The impact of the war on Russia’s fossil fuel earnings
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Presented by Petras Katinas, Centre for Research on Energy and Clean Air during SITE 2023 Development Day conference.
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The impact of the war on Russia’s fossil fuel earnings
- 1. SITE 2023 Development Day conference | How to undermine the Russian war effort and support Ukraine Petras Katinas – 5th December 2023
- 2. Who are CREA & what do we do? ● CREA provide analysis, data & policy recommendations on fossil fuel revenues that enable Russia to wage the war. ● From January 2022 until July 31, 2023, the global bilateral commitment to Ukraine amounted to 237 billion euros, as reported by the Kiel Institute for the World Economy's sanction tracker. Payments to Russia for fossil fuels since 24 February 2022
- 3. The impact of the war on Russia’s fossil fuel earnings Russia is more dependent than ever on earnings from oil to fund the war it helps to decrease budget deficit. In 2022, Russia earned USD 166 bln from the taxes on oil & gas sales (40% of federal budget) - an enabler of their military aggression.
- 4. Where is Russia selling its fossil fuels since the EU bans? ● China & India are the largest buyers of R ● Russia’s crude oil. ● Turkey, China, Brazil & Saudi Arabia purchased the most oil products. ● LNG is purchased by EU, especially Belgium, Spain as well as China & Japan. ● EU, Turkey & China bought high values of pipeline gas ● Russian coal is bought by China, India, South Korea & Turkey. ● EU & Turkey were the largest LPG buyers.
- 5. Russian gas exports ● 44% drop in pipeline gas exports to the EU in 2022 damaged Russia’s gas sector. ● LNG increased 26% to EU - partially offsetting decline in pipeline gas. ● Russia more reliant on EU gas market - making up 47% of sale in 2023 from 37% in 2021. ● Russia’s plans to expand gas production requires EU reduced reliance - must prevent investing in RU LNG projects or building infrastructure. ● LNG shipments are reliant on EU ports for transshipment, storing & re-export LNG to non- EU countries. Banning transshipment could make logistics of LNG exports difficult, lowering profits & volumes.
- 6. Russia continues to rely on EU & G7 insurance / vessels to transport its oil: there are not enough “shadow tankers” ● Sixty-five percent of Russian crude oil was transported by “shadow” tankers, while tankers owned or insured in countries implementing the price cap accounted for 35%. ● “Shadow” tankers transporting oil products, chemicals, and LPG handled 38% of the total volume of products. The remaining volume was shipped by the tankers subject to the price cap policy. ● Russian oil Greek-owned vessels transported over 25% of Russian crude
- 7. The EU imports of refined oil from Russian crude ● The EU imported an estimated EUR 6.5 billion of oil products refined from Russian crude since the beginning of sanctions until the end of October 2023. This made up 11% of their imports of oil products.
- 8. How the price cap coalition whitewashes Russian oil in third countries? The price cap coalition countries are exploiting a significant loophole by increasing imports of refined oil products from nations that have become the leading buyers of Russian crude. The refining loophole provides an outlet for Russian crude oil, supporting volumes and prices through increasing demand for Russia’s oil exports. One year post invasion | Million tonnes
- 9. ● Lukoil’s Burgas refinery increased its reliance on Russian crude to 93% in 2023 up from 70% prior to the invasion. ● Imports of Russian crude accounted for EUR 1.1 bln. ● Burgas exported EUR 984 mln of oil products between Jan - Oct 2023. ● We track shipments showing the Seaexpress delivered 40,000 tonnes of oil products to Netherlands - Russian oil ends up fueling vehicles in the EU. ● Since the ban on Russian oil products, tankers departing Burgas that conducted STS transfers has tripled. Bulgaria 4th largest importer of seaborne Russian crude oil (2023)
- 10. STS transfers of Russian oil ● Ship-to-ship transfers (STS) of crude oil have increased 54% - influenced by logistics & trade in Russian oil becoming more complicated, many ships are reluctant to enter Russian ports. ● While some STS transfers could mask the origin of the oil. ● Focal points of transshipments have been observed in Ceuta (Spain), Constanta (Romania), & Laconian Gulf (Greece). ● STS operations rely on tugboats & shore support, which should be banned. ● The operations involving “shadow tankers” with no or dubious insurance & safety oversight, constituting a risk to coastal waters. ● Instances of vessels turning off their location transponders (AIS) increased 225% globally1 in 2023Q1 on year. 1Platts Maritime Intelligence Risk Suite (MIRS) and Maritime Portal
- 11. ● Russian revenues could have been slashed by EUR 59 bln (49%) by setting the cap for crude oil at USD 30 per barrel (still well above Russia’s production costs, averaging USD 15). ● Full enforcement at current level would have cut Russia’s oil export revenue by ~ EUR 3.75 bln, or 25%, in October. Price cap level is too high
- 12. Thank you for listening, any questions are welcomed? Petras Katinas - Energy Analyst at CREA December 2023
- 13. Annexed slides
- 14. Enforcement of the price cap is failing ● Urals prices have consistently stayed above the cap since July, yet tankers owned or insured by the EU and G7 nations continue to operate. In contrast, prices for the ESPO (Eastern Siberia-Pacific Ocean) blend have never approached 60 USD per barrel. ● Enforcement hasn’t worked in Pacific trade. India & China customs data indicates buyers paying prices above price cap..
