As the sanctions and the costs of the invasion of Ukraine take their toll on Russia’s economy, the country is more dependent than ever on revenue from fossil fuel exports. The EU has taken massive steps over the past year to cut off its dependence on fuel imports from Russia and cut off financing for the Kremlin’s unprovoked and illegal assault against Ukraine and Europe. The short-term windfall generated to Russia by sky-high fossil fuel prices in 2022 is starting to wear out, in part due to reductions in fossil fuel consumption prompted by the high prices. Further cuts to Kremlin’s revenue will therefore materially weaken the country’s ability to continue its assault and help bring the war to an end. CREA’s briefing assesses the impacts of measures taken by the EU and Ukraine’s other allies to date, and identifies further options to drain Kremlin’s war chest.

Key findings include:

• Russia’s earnings from fossil fuel exports fell 17% in December, to the lowest level since the start of the country’s full-scale invasion of Ukraine. 
• The EU oil ban and price cap are costing Russia an estimated EUR 160 mn/day. The fall in shipment volumes and prices for Russian oil has cut the country’s export revenues by EUR 180 million per day. Russia managed to claw back EUR 20 million per day by increasing exports of refined oil products to the EU and to the rest of the world, resulting in a net daily loss of EUR 160 million. 
• The measures caused a 12% reduction in Russia’s crude oil exports and a 23% drop in selling prices, for a 32% drop in Russian crude oil revenues in December.  Germany’s stoppage of pipeline oil imports shaved off another 5% at the end of December.
• Russia is still making an estimated EUR 640 mn per day from exporting fossil fuels, down from a high of EUR 1000 mn in March to May 2022. The EU’s ban on refined oil imports, the extension of the price cap to refined oil and reductions in pipeline oil imports to Poland will slash this by an estimated EUR 120 mn per day by 5 February.
• The EU remained the largest importer of oil from Russia in December, when pipeline crude oil and all oil products are included. This will have changed as Germany ceased to import Russian pipeline oil at the end of December and the EU oil products ban enters into force in February. Japan became the largest importer of LNG from Russia as European buyers cut purchases. China, South Korea, Turkey, India and Japan were the largest importers of coal.
• Russia has so far made EUR 3.1 bn shipping crude oil on vessels covered by the price cap, resulting in approximately EUR 2.0 bn in tax income to the Russian government. This tax income can be eliminated almost completely by revising the price cap to a level that is much closer to Russia’s costs of production.
• Lowering the crude oil price cap to USD25–35, still well above production and transport costs in Russia, would slash Russia’s oil export revenue by at least EUR 100 mn per day.
• The price cap coalition has a strong leverage to push down the price caps — Russia has not found a meaningful alternative to vessels owned and/or insured in the G7 for the transportation of Russian crude and oil products from Baltic and Black Sea ports. 
• In the Pacific, Russia continues to use UK-insured tankers to sell oil to China, although the market price for the oil is above the price cap level. New measures are needed against insurers and tankers engaged in this trade.
• Further measures available to the EU and allies can cut Russia’s fossil fuel export revenues further by an estimated EUR 200 mn per day, from the level projected after the oil products import ban and price cap.

Policy recommendations

• Reductions in fossil fuel demand have played a key role in enabling the implementation and effectiveness of the import bans. It is essential to make these reductions more sustainable economically and socially by further investing in energy efficiency, energy savings and clean energy.
• Revise the oil price cap down to USD25–35 per barrel of crude oil and USD5/barrel higher for refined products. This level substantially reduces Russian mineral tax revenues while keeping Russian oil production economically viable. 
• Strengthen the implementation of the price cap by increasing penalties for tankers violating the cap, as well as strengthening disclosure requirements or requiring payments to be made through an intermediary. 
• Introduce additional sanctions to limit Russian seaborne oil trade. This includes restrictions on sales of tankers, to prevent Russia, its allies and related traders from acquiring old tankers to use to circumvent the cap, as well as prohibiting transhipment of Russian oil in territorial waters and exclusive economic zones of price cap coalition countries. Restrict the use of tankers without adequate insurance coverage and ensure the enforcement of environmental norms for tankers in the Baltic and Black Seas. 
• Institute price caps and/or import restrictions for pipeline oil, pipeline gas and LNG from Russia to the EU.

Press release available here.

Ukrainian version available here | Українська версія доступна тут