Russia seeks ways to bypass US oil sanctions to protect state budget

Russia has a month to prepare before the restrictions take full effect and it'll use that time to adapt to the new situation, said Russian official

Russia anticipates a hit to the state budget from US sanctions against the country’s two largest oil producers over the war in Ukraine, though officials say they’re confident they’ll find ways to mitigate the impact of the measures. 

Losses are inevitable, though hard to quantify at present, after US President Donald Trump’s administration blacklisted Rosneft PJSC and Lukoil PJSC, according to an official close to the Kremlin. Russia will deploy its network of oil traders and shadow tanker fleet to limit the financial impact, the official said, asking not to be identified discussing sensitive issues.  

India’s oil refiners indicated on Thursday that they’ll all but stop buying. If that does come to pass, then it would represent a huge challenge for Moscow to find alternative customers, and potentially hand China significant pricing power. The government in New Delhi has yet to comment on the US measures. Its oil ministry didn’t reply to an email seeking comment. 

 

Russia has a month to prepare before the restrictions take full effect and it’ll use that time to adapt to the new situation, said another Russian official, speaking on condition of anonymity to discuss policy matters. It’s possible Trump may also change his stance, depending on how negotiations with the Kremlin progress, the official said on condition of anonymity. 

The sanctions “will indeed have certain serious consequences for us, but overall, they will not have a significant impact on our economic well-being,” Russian President Vladimir Putin told reporters on Thursday. He called Trump’s decision “an unfriendly act toward Russia,” which is “damaging Russian-American relations.” 

The Treasury Department sanctioned the two oil giants on Wednesday after accusing Russia of a “lack of serious commitment to a peace process to end the war in Ukraine.” They’re the first major US penalties against Russia since Trump returned to the White House in January, a sharp change of tack amid growing frustration at Putin’s refusal to accept a ceasefire for talks to end the war in Ukraine. 

The penalties aim to squeeze Russia’s ability to finance the war that’s now in its fourth year, amid deepening strains on its economy and a widening budget deficit. Even before the latest US restrictions, the government expected income from oil and gas sales that make up almost a quarter of the state budget to fall to a four-year low in 2025 due to lower crude prices and a stronger ruble. 

‘This will certainly have an effect. I’m not going to say that these sanctions are just mosquito bites and nothing serious. But they definitely won’t decrease volumes significantly,” said Konstantin Simonov, head of the National Energy Security Fund, a Moscow-based think tank. “There are ways to bypass such measures and it’s almost impossible to fight them,” said Simonov, who also sits on the public council of the Russian Energy Ministry. 

Ultimately, the impact of the sanctions on Russia will depend in part on whether the US truly intends to hurt Moscow’s oil supply to the global market — a goal the White House shied away from in the past because of fears that oil and fuel prices would rise.

At the very least, the sanctions could lead to a period in which Russian cargoes are deeply discounted on international markets — with the potential for some supply loss.  

Traders will be watching whether Russian oil discounts deepen. The nation’s barrels have traded at deep discounts — especially at the point of export — ever since the war began. At the Baltic sea port of Primorsk, the nation’s flagship grade has been at about $12 to $13 a barrel below the international marker Dated Brent this month, according to data from Argus, a price-reporting agency. 

When the barrels reach their destination, that discount shrinks dramatically, suggesting middlemen are profiting.

With the global market already in surplus and set for a huge oversupply next year, a loss of Russian barrels may be easier to bear this time around. Still, it’s not certain supplies will decline. 

Moscow has overcome multiple threats to its oil flows since Putin ordered the full-scale invasion of Ukraine in February 2022. When buyers in Europe stepped away from the trade early in the war, Russia quickly expanded supplies to India and China, which soon accounted for the vast majority of oil purchases. 

The US move could restart a whole new phase of whack-a-mole, where Rosneft and Lukoil sell their oil to intermediaries who in turn sell to buyers in Asia. 

Several refiners in India, now a key buyer of Russia’s seaborne barrels, said the sanctions will make it nearly impossible for the bulk of those oil flows to continue. If the South Asian nation fully complies with the US restrictions, Russia would all but lose a market for around 1 million barrels a day, or roughly a quarter of all Russian seaborne exports.  

To be sure, India has a recent track record of saying it will heed western measures, only to carry on dealing with Russia once attention fades. Yet if it does follow through, then China’s response will become critical for Moscow. 

Beijing takes a portion of seaborne oil from Russia that’s comparable to India’s, and it would have to step up buying — possibly receiving far more cargoes via the shadow fleet of tankers that delivers Moscow’s barrels. 

Rosneft and Lukoil accounted for just under a half of Russian crude flows in the first half of this year, or nearly 2.2 million barrels a day, Bloomberg calculations show. Together with Surgutneftegas and Gazprom Neft — sanctioned by outgoing President Joe Biden’s administration in January — the four producers accounted for just under 70% of Russia’s total oil exports, or around 3.1 million barrels a day, from January to June. 

Russia plans continued heavy military spending on the war in Ukraine, even as the budget deficit balloons. The government plans to increase borrowing and to raise the Value-Added Tax to 22% from 20% starting next year to help plug the gap. 

Even a 5%-10% decline in exports by Lukoil and Rosneft combined with a wider discount could cost the budget as much as 120 billion rubles ($1.5 billion) per month, said Vladimir Chernov, an analyst at Freedom Finance Global. 

“Export volumes may decline while logistics are being restructured, and discounts are likely to widen again,” on Russian barrels, said Dmitry Polevoy, investment director at Moscow-based Astra Asset Management. The impact may be partly offset if global oil prices rise and the Russian ruble weakens, he said. 

“For now, the situation does not look too alarming for the budget,” Polevoy said. “What is more concerning is a medium- to long-term decline in oil prices.” 

The Biden measures, which also barred the provision of petroleum-related services to Russia and targeted more than 180 vessels linked to the shadow fleet, were designed to choke off Moscow’s energy revenues. 

The sanctions may have compounded the fall in energy revenues triggered by declining global oil prices and a stronger ruble. Oil and gas proceeds plunged 21% in the first nine months of the year to 6.6 trillion rubles, according to Russian Finance Ministry data. 

Publicly, at least, Russian officials are defiant.  

“Our country has developed a strong immunity to Western restrictions,” Foreign Ministry spokeswoman Maria Zakharova said Thursday at her weekly briefing. “The decision by the US Treasury will not cause any particular problems.”