- 15. ● Monitoring & enforcing the price cap relies on “attestations”, issued by traders outside of enforcement agencies’ jurisdiction -> vulnerable to falsified documents. ● Not enough done within current enforcement powers. The UK is the largest insurer of Russian oil (33%), OFSI have previously reported the collection of limited attestation documents. Without scrutiny, Western companies aren’t dissuaded from providing insurance / tankers to facilitate oil exports above the price cap. ● Penalties are too weak: exclusion from insurance & financial services for three months. ● Require banks to verify payment of oil adhered to price cap shift liability to banks for processing violating payments. ● Tankers passing through coastal states should provide insurance documents. Monitoring & enforcement issues
- 16. Additional - Policy recommendations Additional measure: ● Invest more in clean energy to reduce reliance on fossil fuels ● LNG ban ● LPG ban ● Pipeline oil bans ● Pipeline gas bans Every Euro spent buying Russian fossil fuels contributes to funding Putin’s warchest used to fight our allies in Ukraine
- 17. Policy recommendations to tighten sanctions Measures to prevent the laundromat loophole: ● Ban imports from refineries receiving Russian crude. ● Require refineries receiving Russian crude to enforce the crude oil price cap policy to export to the sanctioning countries. ● Advocate to dissuade ally countries purchasing Russian oil. ● Ban investments in refineries identified as importing Russian crude oil. Measures to improve the oil price cap: ● Revise the oil price cap down to USD25–35 per barrel. ● Enhance monitoring & enforcement: ○ Permanently ban tankers. ○ Require underlying sales contracts rather than attestations. ○ Monitoring & enforcement authority collaboration - audits on attestations. ● Additional sanctions: ○ Restrictions on the sales of tankers, to prevent Russia acquiring old tankers to circumvent the cap. ○ Prohibit transhipment of Russian oil in coalition countries waters. ● Require enhanced P&I insurance disclosure & review for vessels not insured by the IG when passing through the Danish Straits / other EU/G7 territorial waters.
- 18. ● Lukoil has been exploiting the exemption to export oil products “cannot be stored in Bulgaria due to environmental and safety risks”, i.e. when the refinery produces more than can be stored or consumed domestically. ● The law clarifies that “such sale, supply, transfer or export is not meant to circumvent the prohibitions”. This exception has allowed Burgas to continue to produce and export the excess products it refines to non-EU countries. ● Our investigation tracks and specific shipment (Seaexpress) that transported refined Russian oil into the Netherlands unloading the fuel at a marine fueling station. ● After presenting the results of the investigation on the day it was published at a conference in Sofia, attended by the Bulgarian Prime Minister, European Public Prosecutor and EU Commission officials, the story created huge amounts of interest. The next evening, we were invited into the Bulgarian Council of Ministers to have an emergency meeting with Bulgaria's Prime Minister and Cabinet Members to discuss our analysis. ● This is an example of how investigations and transparent data analysis can be used to instigate change. This investigation, paired with tireless efforts from the CSD team to work with the Bulgarian Government to end Bulgaria's derogation as soon as possible looks likely and should finally stop Bulgaria's purchases of Russian oil that finances the Kremlin's war chest. Impact of the investigation?
Editor's Notes
- Thank you for your interest in our work: we produced this briefing to shed light on how the price cap policy that started off well has run into serious problems with effectiveness and integrity both in terms of the enforcement and not having lowered the level of the price caps. We want to encourage the architects of this policy to fix its problems or if that fails, for the EU to draw conclusions and return to a full ban on ancillary services to ships transporting Russian oil. The price cap coalition needs to re-take the initiative from the Kremlin in the dynamic game of sanctions - otherwise Putin will learn that the coalition will not follow its own policy and he can continue to manipulate markets.
