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The Elusive Oil Price Cap: Cutting the Flow of Oil Money to the Kremlin

A joint analysis between the Center for the Study of Democracy (CSD) and the Centre for Research on Energy and Clean Air (CREA).

Financing the War in Ukraine

After the Kremlin’s full-scale invasion of Ukraine, the EU introduced a series of packages of sanctions on Moscow, including a ban on oil and oil product imports and a price ceiling on Russian crude trade. In May 2022, after threatening to block the respective EU sanctions package, the Bulgarian government, along with other EU member states, carved out a derogation from the EU ban on the import of Russian crude and oil products. After the introduction of the derogation, the Lukoil-controlled refinery in Burgas, the largest in the Balkans, significantly increased its import reliance on Russian crude from 70% before the invasion to 93%, generating an estimated $2.4 billion in windfall profit since the start of the war because of the difference between the price of Russian and non-Russian crude.

The Centre for Research on Energy and Clean Air (CREA) has estimated that as a result of the derogation, the Lukoil-owned refinery exported EUR 984 million worth of fuels in the first nine months of 2023. This major loophole allows Russia to use the EU to preserve its global oil market share and finance its brutal war in Ukraine. By the end of October, the Neftochim refinery had processed around 34 million barrels of Russian crude oil, generating roughly $2.2 billion in revenues for the Kremlin. In addition, Lukoil, which controls the oil supply chain in Bulgaria and a big part of Southeast Europe, generated a surplus profit of more than $700 million, of which only a fraction would likely be paid back to the Bulgarian budget. The rest has been transfer-priced to offshore subsidiaries in Switzerland, the Netherlands and the UAE. Russia has significantly benefited by selling its crude oil above the cap to its fourth largest seaborne crude oil buyer in 2023, Bulgaria.

Figure 1: Russian crude oil revenues from sales to Bulgaria generating surplus profit for Lukoil

Source: COMEXT Database based on data from the Bulgarian Customs Agency

Circumventing Sanctions

Lukoil Neftochim may have also violated the conditions of Bulgaria’s sanctions exemption, by directly transferring oil products made from processing Russian crude oil to the Netherlands, Italy, Romania and the U.S. Whether the refinery has violated the exemption can be calculated by the mass balance principle, one year after the EU oil products ban was implemented. Although exports to EU countries have dwindled in 2023, Lukoil has used EU ports and key hubs in international waters for ship-to-ship transfers (STS) and onward exports to non-EU countries. Between February and July 2023, a further 3,36 million barrels of gasoline left Bulgarian ports on voyages where the ultimate destination country was obscured through a series of STS transfers. This constitutes 27% of the refinery’s total sales abroad.

In most cases, the low-quality fuels are transferred to ships carrying higher-quality products, increasing the value of the final exports, and thus, the profit Lukoil is generating. CSD analysis reveals that the fuel products have been sold to a range of countries including the U.S., Egypt, Turkey, and Nigeria, among others. CREA’s analysis of Kpler data reveals that between April and October 2023, three shipments carrying more than 600,000 barrels of fuel products from Lukoil worth around $62 million engaged in an STS transfer (mostly near Greece) with a final destination at different U.S. ports in Florida, New York and Houston.

CREA estimates that in the 10 months since oil sanctions on Russia were implemented (5 December 2022), STS transfers of Russian crude oil have increased 54%. The logistics in the Russian oil trade have become more complicated, and many ships have become reluctant to enter Russian ports. A total of 822 STS transfers of Russian oil in EU waters one year since the oil sanctions were implemented. Over half of them happened off the coast of Greece (specifically at the Kalamata Lightering zone). The rest were near Malta, Ceuta (Spain), Constanta (Romania) and Augusta Lightering (Italy). The EU has enabled an estimated 20 million tonnes of Russian oil (around 400,000 barrels per day) to have undertaken STS transfers in its waters over the year after sanctions were implemented. These transfers can be environmentally risky, with some old tankers undertaking STS transfers without insurance in EU waters. 

Despite the overwhelming evidence that Lukoil has taken advantage of the derogation to maximise the export of fuel products on the back of rising Russian crude imports, Bulgarian Prime Minister Nikolay Denkov has consistently downplayed the findings, calling them biased. He has explicitly defended Lukoil, claiming the company has respected all EU and national laws and regulations.

