US imposes the most extreme sanctions on Russian oil to date

A late breaking story on Friday, the US’ OFAC imposed the most extreme sanctions on Russian oil exports yet.

There are three main features of note in these sanctions: around 183 tankers were sanctioned; Russia’s major oil companies were included for the first time (although not Rosneft, the biggest); and the top Russian maritime insurance companies were hit as well.

The goal is to “reduce Russia’s revenue from oil exports.” That is not going to happen. What is going on is that as each of these sanctions come out a game of whack-a-mole starts, and Russia finds workarounds. Each time it takes a couple of months to organise, but so far a solution is always found.

For example, the sanctions on the major oil companies is very easy to avoid – and not Rosneft was excluded as the US still worries about actually reducing the flow of oil and spiking prices – as someone like Surgutneftegas (that was named) can simply sell oil on the domestic market to NoNameNeftegas which then exports it without sanctions.

Russian insurance has been hit for the first time too, and this is a bit more serious. When the crude oil price cap sanctions were brought in on December 5, 2022 the West rather naïvely thought that because it controlled 95% of the maritime insurance business (largely Lloyds of London) that it could use this as the enforcement mechanism. As bne IntelliNews reported not a single barrel of Russian crude oil has been sold below the oil price cap of $60 since. The market share of the western insurance has fallen to 65% since; basically Russia recapitalised its insurance companies and insured the shadow fleet ships itself. Chinese and Indian partners accepted this insurance as valid.

Now these Russian insurance companies have been hit, it will create a problem as ports in India will likely refuse entry to any ship insured by the state-owned Rosgosstrakh et al. But again if you think about it you can think of workarounds pretty easily. Russia’s Sovcomflot can just buy Indian insurance. Again the point is not to stop the oil flow, just make it harder.

The most effective of all, will be the sanctions on tankers. 183 (or thereabouts) is a lot of ships. It’s about a third of the circa 400 tankers in the shadow fleet and OFACs sanctions on these ships mean Asian ports will definitely refuse to admit them.

As we have reported, the European sectoral sanctions have been almost entirely useless as in addition to being easy to dodge they are riddled with carve-outs in order to protect EU businesses that remain heavily dependent on Russian raw materials. It was reported today that Europe’s piped gas imports to Europe were actually up 14% to 32bcm in 2024, despite all the talk of weaning the EU off Russian gas.

However, the US can afford to be tougher as it is almost entirely self-sufficient in everything (enriched uranium being a notable exception).

The Biden administration has avoided imposing really tough sanctions on Russian oil as it worries about the market impact. However, these so-called strangulation sanctions that were launched last December are amongst the most effective yet as they go down a level from targeting sectors to targeting individual companies and ships, threatening their owners with secondary sanctions, which Chinese, Turkish and Indian companies must avoid.

The work around in the shadow fleet’s case is to rename and reflag the tankers, which has been going on, but again that takes time.

And China and India are willing partners in this process. A key point, that is underreported, is that they are buying energy with a big circa 20% discount, while, Europe at least, is paying a premium. With something as fundamental as energy costs, that is a very big competitive advantage indeed – especially when you unit production costs in the Global South are already a third of those in the Developed World. This comes at a time when the report from former Italian Prime Minister and ex-European Central Bank boss Mario Draghi has already highlighted Europe’s fading competitiveness, which has already led to the deindustrialisation of economies like Germany.

The new sanctions won’t reduce Russia’s oil revenue – they are a headache, rather than an unsolvable problem – they will cause supply disruptions and drive up transaction costs that will in turn fuel more inflation in Russia, so they have some merit. But they wont stop the war or bring Russia’s economy to its knees.

The final irony is that they come only 10 days before US President Joe Biden is due to leave office. Ukraine’s supporters have been calling for exactly these sanctions for years, but the Biden administration has studiously avoided enacting them as it is more scared of spiking oil prices than it is of Russia. Biden is desperate to rescue his reputation given his failure to provide Ukraine with enough support to win the war, by going out with a bang and providing Ukrainian President Volodymyr Zelenskiy with some sort of leverage in the inevitable ceasefire talks.

And his job was made easier as there is an oversupply of oil in the market of about 2mn barrels so disrupting Russia’s oil exports (of just under 5mn barrels in 2024) will actually help balance the market. Nevertheless, oil prices jumped on the news from $70 average in 4Q24 to around $80 today – but that is a price level everyone can live with and actually makes the US, now the world’s largest exporter of oil, a lot of extra money.

The wild card here is inbound President-elect Donald Trump, who could take these sanctions off again on January 21. It’s not clear what he will do of course, but one of his traits is to simply undo or reverse anything that Biden did, like sign on to the Paris Agreement. We shall see.