Holes in EU Russia sanctions put attention back on Trump oil threat

Reuters

6 days ago

LONDON, July 22 - The European Union's latest effort to restrict Russia's oil revenue is unlikely to hurt Moscow's war effort severely, leaving U.S. President Donald Trump's threat of secondary sanctions one of the few remaining economic levers to pressure the Kremlin.
The EU on Friday agreed on the 18th package of sanctions against Russia, which foreign policy chief Kaja Kallas said was one of the strongest to date.
The package lowers the price cap on Russian crude to $47.60 a barrel from $60, meaning shippers and insurance companies seeking to avoid sanctions can't handle purchases made above this level. The new cap, which takes effect on September 3, also includes a mechanism to ensure it is always 15% below average Russian crude prices.
A significant new addition is an import ban on refined oil products made from Russian crude. The ban, which would likely kick in next year, seeks to close a loophole created after the EU halted most imports of Russian crude and refined products in the wake of Moscow's invasion of Ukraine in February 2022. This action led to sharp rises in European imports of fuels, particularly diesel and aviation fuel, from China, India and Turkey.
The effectiveness of these initial measures was limited, however, as refiners in those three countries sharply increased imports of Russian feedstock due to the discounts created by the price cap.
Ultimately, the biggest loser from the new ban would likely be India, which accounted for 16% of Europe's imports of diesel and jet fuel last year, according to Kpler data. Russian crude also accounted for 38% of India's crude imports in 2024.
The new ban would exempt countries that are net exporters of crude, meaning the biggest beneficiaries of the new restriction will likely be Gulf producers with large refining operations such as Saudi Arabia, the United Arab Emirates and Kuwait that could pick up the slack from Indian refineries and export more fuel to Europe.
The Western sanctions on Russia's oil sector since 2022 have been carefully crafted to avoid creating a severe energy price shock while still aiming to constrain the revenue of Moscow, the world's third-largest oil exporter. They haven't been overly successful on the latter point.
Russia's crude oil and oil products export revenues reached $192 billion in 2024, significantly more than its defence budget of $110 billion that year. That compared with oil export revenue of $225 billion in 2019.
While Russia's oil exports declined slightly in June to 7.23 million barrels per day, revenue rose by $800 million from May to $13.6 billion thanks to higher global oil prices, according to International Energy Agency estimates.
This partly reflects the fact that Russia has found some workarounds, including developing a vast and opaque network of tankers, insurance and payment schemes that allow it to export its oil above the price cap.
The EU's latest package has also placed 105 additional tankers under sanctions for evading the original price cap, in addition to the 342 already sanctioned.
But Moscow will likely find ways to evade the worst effects of the new sanctions, perhaps by expanding the shadow fleet or further obscuring the origin of its oil through measures such as mid-ocean ship-to-ship transfers.
Moreover, India and China will likely continue buying discounted Russian crude to benefit their domestic markets, while re-routing fuel exports previously bound to the EU to new markets.
So even though, on paper, the new price cap could collectively reduce Russia's oil revenue, in reality, the new EU measures are unlikely to choke off Moscow's financial lifeblood.
One way to hit Moscow's finances would be for President Trump to implement the "secondary sanctions" he threatened last week, whereby countries that buy oil from Moscow will be hit with 100% tariffs unless the Kremlin reaches a deal to end the war in Ukraine within 50 days.
These secondary tariffs mean any country buying Russian oil would face severe restrictions on its ability to trade with the world's largest economy.
Would Trump actually take this drastic step?
Trump has expressed significant frustration with Russian President Vladimir Putin in recent weeks. And given that the multiple rounds of EU and U.S. sanctions on Russia have had a limited impact on Moscow's war chest, secondary sanctions could be one of the few effective tools left.
But in a global energy market, this effectiveness is precisely the problem.
If this drastic escalation of the West's economic war on Moscow were to severely curtail Russia's oil exports, this would also likely lead to a sharp increase in global oil prices and higher inflation – two things the U.S. president certainly does not want.
And that's likely why – despite all these developments – Moscow and oil traders both appear relatively unfazed for now.
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