The Kremlin continues to profit from oil: Mysterious companies involved

Despite the sanctions imposed on Moscow following last year's invasion of Ukraine, it seems they have not proven entirely effective, as Bloomberg reports. Russia's monthly income from oil exports is now higher than it was before the incursion. So, how does the Russian oil reach the buyers? And who are the buyers?

A few months after the Ukraine invasion, Western countries determined a price cap of $60 per barrel for Russian oil. This pricing strategy was devised to sustain the flow of Russian oil to prevent short supply and price surges, while restricting Russia's profit from exports.

The Western countermeasures have failed to perform as intended. According to Bloomberg, these measures have triggered the growth of a lucrative black-market business, from which many unidentifiable traders and companies gain significant benefits.

The issue raises controversy as European carriers profit from the transportation of oil. Conveyance data has shown that Greek ships have moved 20 percent of all oil supplies to Russia in 2023, with Spanish vessels also participating in this arrangement. However, a significant 45 percent of transportation is conducted by the 'shadow fleet', such vessels whose ownership remains unclear.

The West is attempting to tackle the 'shadow fleet' that facilitates the delivery of Russian oil. Since the sanctions were put into effect, the United States has imposed fines on eight tankers carrying crude oil - out of which six belonged to the Russian state-owned company, Sovcomflot.

Besides this, US authorities have approached around 100 vessel operators seeking information on any potential breaches of the price cap. The European Union contemplates introducing a system requiring prior authorization for tanker sales or exports and second-hand vessels. In the UK, sanctions have been enforced on a crude oil trader from Dubai due to an opaque ownership structure.

Lars Barstad, CEO of Frontline Ltd., which manages supertankers, believes that the "shadow fleet" will only become more prevalent. "This will continue as long as regulatory bodies can't take action against it," he explains.

There's also ambiguity not just in the oil transport market but among its purchasers as well. According to Bloomberg, large-scale companies that used to buy most of Moscow's crude oil after the sanctions have since withdrawn from the market. Nevertheless, smaller and formerly unknown entities have taken their place, with some popping up only after the sanctions were enacted. Similar to the ships, the real owners of firms buying oil are not identifiable.

Additionally, Bloomberg traced the endpoint of Russian oil. A significant chunk of it is bought by India, averaging at 72 dollars per barrel.

Bloomberg estimates that in October, Russia's net oil revenues were $11.3 billion, accounting for 31 percent of the country's total net budget revenue. This estimate uses data from the Russian Ministry of Finance. A month prior, the Center for Eastern Studies claimed that in September, Russia's oil export revenues totaled $18.8 billion.

Recent data suggest a decline, but the Kremlin has reason for satisfaction. The revenue from oil is reducing the budget deficit, surpassing prior earnings, and most importantly - crude exports continue to provide a steady income flow. Thus, Russia can anticipate stable revenue and accordingly plan its expenditures.

Sanctions imposed on Russia extend beyond the oil industry. Other product exporters in Russia face restrictions as well. A visible decline in the revenues of Russian corporations is reported by the pro-Kremlin newspaper Izvestia. It states that the revenues of Russian companies reportedly dropped by almost 50.7 percent year over year in the first half of 2023, from 694 billion rubles to approximately 342.2 billion (around 375 billion dollars).

Sanctions have also led to an uptick in the popularity for non-Western marine insurance alternatives. However, adopting these might entail considerable risk as they may not meet proper security standards.

The Kremlin's strategies are a concern for Western nations. The United States and its allies must decide if they truly want to curb Russian oil flows, which could subsequently spike global fuel prices. This could hold definite political implications, particularly for President Biden, who is in line for re-election.

Restraint may be necessary if action is to be taken by the West. According to a Financial Times report, the US administration aims to cut Russian energy revenues by 2030, with a proposed decrease by 40-50 percent during this period.

Geoffrey Pyatt, an assistant to the US Secretary of State, explained in an interview that the Americans plan to take measures to stop Russia from profiting from oil as long as Putin poses a threat to Ukraine and its neighbors. Pyatt asserts that it is crucial to prevent Russia from garnering high oil revenues as it could reignite conflicts in 3-4 years if it does not achieve its objectives in Ukraine.

"Limiting Russia's future income is just as important as crippling its current finances," summarized Pyatt.