On November 2, the U.S. State Department announced a new round of sanctions targeting eight entities involved in Russia’s energy, metals, and mining sectors, among others. The designations specifically targeted the operator of the Arctic LNG 2 project in the latest effort to limit Russia’s future energy revenue.
The sanctions come amid reports from the Wall Street Journal that rising Russian oil revenue has allowed Moscow to withstand the oil price cap the G7 and allies imposed in December 2022, from the Financial Times that Russia is increasingly avoiding the price cap mechanism through various means, and from the Washington Post that the U.S. military might have unknowingly purchased Russian oil. Russia’s budget deficit is expected to meet Moscow’s target of 2% of GDP by the end of the year, despite earlier predictions that it could considerably exceed that level and reach 5% to 6%. Other data shows that Russia’s oil and gas revenue doubled to $17.6 billion in October, buoyed by the shrinking gap between Urals and Brent crude prices and Russian oil firms exceeding Moscow’s oil export limit.
Why it matters: Russia’s energy revenue rebound is a considerable turnaround from earlier this year, after a 46% decline in January 2023 from the year prior, and may encourage the U.S., EU, and some partners to seek additional measures to limit Russia’s ability to fund its war in Ukraine. Over 50% of Russian crude ships without western insurance, the trigger for the oil price cap; this is a 15% increase from January 2023. Moscow has relied on a so-called ‘shadow fleet’ of oil tankers and other arrangements, such as inflating shipping and other costs to keep formal prices under the cap, to skirt Western sanctions. Falsifying paperwork is relatively easy for shippers willing to take the risk. Because fake papers are not easy to detect, these risks may be lower than the price cap coalition would prefer. Moscow is planning $100 billion for its 2024 defense budget, a 700% increase and post-Soviet record.
Russia’s economy is by far the largest that Western policymakers have sought to punish through economic sanctions; according to the World Bank, its economy was the world’s eighth largest in 2022. While the combined U.S. and EU economies are 15-20 times larger, they—and other economies, large and small—remain critically dependent on oil and are unlikely to eliminate this dependency in the foreseeable future. Russia exported nearly 12% of all the crude oil in global markets in 2021, a volume sufficient to wreck the global economy if it disappeared from markets.
Measures like the price cap, or other sanctions targeting Russian oil without blocking its sale or purchase, increase transaction costs for Russia but also increase uncertainty in global markets, supporting higher prices. At the same time, these measures rewire the global economy and create new trade relationships that did not previously exist—such as India’s role as a leading buyer of Russian oil—and that are explicitly structured to avoid sanctions regimes. Over time, these new relationships diminish the effectiveness of past sanctions, requiring new sanctions on a continuous basis to create sustained challenges for Russia and uncertainty in global markets. Time will tell whether Western policymakers can develop impactful new sanctions tools on an ongoing basis.