{"id":62762,"date":"2024-05-06T15:07:31","date_gmt":"2024-05-06T13:07:31","guid":{"rendered":"https:\/\/libmod.de\/network-russia-policy-brief-ukraine-war-france-minic-copy\/"},"modified":"2024-05-14T14:47:19","modified_gmt":"2024-05-14T12:47:19","slug":"how-to-make-energy-sanctions-more-effective","status":"publish","type":"post","link":"https:\/\/libmod.de\/en\/how-to-make-energy-sanctions-more-effective\/","title":{"rendered":"How to Make Energy Sanctions against Russia More Effective"},"content":{"rendered":"

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Foto: Imago Images<\/figcaption><\/figure>\n

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As Russia\u2018s 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<\/em><\/a> argues that it is best to focus on the Russian energy sector.<\/h3>\n

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[\/vc_column_text][vc_message css=\u201c\u201d]This article is the second contri\u00adbution to a dossier on sanctions<\/a> that the Center of Liberal Modernity publishes in the run-up to its annual conference Russia and the West<\/em><\/a> on 15 May.<\/p>\n

A German version is published on Russland verstehen<\/a><\/em><\/p>\n

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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\u2019s economic and military options in order to coerce a behav\u00adioural change in the Kremlin. This is inevitably much harder to do than to deter, as it requires water\u00adtight enforcement in sanctioning countries and multi\u00adlateral cooper\u00adation 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 cooper\u00adation with the private sector.<\/p>

\"Maria<\/p>\n

Maria Shagina<\/a> is a Senior Fellow, Diamond-Brown Economic Sanctions, Standards and Strategy at the Inter\u00adna\u00adtional Institute for Strategic Studies in Berlin. <\/p><\/div>\n

There is one area where constraining Russia\u2019s options is key \u2013 the energy sector. The energy sector has tradi\u00adtionally been a cash-cow for the Russian budget. Histor\u00adi\u00adcally, about 40 per cent of federal revenue came from the sale of hydro\u00adcarbons. As the Russian economy grows on the back of military spending, any export revenue in the energy sector is directed towards the country\u2019s military-indus\u00adtrial complex. To target Russia\u2019s lucrative extractive economy, the G7 imple\u00admented 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 inten\u00adtionally slow-paced \u2013 to avoid roiling the already tight oil markets, avoid spiralling inflation and avoid overcom\u00adpliance from commodity traders. Initially, the price cap worked as intended: it slashed Russia\u2019s 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 effec\u00adtiveness 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<\/a> to 14 dollars per barrel while the budget revenue grew from 13 billion to almost 18 billion dollars per month.<\/p>\n

Ramp up enforcement of the oil price cap<\/h2>\n

What measures in the energy sphere are necessary to increase pressure? First, ramped up enforcement of the oil price cap is essential. Tight\u00adening require\u00adments around the attes\u00adtation 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 incen\u00adtivise them to demand deeper discounts, an outcome in line with Western sanctions policy.<\/p>\n

The Biden administration\u2019s executive order imposing secondary sanctions on foreign financial insti\u00adtu\u00adtions for any involvement in Russia\u2019s defence sector has added another strain on the country\u2019s energy exports. Banks in China, Turkey and the United Arab Emirates started severing corre\u00adspondent accounts with Russian credit insti\u00adtu\u00adtions, thus making it hard to conduct inter\u00adna\u00adtional payments. India became reticent to accept the shipments of Russian oil exports \u2013 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\u2019s circum\u00advention efforts more cumbersome.<\/p>\n

Target the Shadow Fleet<\/h2>\n

Second, targeting the shadow fleet would deprive Russia of the alter\u00adnative that exists outside the G7\u2019s reach. When the Biden admin\u00adis\u00adtration started sanctioning shipping companies and vessels, the impact was immedi\u00adately 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 inves\u00adti\u00adga\u00adtions 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.<\/p>\n

Enforce insurance and sanction flags of convenience<\/h2>\n

Third, the West can leverage the remaining choke\u00adpoints up its sleeve \u2013 Russia\u2019s reliance on European ports for its crude exports and US nexus in the industry of fleet regis\u00adtration. As the majority of Russian crude passes through European waters, it is up to EU countries to step up require\u00adments 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 environ\u00admental disasters.<\/p>\n

There is also asymmet\u00adrical US leverage over vessel regis\u00adtration. While Russia is actively using flags of conve\u00adnience from countries like Liberia, Panama and the Marshall Islands, their management is often headquar\u00adtered in the US, thus giving US author\u00adities the possi\u00adbility to impose sanctions on them. This repre\u00adsents a vulner\u00ada\u00adbility for Russia\u2019s oil fleet.<\/p>\n

Lower the oil price cap<\/h2>\n

Finally, the West should consider lowering the price cap and expand measures to complete the ban on Russian hydro\u00adcarbons. With oil prices rising, there is an urgent need to recon\u00adsider the cut-off point for the price cap. By lowering the cap to 30 dollars per barrel, Russia\u2019s budget revenue would be slashed by 49 per cent.<\/a> Maintaining the status quo will not constrain the Kremlin\u2019s coffers fast and suffi\u00adciently enough. Russia\u2019s macro\u00adeco\u00adnomic challenges would only start appearing at oil prices below 40 dollars per barrel.<\/p>\n

Comple\u00admenting the oil price cap, an EU\/G7\u2019s 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\u2019s commitment to decouple from Russia\u2019s fossil fuels by 2027.<\/p>\n

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