Punishment by addiction: Why lifting oil and gas sanctions could be the best sanction

RU

The summer of 2024 feels like a “last battle.” A victory for Donald Trump in the U.S. elections could lead Washington to stop actively supporting Ukraine’s war effort, thereby compelling Kyiv to negotiate while abandoning any hope of liberating its occupied territories. Simultaneously, Western countries are striving to introduce as many new sanctions against Russia as possible before the prospective “changing of the guard” occurs, and they are also enhancing the effectiveness of restrictions imposed in the wake of Moscow’s full-scale invasion of its neighbor.

Recently, much attention has been focused on the West's efforts to limit Russian oil supplies to third countries. After realizing that the $60 per barrel price cap was ineffective — a fact I detailed back in the fall of 2022 — Western authorities turned their focus against the tools Russia uses to circumvent these restrictions. Specifically, they targeted tankers purchased by Russia through front companies to transport oil without European involvement. So far, sanctions have impacted no more than 60 ships of the Russian “shadow fleet” — this out of an estimated 450 to over 1,000 vessels. This fleet frequently changes the countries where its tankers are registered, falsifies ship documents, and regularly disconnects their automatic identification systems. However, the effectiveness of both the measures already introduced and those proposed to restrict the operations of the “shadow fleet” remains questionable.

The foundation for sanctions policy lies in a country's ability to restrict the supply of its goods or services to a state that violates certain rules of behavior, and its capacity to refuse to purchase goods and services from that country. In this context, Western countries' ban on supplying many of their products to Russia is understandable and, most importantly, feasible. The same applies to the embargo on Russian energy carriers imposed by the U.S., Canada, and, much later and with some exceptions, the European Union. A further level of restriction involves banning the sale of goods produced in third countries that use Western components and technologies, then using these restrictions as an instrument of pressure. An even more advanced approach involves pressuring specific companies with the threat of restricted access to Western markets if they assist in trading with Russia. This is precisely the situation faced by Chinese banks and financial institutions in Central Asian and Middle Eastern countries.

However, this does not mean that one country can prohibit another from trading with third countries simply because it wants to. Notably, even sanctions imposed against individual ships of the “shadow fleet” often lack solid justification. For instance, noting that certain tankers have entered North Korean ports appears to be an attempt to leverage globally recognized UN restrictions against the ships in question, but the utility of such actions is suspect. It is practically impossible to completely halt the operations of the “shadow fleet,” and even if sanctions are announced against hundreds of ships, the potential consequences remain unclear. Moreover, regardless of the sanctions, tankers can still navigate international waters and straits, as the free movement of commercial vessels is guaranteed by international conventions including the Copenhagen Convention of 1857 regarding the Baltic straits and the Montreux Convention regarding the Turkish straits.

The attempt to justify restrictions based on environmental damage also seems to be out of place. While gaps in international law in this area are evident, such legislation is unlikely to be applied to ships of the “shadow fleet.” Straits like the Skagerrak or the Bosphorus cannot be blocked for any commercial vessel or group of ships. Coastal authorities have the right to “initiate restrictive procedures up to the detention of a vessel” only if there are “clear objective signs” of an environmental threat. Passage might be denied to ships insured by companies that have been deemed as unreliable after previously failing to pay insurance claims following a wreck. However, taking such steps would represent a highly expanded interpretation of the UN Convention on the Law of the Sea.

The mere fact that a tanker, which appears somewhat outdated and sails under the flag of Liberia or Belize, is transporting Russian oil from Ust-Luga to India with Ingosstrakh insurance cannot be grounds for its detention or restriction of navigation, and there are no direct indications that any countries intend to restrict the movement of such vessels. Occasionally, news emerges on this topic, usually based on vague statements by officials. These statements typically conclude by acknowledging the importance of “ensuring that any new measures can be practically applied and comply with international law.”

Finally, the proposal to impose sanctions on the end consumers of Russian oil is equally impractical. The concept of an “end consumer” is extremely vague. Is the end consumer an Asian oil trader who purchased the Russian oil? The refinery where the oil was processed? The wholesaler who distributed gasoline to gas stations? Or the owners of the Indian and Thai mopeds that ultimately consumed the fuel? The real issue is that many of these entities may have no connections with Western countries, rendering sanctions ineffective. And if they are connected, the restrictions would likely lead to the termination of their cooperation with Western companies.

For instance, if a Malaysian oil refinery is denied repairs on U.S. equipment because it uses Russian oil, it will simply source equipment from China — a perfectly justified decision. Moreover, taking such an approach could backfire on the West, as European countries themselves increasingly purchase petroleum products made from Russian crude oil in Turkey, the UAE, and even Singapore — not to mention issues surrounding the direct re-export of Russian oil from India to Germany.

A more serious problem than the “gray” registration of ships in the “shadow fleet” is the use of numerous intermediaries in transactions, making it nearly impossible to track the real prices. If sales are formally conducted at prices below $60 per barrel, there is no basis for sanctions, leaving no grounds to restrict the ships. Furthermore, if transactions involve cryptocurrencies or barter, the “price cap” becomes irrelevant.

Energy sanctions against Russia have yielded unimpressive results so far. The refusal of European countries to purchase Russian oil and gas in 2022-2023 led to additional expenses of €650 to €800 billion for Europe, while the “price cap” benefited Chinese and Indian competitors of Western companies, saving them tens of billions of dollars. Further attempts at restrictions may have legal and political, rather than economic, consequences. Continuing these efforts could create the impression that the West has appropriated the right to establish global norms, thereby undermining the concept of international law as a set of rules agreed upon by multiple parties.

Additionally, attempts to restrict the traffic of “shadow” vessels based on alleged environmental damage undermines the presumption of innocence, imposing sanctions for actions that may only occur under certain future conditions. This approach suggests that the West may be overreaching in its sanctions policy, potentially damaging not just the Putin regime but also the legal institutions that underpin the West’s own credibility and its long-standing instruments of “soft power.”

Since the spring of 2022, I have repeatedly advocated for an optimal strategy to leverage Russia's dependence on Western energy markets: continue buying Russian energy resources in the maximum possible volumes while maintaining low prices for oil and gas, and levy a “solidarity tax” of 20-35% of the cost for end consumers in Europe.

This approach would have avoided giving Putin a substantial financial windfall — $100-110 billion from the sharp rise in prices for Russian raw materials on the European market in 2022. It could also have generated up to $60 billion annually in revenues that the EU could use to financially support Ukraine. Sanctions alone cannot replace massive military aid to Kyiv, and unfortunately, the West’s short-sighted strategy has resulted in the need to compensate consumers while simultaneously covering the costs of arms supplies and economic assistance to Ukraine. Despite this reality, the West remains reluctant to acknowledge its mistakes and instead persists in trying to uphold a clearly ineffective scheme — even at the cost of undermining international legal norms and further alienating countries of the “global South” from those of the “free world.”