US officials have imposed sanctions on companies violating the $60 per barrel price cap on Russia's seaborne crude exports for the first time on October 12.
Simultaneously, an international coalition has announced its intentions to strengthen enforcement measures as the impact of the price cap policy seems to be waning.
The first-ever US sanctions targeting price cap violations have targeted UAE-based Lumber Marine SA and Turkey-based Ice Pearl Navigation, according to the Treasury Department.
Lumber Marine's SCF Primorye transported Novy Port crude oil priced above $75 per barrel from a Russian port, while Ice Pearl Navigation's Yasa Golden Bosphorus transported ESPO crude oil priced above $80 per barrel.
Both vessels employed US-based service providers subject to the price cap while transporting Russian-origin oil. In addition to sanctions, their respective vessels were identified as blocked property.
As bne IntelliNews reported, three-fifths of Russia's seaborne crude exports are now being shipped by tankers not required to comply with the G7 oil price cap, according to S&P Global data, as the oil price cap sanctions are increasingly seen to have failed. However, until now the US has been reluctant to enforce the oil price cap sanctions for fear of driving up oil prices even higher – especially in the run-up to next year’s US presidential election.
The Peterson Institute for International Economics (PIIE) and Kyiv School of Economics (KSE) have also documented widespread cases of EU-flagged tankers simply ignoring the sanctions, especially in the Pacific Ocean, where the ships, many of which are Greek, do not sail through EU-controlled waters.
The price caps were initially devised to allow EU and G7 maritime service providers to continue transporting Russian fuels by sea, as long as they were sold at or below $60 per barrel.
Russia has built up a “ghost fleet” of older vessels engaging in high-risk shipping practices, such as falsification of registration, concealment of ownership and cargo, and manipulation of vessel tracking systems, that have emerged to bypass these caps, S&P Global reports.
US officials continue to claim the price cap regime is working despite mounting evidence it is not. The White House pointed to the fall in Russian oil tax revenue at the start of the year, but since then it has bounced back, as Russian Finance Minister Anton Siluanov predicted earlier this year. Russian Inc. went back into profit in May and is now on course to easily hit the Finance Ministry’s 2% of GDP deficit target for the full year. “The worst is over,” said Prime Minister Mikhail Mishustin at a conference last week.
As the realisation that the oil cap sanctions have largely failed, Treasury Secretary Janet Yellen expressed concerns last month about the policy's ongoing effectiveness.
Yellen said: "Russia has spent a great deal of money and effort to provide services for the export of its oil. They have added to their shadow fleet, provided more insurance, and that kind of trade is not prohibited by the price cap."
Treasury Deputy Secretary Wally Adeyemo emphasised the US's unwavering commitment to reducing Russia's oil profits while maintaining stability and ample supply in global energy markets. State Department spokesman Matthew Miller added that "nearly 10 months into implementation of the price cap, we are confident it is achieving" these dual objectives.
Russia's crude production in September stood at 9.43mn barrels per day, a decrease from 10.11mn bpd in February 2022, when Russia invaded Ukraine but more resilient than many analysts had predicted at the onset of the conflict. A report by Yale at the time predicted that Russia’s oil production would slump to 6mn bpd, and even Russia’s Energy Ministry was expecting a 15% decline, whereas oil production quickly recovered in the first year of war as new trade routes to the Asian market were forged.
Since then, oil production fell off again following the imposition of the G7 twin crude and oil product sanctions on December 5 and February 5 respectively, but nevertheless has remained surprisingly robust.
More recently, the tightening global oil market has also led to an increase in oil prices, with the discount of Urals against Dated Brent narrowing to its smallest value since before Russia's invasion of Ukraine.
Russia expects oil demand to grow by 2.4mn bpd to a record level in 2023, Russian Deputy Prime Minister Alexander Novak said on October 12, adding that global oil consumption will go up further on and reach up to 118mn bpd in 2030. The IEA retained its forecast for global oil production in 2023 at a record of 101.6mn bpd. The agency raised its expectations in October for global oil demand to 2.3mn bpd from 2.2mn bpd.