Sanctions Begin To Bite Into Russian Oil Exports

The tightening sanctions on Russia’s oil exports are raising freight costs for moving Russian crude and having India scrutinize deliveries to avoid opaque trades. The U.S. upped the ante in the sanctions game last month, and Russia may now have to work out new routes and ways to circumvent sanctions at a cost.  The sanctions’ estimated direct cost to deliver Russian cargoes now is around 6-8% of the price of a barrel of crude leaving the western ports in Russia for Asia, according to data from commodity price reporting agency Argus crunched by Bloomberg.

Argus has estimated that shipping a barrel of Russian crude from a port in the Baltic Sea to China has cost around $14.50 since December, with more than half of this per-barrel cost attributable to the Western sanctions. The likely directly-related-to-sanctions cost to hire tankers to transport Russian oil is estimated at about $773 million since the end of December 2023, based on shipments tracking by Bloomberg.

“Whether this turns into actual supply losses will depend on how quickly workarounds are found for freight issues and whether Russian sellers are willing to deepen discounts,” Richard Bronze, head of geopolitics at Energy Aspects, told Bloomberg.  Russia needs to find buyers for the crude oil that was left stranded after the U.S. slapped sanctions on Russia’s state tanker operator Sovcomflot last month. China has come to the rescue—most cargoes previously bound for India are now either discharging or heading to private refiners in the world’s top crude importer.

The U.S. levied new sanctions against Russia last month on the second anniversary of the Russian invasion of Ukraine and in response to the death of opposition politician Alexey Navalny.Among the 500 targets of the new sanctions, the U.S. Treasury and State are targeting Sovcomflot and more than a dozen tankers linked to the Russian state-owned firm.  

Stranded cargoes of Russia’s Sokol crude, previously headed to India but idled off South Korea and Singapore since the U.S. stepped up sanctions enforcement, started to make their way to China earlier this month, beginning to clear a backlog of more than 10 million barrels of the grade sitting on tankers at sea. With Indian refiners shying away from the Sokol grade, Russia is now looking for alternative buyers for its crude. Some barrels appear to have been placed with private Chinese refiners, often referred to as teapots, while others wait for other takers.

Nearly half of China’s Sokol imports in March have been from sanctioned tankers diverted from India, Armen Azizian, Senior Oil Risk Analyst at Vortexa, wrote in an exclusive report this week.  On the other hand, Russian crude exports on Sovcomflot’s fleet to India have dropped by 300,000 barrels per day (bpd) from the 2023 average as exports on Sovcomflot’s fleet shift towards China, Vortexa noted.

All Indian refiners are now reportedly refusing to take Russian crude transported on vessels of Sovcomflot to avoid running afoul of the stricter enforcement of the U.S. sanctions on Russia.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.  

Russia could also move a lot of its oil with the “shadow fleet” of tankers it has amassed over the past two years to continue selling crude and products to willing customers under the radar.However, with India – Russia’s second-largest crude buyer after China – more careful to avoid fallout from the stepped-up sanctions, Moscow will have to find new customers for some of its barrels, or see its revenues from oil diminished.

Russia has admitted as much, with central bank governor Elvira Nabiullina saying last week, “After the decline at the beginning of the year, exports have been rebounding, driven by the increase in oil prices. However, secondary sanctions hinder this process.”Payments are also pressured by sanctions, the Bank of Russia governor said.”Due to sanctions, there are certainly difficulties with conducting cross-border payments,” Nabiullina was quoted as saying by Russia’s TASS news agency.