Experts believe that the new United States (U.S.) sanctions could significantly impact a key Russian revenue source for financing the war in Ukraine.
Joseph Biden’s administration, at the very end of its current term, imposed sanctions on Russia’s oil sector, which is President Vladimir Putin’s key source of income. On January 10th, the White House announced new sanctions against the Russian oil sector. Nearly 200 vessels of the so-called “Russian shadow fleet” were blacklisted, and punitive measures also targeted Russian oil producers Gazprom and Surgutneftegas.
At the end of 2022, sanctions were introduced to set a price cap on Russian oil. In the meantime, Moscow managed to find various ways to circumvent these measures. The goal of the sanctions was to limit the price of oil, using various mechanisms, to a maximum of 60 dollars (about 58.2 euros) per barrel of Russian oil.
What effects do experts expect from the new sanctions?
Craig Kennedy, an independent expert on Russia who works at the Davis Center for Russian Studies at Harvard University, is convinced that the new sanctions package is a “painful blow” for Russia. “This means that some ships, which they previously relied on, will now have to remain anchored in ports worldwide; they will no longer be of any use,” he said.
Benjamin Hilgenstock from the Kyiv School of Economics described the U.S. measures as “a very welcome development.” However, he emphasized the need to maintain pressure. “Countries in the international coalition must continue to sanction shadow tankers until that shadow fleet becomes history,” he added.
The price of crude oil has reached its highest level since August last year. The Biden administration’s move is also believed to be motivated by forecasts that suggest a potential oversupply of oil on global markets during 2025.
How important is oil to Russia?
Initially, when the price cap for Russian oil was introduced, the goal was to prevent market disruptions – the idea was to keep Russian oil on the market to ensure supply while capping its price to reduce Russian revenues. Western insurance companies and logistics firms, which dominate the global shipping market, would not provide their services if Russian oil was sold above 60 dollarsper barrel – effectively making it impossible to distribute Russian oil globally.
However, Russia bypassed the cap by purchasing hundreds of older tankers and establishing its “shadow fleet.” These vessels began transporting oil to countries that bought larger quantities, such as India and China, using opaque insurance models.
Although Russian revenues significantly declined in the first six months after the price cap was introduced, they largely recovered over the past 18 months. According to the Centre for Research on Energy and Clean Air (CREA), Russian revenues from crude oil exports increased by 6% in 2024, despite export volumes dropping by 2% compared to the previous year.
Oil export revenues are extremely important for President Vladimir Putin, given his drastic increase in military spending to gain an advantage on the battlefield in Ukraine. Military spending has more than tripled since 2021, reaching a record 13.5 trillion rubles (around 131 billion dollars or 128 billion euros) in this year’s budget – a massive 25% increase compared to last year.
“Oil has become crucial for Russia,” Kennedy said. “Russia is under increasing pressure. After losing the European gas market, oil exports have become even more important to maximize returns.” Since the invasion of Ukraine in early 2022, the European Union (EU) has dramatically reduced its gas purchases from Russia.
The shadow fleet
After it became evident at the end of 2023 that the shadow fleet was helping Russia circumvent sanctions, specific tankers ended up on the U.S. blacklist.
Kennedy described this move as “incredibly successful” and added: “As soon as a tanker’s name and number appeared on that list, countries like China and India were less willing to accept Russian oil transported by those vessels.”
As a result, Russia was forced to stop using several tankers. “With just one stroke of the pen in Washington, dozens of these ships, worth 40 million dollars each, were rendered unusable,” Kennedy emphasized.
However, in March 2024, the U.S. halted the practice of sanctioning individual tankers, allegedly due to concerns that such strict measures against Russian oil could lead to a supply shortage on global markets and a price shock ahead of the U.S. presidential elections.
Although the United Kingdom (UK) and the EU have since started sanctioning Russian tankers, experts believe that the U.S.’s decisions remain crucial. Kennedy expects that a significant number of Russian tankers under sanctions by the U.S., the UK, and the EU could increase pressure on Moscow.
What is the damage to Russia?
Russia will continue earning billions from its oil exports, but experts believe the latest U.S. decision will be very painful for Moscow. Benjamin Hilgenstock argues that Russia’s economy could be seriously weakened by two measures: targeted sanctions against specific tankers and combating manipulations during oil offloading. This involves situations where shippers falsely claim that the price of oil on a given tanker complies with the declared cap.
“That would be very painful,” he said. “It would put additional pressure on the ruble, leading to increased inflation, reduced budget expenditures, and so on.”
If India and China continue to ignore sanctions against tankers, Russia may be forced to adhere to the price cap – or simulate compliance, for instance, by falsifying documentation. “Whatever happens, it’s becoming riskier and more expensive for Russia,” Kennedy stated.
Less oil, more peace?
Regardless of the fact that discussions about the dynamics of the Russian oil price cap and insurance manipulations may seem abstract to many, the reality is that successful sanctions against Russia’s energy sector directly impact Vladimir Putin’s ability to wage war in Ukraine and dictate further developments on his terms.
“This undermines confidence in Moscow’s ability to prevent a sudden and severe crisis that would shatter the illusion that Russia is resilient and capable of fighting as long as necessary,” Kennedy said.
Ukrainian President Volodymyr Zelenskyy has personally responded to the U.S. sanctions announcement. “The less revenue Russia earns from oil sales, the sooner peace can be restored,” he wrote on the platform X, Deutsche Welle writes.