- Since the full-scale invasion, the different countries and companies paid to Russia 554 bn euros, while the EU paid 182 bn EUR. Tha majority Russia received for oil, natural gas and coal. For comparison. From January 2022 until July 31, 2023, the global bilateral commitment to Ukraine amounted to 237 billion euros, as reported by the Kiel Institute for the World Economy's sanction tracker.
- Fossil fuel is crucial for balancing Russia federal budget. More that 40% of total annual income comes from fossil fuel.
- The primary purchasers of Russian fossil fuels are China and India. Typically, China constitutes 40-45% of the total Russian fossil fuel exports, while India accounts for 21%. These nations predominantly acquire crude oil, with lesser volumes being allocated to oil products, coal, and gas. The European Union (EU) contributes to 14%, primarily importing pipeline gas and liquefied natural gas (LNG), with some countries having exemptions."
- 44% drop in pipeline gas exports to the EU in 2022 damaged Russia’s gas sector (production cuts & lower tax revenues). LNG increased 26% to EU since the invasion - partially offsetting decline in pipeline gas. Russia more reliant on EU gas market - making up 37% of sale in 2021 now 47% in 2023. Russian LNG shipments are also reliant on EU ports for transshipment, storing & re-export LNG to non-EU countries. Banning transshipment could make logistics of LNG exports difficult, lowering profits & volumes. Russia’s plans to expand production of gas require EU reduced reliance - must prevent investing in RU LNG projects or building infrastructure.
- Russia has made an estimated EUR 58 bln in export revenue on seaborne oil since the EU import bans and the price caps entered into force , with the majority of this oil carried on European-insured or owned tankers. Sixty-five percent of Russian crude oil was transported by “shadow” tankers, while tankers owned or insured in countries implementing the price cap accounted for 35%. “Shadow” tankers transporting oil products, chemicals, and LPG handled 38% of the total volume of products. The remaining volume was shipped by the tankers subject to the price cap policy. Russian oil; Greek-owned vessels transported over 25% of Russian crude
- This loophole enables Russian crude oil to be 'whitewashed' and sold to coalition countries, potentially undermining the impact of sanctions on Russia. Key re-export hubs include Jamangar and Vadinar in India, Aliaga in Turkey, and Singapore, along with certain ports in China. Refined products from China are directed to Australia, those from India reach the EU and Australia, and the majority of Turkey's refined product exports go to the EU. Such cases where the enforcement of the price cap is failing,, the laundromat process circumvents the price cap further creating demand for Russia’s crude oil and funding the Russia’s warchest
- The EU, most of G7 and Australia have banned or limited imports of Russian crude oil and oil products, leading to a significant fall in Russia’s oil prices and export revenues. However, these price cap coalition countries have increased imports of refined oil products from countries that have become the largest importers of Russian crude. This is a major loophole by which, Russian crude oil is being ‘whitewashed’ and sold to price cap coalition counties that can undermine the impact of the sanctions on Russia.
- Ship-to-ship transfers (STS) of Russian crude oil have increased +54% since the implementation of the oil price cap sanctions until the end of Oct 2023 - mainly because the logistics & trade in Russian oil have gotten more complicated, many ships are reluctant to enter Russian ports. While some ship-to-ship transfers could be done to mask the origin of the oil, this is not the main reason, let alone the only reason they are undertaken. Focal points of Russian oil transshipments have been observed in Ceuta (Spain), Constanta (Romania), & Laconian Gulf (Greece). STS operations in these areas rely on tugboats & shore support, which should be banned. The operations involving “shadow tankers” with no or dubious insurance & safety oversight, constituting a risk to coastal waters. STS from price cap-compliant tankers to “shadow” tankers should be banned. Instances of vessels turning off their location transponders (AIS) increased 225% globally1 in 2023Q1 on year. Source: https://www.spglobal.com/commodityinsights/PlattsContent/_assets/_images/latest-news/053123-infographic-russia-dark-sts-transfers-ship-to-ship-western-sanctions-oil-crude-tankers-shipping.jpg
- As seen by the modelled chart in the right hand side of the slide, Russian revenues could have been slashed by EUR 59 billion euros by setting the price cap for crude oil at USD 30 per barrel and revising the caps for oil products accordingly. USD 30 is a level closer to Russia’s production costs, which average USD 15/barrel, while still comfortably above those costs, incentivising continued production. lowering the cap would also be deflationary, reducing oil prices Russia can receive for their exports. As oil prices have fluctuated this year, Russian oil export volumes have remained relatively stable. Strengthened enforcement of the price caps and lower price cap levels are needed if the architects of the oil price cap policy want it to function as a credible policy and to lower Russia’s oil export revenues. Full enforcement of the price caps would have cut Russia’s oil export revenue by approximately EUR 2 billion, or 12%, in April alone when prices were above the 60 dollars per barrel level in comparison to sales taking place at the market level prices.
