Heightened scrutiny of its energy sector is resulting in increased delays and even rejections in transferring funds
Acknowledging the global need for Russian oil while simultaneously aiming to limit Moscow’s profits from its energy assets presents a complex dilemma for the West. These conflicting objectives set the stage for a strategic game of cat-and-mouse.
Recent developments indicate a tightening grip on Russia’s energy sector. In December 2023, the U.S. Treasury warned of potential sanctions for foreign banks evading Russian price regulations and called on them to boost compliance. Global banks, particularly those in China, Turkey, and the UAE engaged with Russia, are now asking their clients to provide written guarantees that no person or entity from the U.S. Special Designated Nationals list is involved in a deal or is a beneficiary of a payment.
This heightened scrutiny has led to delays and even refusals in transferring funds to Russian oil firms.
Moreover, Ukrainian drone attacks on Russian oil facilities have also increased pressure on the Russian oil industry. According to Newsweek, Russia’s Federal State Statistics Service, Rosstat, reported that in the week ending Mar. 24, the nation’s production of motor petrol fell by approximately 7.4 percent to 754,600 tons compared to the week prior, when production was at 815,300 tons. To manage any surge in domestic fuel prices, on Mar. 1, Russia banned gasoline exports for six months, leading to more lost revenue.
Additionally, escalating sanctions on Russian oil exports have inflated freight costs, impacting the movement of Russian crude. According to Argus Media, transporting a barrel of Russian crude from a Baltic Sea port to China has averaged approximately $14.50 since December, with over half of this expense directly linked to Western sanctions.
The repercussions extend to India, where imports of Russian crude have dwindled, partly due to the U.S. Treasury and State blacklisting the Russian state tank operator Sovcomflot. Indian refiners are reportedly refusing to take Russian crude transported on Sovcomflot vessels to avoid violating sanctions, according to oilprice.com. Russian crude exports on Sovcomflot’s fleet to India have dropped by 300,000 barrels per day (bpd) from the 2023 average, it said.
All Indian refiners are now carefully checking the ownership chain of every tanker carrying Russian crude to ensure the vessels are not affiliated with Sovcomflot or other entities on the U.S. sanctions list, unnamed sources with knowledge of the matter told Bloomberg last week. Most cargoes previously bound for India are now either discharging or heading to private refiners in China, the world’s top crude importer.
Despite these challenges, Russia retains leverage. Asian imports of Russian crude surged to a 10-month high of 27.48 million barrels per day (bpd) in March, primarily driven by increased arrivals in top-importing Asian markets, notably China, Reuters reported, quoting an LSEG Oil Research report. China’s crude imports from Russia in March approached 11.75 million bpd, up from 11.16 million bpd in February and 10.44 million bpd in January, LSEG Oil Research data showed.
However, the sanctions risk driving oil market prices higher, which could benefit Moscow but pose challenges for the Biden Administration, particularly in an election year. While Washington wants the sanction regime to work, behind the scenes, it is also striving to dissuade Kyiv from targeting Russian oil installations because it may negatively impact the global energy balance.
In response, Russia has begun flexing its oil market muscle. It has instructed its oil companies to reduce oil output and ensure compliance with its reduced OPEC+ output quota, potentially pushing oil prices to $100 a barrel later this year, warned J.P. Morgan Global Commodities Research last week, unless the U.S. or other suppliers take countermeasures.
This will not be easy. Given the shaky market balance, it seems the U.S. is keeping the dark “shadow fleet” of Russian tankers taking its crude to customers on a rather loose leash.
In this ongoing strategic manoeuvering, no clear victor is in sight.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
For interview requests, click here.
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