Russia’s Oil Keeps Flowing Despite Sanctions. That’s Exactly How the U.S. Wants It.
Two-and-a-half years after Vladimir Putin invaded Ukraine, provoking successive waves of Western economic sanctions, Russia is pumping about as much oil as ever. That’s the way Washington and other Western governments want it.
Russian production has dipped 8% from the prewar month of January 2022, to about 9.8 million barrels a day, but mostly thanks to compliance with OPEC+ cuts.
“From the beginning, the West tried to maximize sanctions without affecting Russia’s core industry, oil.” Says Eddie Fishman, a former U.S. sanctions official now at Columbia University’s Center on Global Energy Policy.
Avoiding an energy shock when inflation was already rocketing to 40-year highs took precedence over a strike at Russia’s economic jugular. That’s a comforting thought as crude prices head north again on Israel’s confrontation with Iran. It’s not so comforting for those hoping that Putin will make peace in Ukraine.
Sanctions did aim to cut Moscow’s earnings from oil sales. They have, some. The European Union stopped buying Russian oil in the winter of 2022-23. Exports rerouted elsewhere were supposed to be subject to a $60-a-barrel price cap. The EU and U.K. would enforce that by denying tanker insurance, which they dominate, to noncompliant shippers.
Moscow countered by assembling a “shadow fleet” of 300-some secondhand tankers, says Craig Kennedy, an associate at Harvard’s Davis Center for Russian and Eurasian Studies. It tacked on “mystery insurance that was good enough for India or China,” which stepped in as buyers.
The Biden administration started sanctioning individual shadow tankers last autumn, then stopped this February as Houthi militias in Yemen continued to threaten Red Sea shipping, Kennedy notes—another apparent concession to U.S. pump prices.
The expense and bother of shadow fleet shipments to Asia are still costing Russian exporters $5 to $10 a barrel compared with their former European sales, says Ronald Smith, senior oil and gas analyst at BCS Global Markets.
Roughnecks in West Siberia have adjusted well to any shortages of sanctioned Western equipment, and the forced exit of service companies like Halliburton and Baker Hughes, says Hunter Kornfeind, an oil market analyst at Rapidan Energy Group. “The domestic industry has continued to perform,” he says.
The worst economic blow to Russia was self-inflicted when Putin cut most gas exports to Europe in hopes of breaking its resolve to support Ukraine. That’s costing the Kremlin up to $20 billion a year, Smith figures, more than 1% of gross domestic product.
The Free World has stymied the Kremlin’s ambitions to replace pipeline exports with liquefied natural gas, forcing French oil major TotalEnergies out of an LNG partnership in the Arctic, and withholding ice-breaking tankers that are only built in South Korea. Exxon Mobil pulled out of a joint venture to extract oil from Russia’s Arctic, leaving longer term supplies in question as West Siberian fields dwindle. “Russia’s status as an energy superpower has fundamentally altered on a five-to-20-year horizon,” Fishman says.
For now, though, a trade surplus of $86 billion last year enables Putin to absorb his gas losses and meet skyrocketing military expenses. The next U.S. president, particularly if it is Kamala Harris, could have a freer hand to go after Russia’s shadow fleet and tighten other “secondary sanctions” without immediately worrying about losing an election over domestic gasoline prices. But markets aren’t betting on it.
“Either candidate will gradually push the envelope on Russia sanctions,” Rapidan’s Kornfeind predicts. “But not enough to raise prices.”