The Oil Price Cap Strategy and Its Shortcomings
When G7 nations and the European Union imposed a $60-per-barrel price cap on Russian oil in December 2022, the goal was innovative: allow Russian oil to continue flowing to global markets while limiting Moscow’s revenue from its most valuable export. Three years into this experiment, evidence suggests that Russian sanctions have been largely circumvented through a sophisticated network of tankers, insurers, and intermediaries operating outside Western regulatory frameworks.
According to Al Jazeera, Russia has assembled a shadow fleet of at least 187 tankers capable of transporting crude oil and refined petroleum products without relying on Western shipping services or insurance. The Kyiv School of Economics estimates that this fleet has enabled Russia to maintain oil revenues at approximately $178 billion in 2023, with projections reaching $200 billion in 2024.
How the Shadow Fleet Operates
The mechanics of Russia’s sanctions evasion strategy reveal sophisticated adaptation to Western pressure. According to Lloyd’s List, Russian entities purchased aging tankers from Western companies at prices higher than scrap value but still commercially advantageous. These vessels operate without Western protection and indemnity (P&I) insurance, instead relying on alternative coverage from countries like Russia and China.
The limited effectiveness of the price cap is evident in market pricing. According to Politico, Russia’s benchmark Urals crude traded at approximately $84 per barrel in October 2023, substantially above the $60 cap. The Centre for Research on Energy and Clean Air (CREA) found that virtually no barrels of Russian crude were being sold below the mandated cap price by 2024, effectively rendering the mechanism toothless.
This circumvention became possible through alternative shipping arrangements. Western protection-and-indemnity-insured tankers dropped approximately two-thirds of their trade in Russian crude between April and October 2023, but the shadow fleet tripled its operations to 2.6 million barrels per day over the same period, according to Politico.
Alternative Trade Partners and Payment Mechanisms
Russia’s success in evading oil sanctions depends heavily on willing trade partners. According to Al Jazeera, China and India dramatically increased their purchases of Russian oil after Western sanctions were imposed. India increased Russian oil imports by 134% over recent years, accounting for almost half of Russia’s seaborne crude trade.
These alternative markets have been complemented by new payment mechanisms that avoid Western financial systems. According to Business Insider, India’s top oil refiners began buying Russian crude with the UAE dirham, while the UAE has agreed to trade oil with India in rupees. Such arrangements create pathways for continued trade that circumvent dollar-denominated transactions and associated sanctions risks.
The development of these alternative payment channels accelerated the global trend toward de-dollarization. According to Reuters, Chinese President Xi Jinping told Gulf Arab leaders that China would work to buy oil and gas in yuan, supporting Beijing’s goal to establish its currency internationally and weaken the dollar’s grip on world trade.
The EU’s Implementation Challenges
EU sanctions have faced particular challenges in implementation and enforcement. According to Lloyd’s List, the loosely worded legislation in Europe’s sanctions packages has created legal ambiguity for the insurance sector. Phrases such as “as soon as possible” and “exceptional temporary derogation” contrast sharply with the insurance sector’s requirement for legal clarity, making compliance difficult to implement consistently.
The European Union’s reluctance to fully sanction Russian energy exports earlier in the conflict gave Moscow valuable time to develop alternative trade arrangements. According to Monde Diplomatique, “sanctions have functioned as a kind of externally imposed protectionism” that pushed Russia to develop domestic alternatives to Western imports while finding new markets for its exports.
The Refining Loophole
A major weakness in the oil sanctions regime is what experts call the “refining loophole.” According to Politico, countries like India buy large volumes of Russian crude at discounted prices, process it into refined products, and then sell these products globally without restrictions. This means European consumers may unknowingly be using petrol, diesel, and jet fuel produced from Russian crude, indirectly financing Moscow’s war machine.
The scale of this activity is substantial. According to Politico, India’s exports of fuel products to the EU have skyrocketed since 2022, coinciding with its increased imports of Russian crude. While technically not violating EU sanctions in Russia, this trade effectively undermines the intent of the restrictions.
Why Enforcement Remains Weak
Enforcement of the oil price cap has proven challenging for multiple reasons. According to The Guardian, Western governments must balance Russian sanctions implementation with economic self-interest, including concerns about global oil prices and inflation. This tension has led to hesitancy in aggressively enforcing restrictions.
Limited resources for monitoring and enforcement create additional gaps. According to Politico, Western governments have taken few actions against sanctions violators, with only a handful of individuals charged for failing to adhere to the rules. The relative rarity of investigations and penalties has created an environment where circumvention carries limited risk.
These implementation failures help explain why sanctions are not working as intended against Russia’s oil sector. The Kyiv School of Economics estimates that Ukraine’s Western allies could reduce Russia’s oil revenue by a quarter if they did more to enforce the embargo and price cap, and by more than half if they lowered the price cap to $50 a barrel. However, Moscow is banking that they will not take these more aggressive steps.
The Need for Strategic Recalibration
The experience with Russia’s shadow fleet demonstrates the limits of sanctions in a multipolar world where alternative markets, shipping services, and financial channels exist. To increase effectiveness, Western governments might consider several adjustments to their approach.
First, closing the refining loophole would require tracking the origin of crude oil used in refined products, potentially through chemical fingerprinting technologies or stricter certification requirements. Second, dedicating greater resources to monitoring and enforcement could increase the risk calculus for sanctions violators. Finally, secondary sanctions targeting entities that facilitate Russia’s oil trade might increase compliance among non-Western actors currently willing to trade with Moscow.
Without these adjustments, the oil price cap will likely remain more symbolic than effective, demonstrating the challenges of using economic tools against determined countries with sufficient resources and alternative trading partners in today’s multilateral international system.
