Almost two and half years into Russia’s full-scale invasion of Ukraine, Moscow’s war machine still runs on energy revenues—despite unprecedented Western sanctions that took a bite out of, but hardly battered, the Kremlin’s cash cow.
Russian exports of oil, natural gas, and coal continue apace with their biggest markets in Asia, especially China and India. Even Europe, which has largely sworn off Russian gas since the invasion, is stealthily buying a lot more of the stuff off tankers to meet its own energy needs, indirectly helping finance the invader that it spends so much time, energy, and money trying to combat.
Russian energy export revenues before the war were about 1 billion euros ($1.1 billion) a day, and the whole gamut of sanctions had brought that down to about 660 million euros ($720 million) by this June—but those levels have stayed remarkably steady for the past 18 months. Russia recorded a rare current accounts surplus just last month, a sign of that export health. The sanctions battle, like the war itself, seems to have stalemated.
“The glass is neither half full, nor half empty. The sanctions are working, but not as well as we expected,” said Petras Katinas, an energy analyst at the Centre for Research on Energy and Clean Air (CREA).
Some aspects of Russia’s energy exports have fallen off a cliff, such as its exports of natural gas via pipelines, which have all but disappeared from the lucrative European market. But the country’s exports of oil and refined oil products, which make up the biggest chunk of its sales, have stayed essentially the same after an initial hit in the first months after the introduction of Western sanctions, and state earnings even crept a little higher thanks to a rise in global oil prices.
The main Western effort to curb Russian energy earnings was a balancing act meant to keep the global market supplied while limiting the Kremlin’s take by capping Russian oil sales at $60 a barrel. Some countries wanted an even lower price cap of about $30 a barrel to really cut Moscow’s earnings, but that idea—as demonstrated when Ukraine floated it again this spring—was politically and diplomatically a lot tougher.
Still, the original price cap worked great at first, until Russia—with a little help from its friends in OPEC—goosed the global price of oil higher, which dragged the price of discounted Russian oil above the cap as well. That’s pretty much where it has been for the past year.
More importantly, Russia has found a reliable way to sidestep that formal limit on its crude oil exports by using a fleet of so-called shadow tankers that don’t have to follow Western restrictions on insurance, safety, and the like. About 4 out of every 5 barrels of seaborne crude that Russia sells are now carried on shadow tankers, Katinas said, meaning that they are entirely outside the reach of Western measures. (Those shadow tankers aren’t beyond the reach of the Iran-backed Houthi insurgents in Yemen, though: One got blown up trying to take Russian oil to China this week.)
“The strategy was good, but the tactics were poor—there was little enforcement,” Katinas said.
The United States cracked down on part of that trade a couple of times—late last year on shadow tankers and earlier this year on Russian state-owned vessels—by sanctioning individual tankers; CREA estimates that tougher enforcement probably cost Russia about 5 percent of its oil export revenues since October 2023. But there is still a long way to go to ensure thorough enforcement of the existing limits on Russian oil trade: Full enforcement would have kept almost 20 billion euros ($21.8 billion) out of Russian President Vladimir Putin’s coffers, CREA estimates.
The Biden administration has toyed with additional efforts to tighten the screws on the shadow fleet, but it worries that stricter measures might send oil (and gasoline) prices higher just in time for a pivotal U.S. presidential election in November.
But there is a way to get there without causing much pain, if any, for global energy consumers, argue global economy experts Robin Brooks and Ben Harris of the Brookings Institution. There remain some 100-odd unsanctioned ships in the Sovcomflot state-owned fleet that are doing heavy lifting for Russian oil exports. Targeted sanctions on just 15 of the busiest of those tankers would cut into a good-sized chunk of Russia’s oil export earnings with little market impact. “With such a process in place, we anticipate little to no impact on global oil prices but suspect the action will meaningfully lower Russia’s revenue from the oil trade,” they wrote.
But it’s not just oil. Russian natural gas exports are not dead yet, either, despite lots of pain for state-owned energy company Gazprom and plenty of crowing in Europe about largely weaning itself off of what used to be its biggest energy supplier. Some European countries, including Hungary, Austria, and Slovakia, are still heavily reliant on the remnants of Russian gas that arrive via Ukraine or Turkey, for reasons that range from the geographic to the political.
What’s amazing about the sharp decline in exports of Russian natural gas to what was formerly the nation’s biggest market is that Russian natural gas is not sanctioned in Europe at all, yet it has suffered the most of all of Moscow’s energy streams.
“Gas is not sanctioned; it was the stupidity of Putin” that drove the Europeans off of it, Katinas said.
But this year, Russian gas is sneaking back into Europe in liquefied form, supercooled and shipped on tankers rather than compressed and routed through pipelines. European Union imports of Russian liquefied natural gas, or LNG, are up 24 percent over past year, especially to big Western European countries such as France, Spain, and Belgium; the bloc buys half of all Russian LNG exports.
There are plenty of reasons why—Spain’s main suppliers in North Africa have their own geopolitical squabbles that have disrupted exports, long-term contracts with Russia essentially lock in some European buyers for years, and Russian gas is nearby and fairly cheap compared to alternatives—but the biggest reason is simply concern over the security of supplies.
“There was lots of talk even last year about banning LNG imports, but then what prevailed were the fears about the implications for the security of supply,” said Anne-Sophie Corbeau, a gas expert at Columbia University’s Center on Global Energy Policy. The trickle of Russian gas that still comes in through Ukraine will end later this year; Turkey, despite offers to do more, can hardly export significantly more gas to southern Europe since it isn’t a gas producer itself. And Europeans remember the shock and pain of the war’s first winter, when energy prices skyrocketed due to the upheavals in the gas market.
Last month, the European Union finally took its first step to deal with Russian LNG—not by banning the import of the fuel, but by making sure that European ports would not be waystations for Russian exports to Asia. That measure won’t even start until early next year. And there certainly won’t be any further EU efforts to target Russian gas this year, with Hungary at the helm of the rotating presidency of the EU council.
“We are not actually banning imports, but preventing other countries from getting Russian LNG,” Corbeau said. “It makes life more difficult for Russia’s Asia exports, but does nothing to keep LNG out of Europe.”
The good news, such as it is, is that LNG isn’t quite the cash cow for the Russian government that other energy sources are. Oil is sold in huge volumes and is taxed; pipeline gas, too, helps prop up the federal budget. But LNG has all sorts of tax breaks that mean much less of that Western money goes straight to the Ukrainian battlefront. In terms of how to target Russian energy earnings, Corbeau said, “first oil, then piped gas, then finally LNG.”
The bad news is that despite years of unprecedented sanctions on one of the world’s biggest energy providers, Russia’s cash machine is still working enough to continue underwriting the war. The relatively limited success in the battle against the country’s energy sector is mirrored by similar failings in cracking down on Russian trade in all sorts of other things, from Western machinery routed through Central Asia to the high-tech Chinese-made components needed for the war.
“We are not doing enough. We need to strengthen sanctions—we need to start enforcing sanctions, and start punishing companies that are violating them,” said Katinas. “There are just too many loopholes.”
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