREA saw Russian exports dropping in September and Russia’s revenue from fossil fuel exports decreasing by about 14 percent. Globally, Russian revenues from fossil fuels were down 300 million euros per day in September compared to February and March of this year, according to CREA.
While fossil fuels get more attention, Russia is also a market leader on nuclear energy. Russian nuclear technology, as well as fuel, has thus far escaped significant bans from the EU, as CNBC reported Friday, despite calls from Ukraine to impose such restrictions. Russia continues to invest heavily in its nuclear technology, and nuclear facilities in many nations are dependent on Russian technology and cooperation to function, even if they’re not directly importing Russian nuclear fuel, according to a report by Robert Ichord for the Atlantic Council.
Russia has developed and borrowed methods of sanctions evasion
Not all of Russia’s energy exports are easily discernible; Russia has several illicit strategies to evade western sanctions on its energy products and financial system. Because these transactions are, by their nature, often difficult to track, it’s hard to know how effective and how widespread they are — not to mention how much the Russian economy is benefiting from them.
“As a general matter, I think that the most widespread sanctions evasion technique is for sanctioned Russian businesses to hide behind front companies that are not sanctioned and/or to conduct transactions through third party countries that do not present sanctions issues,” Thomas Firestone, co-chair of the white collar and internal investigations practice group at Stroock & Stroock & Lavan, told Vox via email. That can cause problems for companies doing business with such firms, causing them to perhaps unwittingly do business with sanctioned entities.
Russia has plenty of models on which to base illicit shipping transactions; according to a July article in the journal Strategic Comment, Iran developed methods like “multiple ship-to-ship transfers, temporarily disabling vessel-tracking transponders and using obscure sailing patterns” to hide shipments of its oil. Ships also have “complex ownership structures” to hide who controls them, or often sail under flags of countries with lax adherence to the rule of law, to obscure their origin with a lower chance of pushback. Some Russian tankers are reportedly shipping under the flags of St. Kitts and Nevis and the Marshall Islands.
According to Umbach’s research, “more Russian oil tankers ship without a reported destination,” with Russian state-owned shipping firm Sovcomflot declining to supply end-point information for one-third of its fleet in April, according to Strategic Comment. According to the Wall Street Journal, some 11.1 million barrels of oil were shipped that way in April, up from almost zero prior to the invasion. Without a set destination, the oil can undergo a ship-to-ship transfer to obscure its origins.
Another tactic sanctioned countries — now, including Russia — have used to obscure the origins of their petroleum products is to blend it with oil from other countries, “passing it off as Latvian or other foreign blends” like Lithuanian or Turkmenistani, according to Umbach. Royal Dutch Shell transported oil under this scheme as of April, with the reasoning that the company was obligated to do so under previous contracts, and that because the blend contained only 49.99 percent Russian oil, the whole product was no longer of Russian origin. Shell later promised to cease accepting refined oil with any Russian petroleum, and said it would continue with a planned phase-out of all Russian crude products.
As Russia becomes further estranged from the global market, these methods will only become more pronounced and more common, as they have in other sanctioned states like Iran and Venezuela — making the fuel for Russia’s war machine and the revenue it generates even more difficult to track.