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Loopholes in oil sanctions – Four measures could further weaken Russia

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Loopholes in oil sanctions – Four measures could further weaken Russia
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Loopholes in oil sanctions – Four measures could further weaken Russia

The sanctions are definitely having an effect, but things need to be improved, say Benjamin Hilgenstock, Elina Ribakova and Guntram Wolff

The sanctions are definitely having an effect, but things need to be improved, say Benjamin Hilgenstock, Elina Ribakova and Guntram Wolff

Quelle: Getty Images/Karl Hendon

Despite Western sanctions, Russian oil companies continue to earn well. Because the price cap of the G-7 countries is being circumvented to a large extent. It should be improved urgently. These four measures can contribute to a significant and rapid improvement.

Russia’s brutal war of aggression in Ukraine has been going on for fifteen months now. The Western sanctions regime has not been able to stop Putin, but it is having an effect.

Those are particularly important energy sanctions, which have been in force since the end of last year. Because Putin and his regime were able to make enormous profits last year thanks to high oil prices and export volumes, which financed the war.

After the West hesitated for almost a year, the sanctions are now having a severe impact on the Russian budget. To keep it that way, they should G-7 countries concrete steps for more transparency, stricter consequences for violations of sanctions and the closing of loopholes in the financial sector.

Read more about EU sanctions here

The EU embargo and the G-7 price cap on Russian oil exports are the most complex interventions ever made in global energy markets as part of an economic sanctions regime. And the measures are having the desired effect: Russian oil has remained on the market and price increases have been prevented accordingly.

At the same time, the sanctions have contributed to significant price discounts on Russian oil as European customers have essentially disappeared from the market – and as a result Russia’s export earnings and tax revenues have fallen significantly. In concrete terms, in the first quarter of 2023 the country earned almost 30 percent less from the export of crude oil and oil products.

Guntram Wolff, economist and managing director of the German Society for Foreign Relations (DGAP)

Guntram Wolff, economist and managing director of the German Society for Foreign Relations (DGAP)

Those: gdap

This affects the Russian state budget. For January through April, the Treasury Department reports a more than 50 percent drop in oil and gas revenues from the same period last year. At the same time, as spending is being pushed up by the war in Ukraine, the deficit is growing steadily – and financing is becoming more difficult. Nevertheless, there is cause for concern.

Violations of oil price caps require a response

It has been shown that the oil price cap is being circumvented to a large extent. In particular, this concerns exports from Kozmino, Russia’s main Pacific port for crude oil. One Study from the Kyiv School of Economics (KSE) shows that in the first quarter of this year almost all exports from there were sold above the $60/barrel cap. At the same time, companies from the G-7 and the EU were involved in half of all exports.

The current sanctions regime does not appear to be able to prevent this. The companies involved must request certificates and assurances from their clients that a transaction is taking place below the price limit. However, you do not have to check them, let alone pass the information on to the authorities.

Another problem is that Russian companies are increasingly able to increase their profits from oil trading. This is because Russia now transports a significant proportion of its exports using its own ships – or with the help of third-country shipping companies that may have business ties with Russian oil companies.

And these have been shown to exaggerate the cost of transportation. This means that a transaction is formally compatible with the price cap – the export price is less than 60 dollars/barrel – but ultimately the customer pays the world market price and the difference ends up in Russian wallets via the shipping company.

Benjamin Hilgenstock, Senior Economist an der Kyiv School of Economics

Benjamin Hilgenstock, Senior Economist an der Kyiv School of Economics

Source: cepr

So it needs to be improved. The following measures can contribute to a clear and rapid improvement – through more transparency, stricter consequences for violating sanctions and closing loopholes.

First, G-7/EU firms involved should inform authorities of any transaction within the price cap system in which they are involved – as well as any suspicious activity they observe. Contracts clearly stating the selling price should become part of the reporting requirement.

Elina Ribakova, economist and expert on emerging markets in Eastern Europe, the Middle East and Africa

Elina Ribakova, economist and expert on emerging markets in Eastern Europe, the Middle East and Africa

Source: pee

Second, more Russian banks should be sanctioned in order to restrict transaction channels and allow for better monitoring. However, many financial flows now take place hidden in third countries. Thirdly, the West should therefore identify and sanction such financial institutions in third countries if they clearly contribute to circumventing the price cap.

Access to the Western financial system can be used as a powerful lever to implement energy sanctions. Because the global financial system is still dominated by the West. However, Western central banks and banking regulators must play a larger role in this and ultimately combat these profits such as money laundering from other illegal activities.

Dubious and non-transparent financial locations will oppose tougher financial sanctions. However, the big oil buyers India and China would certainly benefit. Because the tighter implementation of the price cap increases their market power: they can buy Russian oil cheaper.

Benjamin Hilgenstock is Senior Economist at the Kiev School of Economics (KSE), Elina Ribakova Senior Fellow at the Peterson Institute, Bruegel and KSE. Guntram Wolff is Director and CEO of the German Council on Foreign Relations (DGAP).

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