How to Make Energy Sanctions against Russia More Effective

Foto: Imago Images

As Russia‘s full-scale invasion of Ukraine enters its third year, the question about the efficacy of sanctions is more pressing than ever: Have they been effective and what more can be done? Maria Shagina argues that it is best to focus on the Russian energy sector.

This article is the second contri­bu­tion to a dossier on sanctions that the Center of Liberal Modernity publishes in the run-up to its annual confer­ence Russia and the West on 15 May.

A German version is published on Russland verstehen

While Western sanctions have clearly failed to deter Russia from invading its sovereign neighbour, their task now is to constrain. Sanctions and export controls aim to constrain Russia’s economic and military options in order to coerce a behav­ioural change in the Kremlin. This is inevitably much harder to do than to deter, as it requires water­tight enforce­ment in sanc­tioning countries and multi­lat­eral coop­er­a­tion to prevent the target from miti­gating the impact with the help of third countries. Does it mean that sanctions are futile as a policy of denial? No, but it requires smart design, robust enforce­ment and enhanced coop­er­a­tion with the private sector.

Maria Shagina

Maria Shagina is a Senior Fellow, Diamond-Brown Economic Sanctions, Standards and Strategy at the Inter­na­tional Institute for Strategic Studies in Berlin. 

There is one area where constraining Russia’s options is key – the energy sector. The energy sector has tradi­tion­ally been a cash-cow for the Russian budget. Histor­i­cally, about 40 per cent of federal revenue came from the sale of hydro­car­bons. As the Russian economy grows on the back of military spending, any export revenue in the energy sector is directed towards the country’s military-indus­trial complex. To target Russia’s lucrative extrac­tive economy, the G7 imple­mented an oil price cap, a two-pronged policy which aimed to encourage Russia to supply oil to the markets while slashing its budget revenue at the same time. By design, the policy was inten­tion­ally slow-paced – to avoid roiling the already tight oil markets, avoid spiralling inflation and avoid over­com­pli­ance from commodity traders. Initially, the price cap worked as intended: it slashed Russia’s budget revenue by 40 per cent in January 2023 while increasing the discount for Urals to 40 dollars per barrel. However, as enforce­ment lagged, the effec­tive­ness of the price cap waned. Moscow has been effective in diverting its crude to China, India and Turkey, using a vast shadow fleet and dodgy insurance. In the second half of 2023, the discounts narrowed to 14 dollars per barrel while the budget revenue grew from 13 billion to almost 18 billion dollars per month.

Ramp up enforce­ment of the oil price cap

What measures in the energy sphere are necessary to increase pressure? First, ramped up enforce­ment of the oil price cap is essential. Tight­ening require­ments around the attes­ta­tion process is key. As soon as the G7 countries stepped up enforce­ment in early 2024, compli­ance with the price cap grew, leading to a larger discount of 18 dollars per barrel. While it is futile to expect the Global South to join the price cap, its robust enforce­ment would incen­tivise them to demand deeper discounts, an outcome in line with Western sanctions policy.

The Biden administration’s executive order imposing secondary sanctions on foreign financial insti­tu­tions for any involve­ment in Russia’s defence sector has added another strain on the country’s energy exports. Banks in China, Turkey and the United Arab Emirates started severing corre­spon­dent accounts with Russian credit insti­tu­tions, thus making it hard to conduct inter­na­tional payments. India became reticent to accept the shipments of Russian oil exports – all due to the risk of secondary sanctions. Although the executive order does not target the energy sector, the chilling effect is there and it is reflected in months-long payment delays, making Russia’s circum­ven­tion efforts more cumbersome.

Target the Shadow Fleet

Second, targeting the shadow fleet would deprive Russia of the alter­na­tive that exists outside the G7’s reach. When the Biden admin­is­tra­tion started sanc­tioning shipping companies and vessels, the impact was imme­di­ately evident. The majority of vessels targeted could not dock in ports or find new buyers. The capacity of the shadow fleet is not limitless, so launching inves­ti­ga­tions and imposing heavy penalties would alter the risk calculus even for rogue actors in the industry. As a result, it would increase the sanctions premium, leading to higher shipping costs and lower revenue for Russia.

Enforce insurance and sanction flags of convenience

Third, the West can leverage the remaining choke­points up its sleeve – Russia’s reliance on European ports for its crude exports and US nexus in the industry of fleet regis­tra­tion. As the majority of Russian crude passes through European waters, it is up to EU countries to step up require­ments for adequate and well-capi­tal­ized insurance. This would not only force the Kremlin to rely on G7 insurance again, but would also reduce the risk of envi­ron­mental disasters.

There is also asym­met­rical US leverage over vessel regis­tra­tion. While Russia is actively using flags of conve­nience from countries like Liberia, Panama and the Marshall Islands, their manage­ment is often head­quar­tered in the US, thus giving US author­i­ties the possi­bility to impose sanctions on them. This repre­sents a vulner­a­bility for Russia’s oil fleet.

Lower the oil price cap

Finally, the West should consider lowering the price cap and expand measures to complete the ban on Russian hydro­car­bons. With oil prices rising, there is an urgent need to recon­sider the cut-off point for the price cap. By lowering the cap to 30 dollars per barrel, Russia’s budget revenue would be slashed by 49 per cent. Main­taining the status quo will not constrain the Kremlin’s coffers fast and suffi­ciently enough. Russia’s macro­eco­nomic chal­lenges would only start appearing at oil prices below 40 dollars per barrel.

Comple­menting the oil price cap, an EU/G7’s ban on Russian pipeline gas, nuclear energy and Liquified Natural Gas (LNG) would deprive the country of future export earnings. Moreover, such a policy would be strongly aligned with the EU’s commit­ment to decouple from Russia’s fossil fuels by 2027.


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