The Elusive Price Cap

Data  also suggests that since the end of July 2023, Lukoil has imported Russian crude oil at prices above the $60 price cap. The average import price for Russian crude at the Rosenets Port Terminal steadily rose from $54,9/barrel in June to $85.5/barrel in October. Concurrently, Lukoil’s average monthly Russian crude oil imports rose from 2.75 million barrels between February and June to around 4 million between July and October, providing at least $690 million in additional oil revenues to Russia. Russia’s revenues could have been cut by $231 million if these purchases by Lukoil had taken place at the price cap. CREA estimates that the Kremlin has also earned an estimated $468 million in tax revenues from the sale of Russian crude to Burgas between August and October 2023, selling its oil above the price cap. In this period Russia has earned close to $1.5 billion in total tax revenue in 2023 (around 3% of their total oil budget revenue).

Figure 2: The average price of Russian crude oil imports has consistently risen above the oil price cap in parallel to an increase in crude oil imports

Source: COMEXT Database based on data from the Bulgarian Customs Agency

Kremlin’s Enablers

CREA’s analysis of Kpler shipment, vessel insurance and ownership data estimates that in 2023, 91% of crude oil shipments from Russia to Burgas were transported on ships owned (most notably Greece) or insured in countries that implement the oil price cap. Given that these tankers shipped almost all Russian crude oil to Burgas, and that the average Russian import price was significantly higher than the oil cap in these two months.

Although the Council Regulation (EU) No 833/2014 imposing sanctions against Russia says that the ceiling on the seaborne trade of Russian crude oil refers to transactions with third countries (non-EU/G7), the fact that the cap does not cover maritime Russian crude imports under the Bulgaria derogation is a glaring loophole in the sanctions. Lukoil, the Bulgarian government and Western shipping and insurance enablers of Russian oil trade have exploited the legal gap to maximise the Kremlin’s tax revenues. CREA's analysis estimates that as a result of the oil price cap not covering shipments of Russian oil to Bulgaria, Russia has earned an extra $231 million from its exports of crude oil to a country within the EU borders between August and October 2023.

What’s next?

There is an urgent need to strengthen the implementation and enforcement of the oil sanctions with a particular focus on the oil price cap. In addition, the derogation has been used as a backdoor for possible additional crude sales to the EU and likely illegal shipments of final products to other member states, Turkey and North Africa.

  • Enforcing the oil price cap. The EU should immediately ban the violation of the oil price cap for seaborne imports of Russian crude that are still allowed under the derogation from EU Regulation 833/2014.
  • Lifting of the derogation. The sooner the derogation is lifted, the faster Europe will close the biggest loophole in the Russian sanctions regime. If the exemption stays in force until 1 March 2024, all exports of Russia-made fuel products should be banned from the start of the new year. The price of Russian crude imports should not exceed $60 per barrel and the revenues generated by Lukoil through the difference between the import price and the average Brent crude price should be taxed at 100% to prevent the Russian company from obtaining surplus profit from selling fuel products on the Bulgarian market.
  • Noncompliant cargo. The measures to prevent European shipping companies from servicing non-compliant crude are ineffective. Vessels that have handled noncompliant crude regain access to EU insurance services just 90 days after unloading their last noncompliant cargo. Increasing the ban for ships handling non-compliant crude to one year will increase deterrence.
  • Closing STS loopholes. STS operations in EU waters that rely on tugboats and shore support from port authorities in Romania, Greece, Malta, Spain and Italy should be banned. Enhanced due diligence should also be conducted in the context ofSTS transfers, especially in areas at higher risk for illicit trading activity or manipulation of automated ship tracking systems. Port authorities should verify oil record logs to hold accountable records of cargo movements aboard vessels.
  • Robust due diligence. Both oil clients and government authorities should carry out appropriatedue diligence, especially for ships that have undergone numerous administrative changes. Operations involving “shadow tankers” with no or dubious insurance and safety oversight, constitute a risk to coastal waters and should be banned. This applies also to STS from price cap-compliant tankers to “shadow” tankers.
  • Increasing the fines. Port authorities and customs agencies should significantly enhance their monitoring andinspection of vessels to ensure compliance with the oil sanctions regime. For example, EU members should increase the fines imposed for violating the rules of the derogation to 10% of the company’s annual revenues, which is in line with similar anti-trust regulations.    
  • Lower the oil price cap. The EU should also tackle the elephant in the room head-on. The oil price cap has failed to significantly lower global oil prices. A dynamic oil price cap should be introduced with the 12th sanctions package that is set at 50% of the spotprice of the Brent benchmark price. This would stimulate Russia to keep selling oil to the global market but would significantly squeeze the country’s budget revenues and deprive it of resources to maintain the war effort in Ukraine.

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