- The EU, most of G7 and Australia have banned or limited imports of Russian crude oil and oil products, leading to a significant fall in Russia’s oil prices and export revenues. However, these price cap coalition countries have increased imports of refined oil products from countries that have become the largest importers of Russian crude. This is a major loophole by which, Russian crude oil is being ‘whitewashed’ and sold to price cap coalition counties that can undermine the impact of the sanctions on Russia. Box 1: The key findings of the laundromat report are that, in the year following Russia’s invasion of Ukraine: Western sanction imposing countries imported EUR 42 billion worth of oil products from countries that have increased imports of Russian crude oil in the 12 month period since Russia’s invasion. These 5 identified “laundromat countries” increased imports of Russian crude oil by 140% in volume terms in the year after Russia’s invasion compared to the prior year. These 5 countries have also made up 70% of Russia’s crude oil exports since the crude oil ban was implemented (5th December) until the year after Russia’s invasion. These laundromat countries have also increased oil product exports to price cap coalition countries by 26% while exports to other countries were flat - showing that the main increase in laundromat oil product sales were to sanction imposing countries. Chart: This Sankey diagram to the right shows the flows of Russian crude oil (starting from the left hand side) travelling into laundromat countries represented in the middle of this chart: UAE, Turkey, Singapore, India and China in the first flow of the sankey diagram in the one year period after the invasion of Ukraine. The second flow in the sankey diagram to the right hand side of the chart shows the flow of refined oil products moving to price cap coalition countries. The thickness of the bars represents the volumes of oil that travels to price cap coalition countries. Box 2: Why is this “laundromat” process a concern? The refining loophole provides an outlet for Russian crude oil, supporting volumes and prices through increasing demand for Russia’s oil exports. In cases where the enforcement of the price cap is failing, especially Russia–China trades, the laundromat process circumvents the price cap further creating demand for Russia’s crude oil and funding the Kremlin’s warchest.
- Reported prices for Urals crude rose above the price cap in April as seen in the chart on the right hand side of this slide, but EU & G7-owned and insured tankers continued to lift Russian oil during this period, indicating that enforcement is not working. It has been apparent for months that enforcement of the price cap doesn’t work in the Pacific trade from Russia’s Far Eastern ports to China. Customs data from India and China indicates that buyers are paying prices well above the Urals benchmark, although still at a discount to Brent crude. Failure in enforcement was an open invitation for Russia & OPEC+ to continue to manipulate markets with supply cuts.
- Monitoring & enforcing the price cap relies on “attestations”, which can be issued by any trader outside of enforcement agencies’ jurisdiction, making the system vulnerable to false documents. Not enough is being done within current enforcement powers. The UK being the largest insurer of Russian oil (33% of total Russian oil since sanctions implemented), enforcement agency OFSI have previously reported the collection of few attestation documents. Without scrutiny, Western companies aren’t dissuaded from providing insurance or tankers to facilitate Russian oil exports above the price cap. Penalties for violating the price cap policy are too weak: exclusion from insurance & financial services for three months. Require banks to verify payment of oil adhered to price cap shift liability to banks for processing violating payments. Tankers passing through coastal states should provide insurance documents. https://www.globalwitness.org/en/campaigns/stop-russian-oil/the-price-aint-right/
- The purpose of the price cap policy is to enable Russian oil to find markets at a discounted price. In theory, if the price cap for crude oil was set at a sufficiently low level, and if the coverage and enforcement of the cap was perfect, importing refined Russian oil from third countries would not undermine the policy. However, the price cap is currently set at a level that is far in excess of Russia’s costs of production, allowing the Kremlin to extract most of the export revenue as tax. Furthermore, the cap is not effective on shipments from Russia’s Far Eastern ports due to lackluster enforcement, and obviously cannot cover oil exports through pipelines. Restricting oil product imports from third countries that import Russian crude oil would also create an additional layer of leverage against Russia’s attempts to work around the price caps and import bans. we recommend to: Ban imports to the price cap coalition from refineries receiving any Russian crude. Alternatively, develop legislation to require oil product importers into sanctioning countries to provide documentation of the origin of the crude oil used to produce oil products, and deny imports of refined oil products from originally Russian origin. Ban maritime services in perpetuity to vessels used to transport Russian crude without complying with the price cap. Reduce reliance on fossil oil through energy saving measures, sustainable transport policies, electric vehicles and clean energy investments. Lower oil demand and prices will reduce Russia’s pricing power and leverage, as well as reduce reliance on other questionable suppliers of oil. Advocate through political relationships or trade deals to dissuade ally countries from purchasing Russian oil as it is providing finance to Putin’s warchest. Ban investments in refineries identified as importing Russian crude oil and exporting oil products likely from Russian origin to price cap coalition countries. Another possible solution could be to require refineries receiving any Russian crude to enforce the crude oil price cap policy as a precondition for exports to the price cap coalition countries. However, the apparent dysfunction of the review mechanism that was supposed to lower the price cap over time has made this approach ineffective as the current price cap level of USD 60 still allows Russia to make a sizable, taxable profit.
