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The West wants to cut off Russia’s oil revenues. Who will that hurt?

The United States and its allies plan to embargo Russian crude oil shipments — and impose a price cap on Russian oil. That might backfire.

Oil pumping jacks in an oil field near Neftekamsk, in the Republic of Bashkortostan, Russia, on Nov. 19, 2020. (Andrey Rudakov/Bloomberg)
6 min

To date, the United States and its allies haven’t managed to dent Russia’s oil revenue, Russia’s major source of war finance. Oil exports contribute about $20 billion a month to Putin’s war chest. The United States stopped importing Russian crude, but Europe remains the largest buyer of Russian oil, and India and China have mostly made up for the drop in European demand.

The United States and its allies announced a new strategy last month to disrupt Russia’s oil profits. They plan to embargo Russian seaborne crude and impose a price cap on Russian oil shipments. This is supposed to increase Russia’s shipping costs and force the Kremlin to lower the price of its oil. The plan, however, will only work if the West can control Russian crude oil shipping. If it can’t, then oil prices will go up, hurting Western economies while boosting Putin’s war chest.

Can the West achieve its goals? My research suggests that the United States and its allies will struggle to control Russia’s oil exports.

The West wants to embargo Russian oil

The West’s key challenge is that the global economy relies on Russian crude. Russia is the world’s third-largest oil producer, and banning Russian oil would have catastrophic consequences for the global economy. With inflation and energy costs at all-time highs, Western leaders have reasons to ensure Russian oil continues to flow — even though this helps Putin pay for his war in Ukraine.

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Ensuring Russian oil flows but reducing Putin’s oil income is what lies behind the new policy. The European Union decided in May to stop importing Russian seaborne crude after Dec. 5 and Russian petroleum products after Feb. 5, 2023. Russia will have to reroute more than a quarter of its crude exports — an estimated 1.3 million barrels per day — and up to 1 million barrels of its petroleum products.

Most of Russia’s oil will be diverted to India and China, but doing so will escalate Russia’s shipping costs significantly. It takes seven days on average for Russian crude to reach European markets — and 21 days to reach Asian markets. Russia will also need 70 additional smaller Aframax tankers to load oil in its major crude ports, which cannot be serviced by large tankers.

Europe will also find itself importing more oil over longer distances across the Atlantic and via West Africa and the Persian Gulf. The rerouting of global oil flows will have a tightening effect on tanker markets and add to upward pressures on oil prices, weakening the global economy and risking more cash going to the Kremlin.

The West also wants to impose a price cap

The price cap on Russian oil, which the Group of Seven nations and the E.U. adopted on Sept. 2, is designed to mitigate this risk. Starting Dec. 5, Russia can no longer sell its oil to third parties above a certain price, which is yet to be determined. The price cap will limit the Kremlin’s oil income but encourage Russian crude exports to ensure lower oil prices and offset the rise in global crude shipping costs due to the E.U. embargo of seaborne Russian oil imports.

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Critics of the U.S.-led initiative argue that Russia will not sell its oil to countries that impose a cap — and point out that India, China, Turkey and other countries will continue to buy cheap Russian oil above the price. Russian crude trades at a $30 discount per barrel as a result of the West’s existing sanctions.

Yet Russia relies on shipping to export most of its oil. Oil tankers require insurance, and E.U. and G-7 companies dominate marine insurance markets. The London-based International Group of Protection and Indemnity Clubs, for example, covers 90 percent of third-party liability risks, such as oils spills, that can cost shipowners billions of dollars. Under the G-7’s plan, shipowners will have to adopt the price cap to get insurance coverage for their vessels from one of the group’s members. The idea is that this requirement will increase the Kremlin’s shipping costs and force Russia to lower oil prices, even if it sells crude to countries that don’t participate in the West’s initiative.

Can Russia evade these sanctions?

Russia is exploiting tactics used by Iran and Venezuela to evade the West’s shipping sanctions to enforce the price cap. Iran and Venezuela rely on a fleet of about 220 elderly tankers owned by anonymous shell companies. These vessels use laundered identification numbers, regularly change names and national flags, and turn off vessel-tracking systems to conceal their activities.

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Russia is a much bigger oil producer than Iran and Venezuela. It exports nearly 4 million barrels per day, while Iran and Venezuela combined export only 1.7 million barrels. Russia needs a much larger tanker fleet that can operate beyond the reach of Western shipping sanctions. Can Russia build this capacity? It’s possible.

Russia’s state-owned Sovocomflot already owns dozens of tankers that can carry Russian crude. Local insurance providers such as Ingosstrakh and the government-controlled Russian National Reinsurance Company have started to provide insurance coverage for Russian oil shipments. Russia can also count on Indian and Chinese companies for vital shipping services. For example, the Indian Register of Shipping has issued safety certificates for Russian tankers, and Chinese-owned vessels are already carrying Russian crude.

The West’s sanctions are also limited and difficult to enforce. Underwriters typically don’t know the trading price of the cargo they are insuring, and law enforcement authorities may have difficulty obtaining reliable information from countries who aren’t willing to adopt the price cap. U.S. officials have also ruled out using secondary sanctions — that is, sanctions on non-U.S. companies that might help Russia — to enforce the price cap universally. That could allow non-U.S. companies to help Russia avoid Western sanctions.

The West’s strategy seems likely to backfire if Washington, Brussels and London cannot enforce the price cap and control Russia’s oil shipments. The strategy will then lead to higher oil prices that undermine the global economy — and boost the Kremlin’s ability to finance Russia’s war in Ukraine.

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Jan Stockbruegger (@stockbruegger) is a postdoctoral research fellow at the University of Copenhagen’s political science department.