Russian President Vladimir Putin Meets With Cabinet on Oil Development, May 17, 2022. Image courtesy Kremlin.
How Russia Circumvents the American Oil Sanctions Regime
On March 7, the European Union proposed new sanctions against the Russian government following the death of Russian dissident Alexi Navalny. These sanctions follow President Joe Biden’s announcement sanctions against Russian oil. The new Russian oil sanctions target more than 500 entities, including two of Russia’s largest companies by revenue, SUEK and Mechel, which are connected to Russia’s military-industrial complex. Although intended to curtail Russian aggression, Russia has utilized several mechanisms to decrease the bite of sanctions against it, including shifting its trade dependencies, employing “ghost ships,” and falsifying contracts with Group of Seven (G7) countries to evade these sanctions.
The Current Russian Sanctions Regime
Following Russia’s invasion of Ukraine in February 2022, the United States launched an extensive sanctions regime against the Russian government. Initial repercussions included a ban on Russian gold imports and sanctions on members of the Duma legislature who sponsored legislation to recognize the so-called “Donetsk People’s Republic” and “Luhansk People’s Republic.”
In December 2022, the U.S., other members of the G7 and Australia imposed a $60-a-barrel cap on Russia’s seaborne exports of crude oil. In collaboration with European Union (EU) policymakers, the Biden administration jointly devised the cap to keep the international oil market well-supplied and reduce streams of revenue fueling Russia’s war machine. Instead of complying with this cap, Russia has largely shifted its oil trade dependencies to neighboring Asian allies to evade economic consequences.
Mechanism #1: Shifting Trade Dependencies
Although this cap relied on the assumption that Russia’s dependence on EU shipping would force compliance, Russia shifted its trade dependencies. As Russia reduced its oil exports to EU members, India and Turkey have emerged as a primary outlet for Russian crude oil, with India purchasing approximately two million barrels per day as of May 2023. Four months after the start of the Russian-Ukrainian War, Russia and China’s “no-limits” partnership enabled Russia to surpass Saudi Arabia to become China’s largest supplier of petroleum, exporting 8.4 million metric tons of crude to China per day.
Furthermore, private European companies still trade with Russian companies. The Carnegie Endowment’s Fueling the War dataset conveys that most of the voyages from Russia to Italy went to the ISAB refinery on Sicily, which was recently sold by the Russian oil company, Lukoil. Romania and Bulgaria further receive high quantities of Russian crude oil, thereby maintaining Russian economic ties in Europe.
Mechanism #2: “Ghost Ships”
Russia also uses “ghost ships” to evade oil sanctions. Ghost ships are commercial maritime vessels that lack proper insurance, have opaque ownership status, or “flag hop” between different national registries. When kleptocratic shipping companies violate sanctions, they often fragment and reconsolidate into smaller subsidiaries that continue facilitating Russian oil trade. The U.S. and its allies sanctioned Russian shipping like FESCO and Sovcomflot, but many subsidiary companies like Sun Ship Management Ltd. of Dubai deployed them to trade Russian oil. Ghost ships, as part of larger “shadow fleets,” also trade Russian oil with Iran and Venezuela, thus strengthening the geopolitical alliance between the countries to counter American regional influence.
The complicated web of ownership and the lack of a clear definition for what qualifies as a ghost ship has resulted in 864 new maritime companies being linked to Russia through obscure means, allowing the Kremlin to realign its macroeconomic strategy. A February 2023 New York Times investigation found that one ship from such a company, the Cathay Phoenix, engaged in “spoofing,” or sending fake location signals, to thwart regulators’ attempts to determine the ship’s location. The ship spoofed that its location was in the Sea of Japan, but the ship was found to be loading oil at the Russian port of Kozmino, part of a journey to China that likely breached U.S. sanctions.
Mechanism #3: Falsification of Contracts
To transport its oil, Russia needs to rely on G7-owned tankers and insurance as these countries control most of the market. Tankers belonging to G7 countries must verify that they are selling oil at or under the $60 cap.
However, as outlined by Daniel Spiro, Russia can fake the documentation of the contract to circumvent the cap. Russian companies present a contract with false prices and then agree with the buyer on the actual price, which may be well above the cap. A shipment can resell multiple times during transit, which makes it harder to check the whole transaction and original selling price. The Kyiv School of Economics is already working to aggregate and systematize Russian crude oil trade data to gain a bigger picture of the effects of these deals.
Conclusion
The overall impact of fraudulent activity remains difficult to quantify, but a growing body of research is finding that Russia is undermining American oil sanctions through nuanced networks of subsidiaries, unregulated fleets, and falsified contracts. As Russia continues its invasion of Ukraine, American policymakers must consider Russia’s networks to develop stronger Russian oil sanctions to hit Russia’s war machine where it hurts.