- The purpose of the price cap policy is to enable Russian oil to find markets at a discounted price. In theory, if the price cap for crude oil was set at a sufficiently low level, and if the coverage and enforcement of the cap was perfect, importing refined Russian oil from third countries would not undermine the policy. However, the price cap is currently set at a level that is far in excess of Russia’s costs of production, allowing the Kremlin to extract most of the export revenue as tax. Furthermore, the cap is not effective on shipments from Russia’s Far Eastern ports due to lackluster enforcement, and obviously cannot cover oil exports through pipelines. Restricting oil product imports from third countries that import Russian crude oil would also create an additional layer of leverage against Russia’s attempts to work around the price caps and import bans. we recommend to: Ban imports to the price cap coalition from refineries receiving any Russian crude. Alternatively, develop legislation to require oil product importers into sanctioning countries to provide documentation of the origin of the crude oil used to produce oil products, and deny imports of refined oil products from originally Russian origin. Ban maritime services in perpetuity to vessels used to transport Russian crude without complying with the price cap. Reduce reliance on fossil oil through energy saving measures, sustainable transport policies, electric vehicles and clean energy investments. Lower oil demand and prices will reduce Russia’s pricing power and leverage, as well as reduce reliance on other questionable suppliers of oil. Advocate through political relationships or trade deals to dissuade ally countries from purchasing Russian oil as it is providing finance to Putin’s warchest. Ban investments in refineries identified as importing Russian crude oil and exporting oil products likely from Russian origin to price cap coalition countries. Another possible solution could be to require refineries receiving any Russian crude to enforce the crude oil price cap policy as a precondition for exports to the price cap coalition countries. However, the apparent dysfunction of the review mechanism that was supposed to lower the price cap over time has made this approach ineffective as the current price cap level of USD 60 still allows Russia to make a sizable, taxable profit.
- The EU, most of G7 and Australia have banned or limited imports of Russian crude oil and oil products, leading to a significant fall in Russia’s oil prices and export revenues. However, these price cap coalition countries have increased imports of refined oil products from countries that have become the largest importers of Russian crude. This is a major loophole by which, Russian crude oil is being ‘whitewashed’ and sold to price cap coalition counties that can undermine the impact of the sanctions on Russia. Box 1: The key findings of the laundromat report are that, in the year following Russia’s invasion of Ukraine: Western sanction imposing countries imported EUR 42 billion worth of oil products from countries that have increased imports of Russian crude oil in the 12 month period since Russia’s invasion. These 5 identified “laundromat countries” increased imports of Russian crude oil by 140% in volume terms in the year after Russia’s invasion compared to the prior year. These 5 countries have also made up 70% of Russia’s crude oil exports since the crude oil ban was implemented (5th December) until the year after Russia’s invasion. These laundromat countries have also increased oil product exports to price cap coalition countries by 26% while exports to other countries were flat - showing that the main increase in laundromat oil product sales were to sanction imposing countries. Chart: This Sankey diagram to the right shows the flows of Russian crude oil (starting from the left hand side) travelling into laundromat countries represented in the middle of this chart: UAE, Turkey, Singapore, India and China in the first flow of the sankey diagram in the one year period after the invasion of Ukraine. The second flow in the sankey diagram to the right hand side of the chart shows the flow of refined oil products moving to price cap coalition countries. The thickness of the bars represents the volumes of oil that travels to price cap coalition countries. Box 2: Why is this “laundromat” process a concern? The refining loophole provides an outlet for Russian crude oil, supporting volumes and prices through increasing demand for Russia’s oil exports. In cases where the enforcement of the price cap is failing, especially Russia–China trades, the laundromat process circumvents the price cap further creating demand for Russia’s crude oil and funding the Kremlin’s warchest.