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The Elusive Russian Oil Phaseout: New Loopholes to Maximize Kremlin Revenues

CSD’s detailed analysis on oil sanctions circumvention published on December 14 and reported in the Politico newspaper, reveals a disturbing reality: Russia has adeptly exploited the governance gaps in EU Regulation 833, including the derogation from the EU import ban on Russian oil, ship-to-ship transfers (STS) in EU waters, and the utilization of shipping and insurance mechanisms.

Lukoil imports much more crude oil from Russia than it needs and at prices much higher than the oil price cap of $60 per barrel.

In the months after August, 2023, Bulgaria has allowed Russia to export to crude oil to the Lukoil Neftohim refinery on the Black Sea coast at average prices much higher than the oil price cap of $60 per barrel, set by the EU and G7, reaching over $85 per barrel. In addition, in the same period, Bulgaria has imported on average 50% more Russian oil (up to 4 million barrels per month) than the average volumes between February and June, 2023. The Kremlin’s tax revenues from the natural resource extraction tax and the export duty are at least $500 million. The total Kremlin tax revenues from the derogation from Regulation 833 allowing Bulgaria to continue buying Russian crude oil until the end of 2024 have already reached $1.5 billion February to October, 2023, 3% of the total Russian oil budget revenues.

The Bulgarian Parliament voted today to lift the derogation of the import of Russian crude oil from 1 March, 2024.

However, MPs have implanted two major loopholes in the bill that aim to compensate Lukoil for the early end of the exemption.

Despite the political agreement to ban the export of Russia-made fuels from 1 January, 2024, the law in fact envisions that the Customs Agency, under the control of the Finance Minister, will allow Lukoil to process all Russian crude oil imports done before the end of 2023, and sell the low-octane gasoline (A92 with trade code: 27101241) to the global market. The export permit applies also to Russia-made fuel products that were already processed and stored by Lukoil before 1 January, 2024.

Figure 1. Exports (thousand tons) of low-octane gasoline and special spirits (total and via STS)

Source: CSD based on official customs data.

Lukoil will likely export the low-octane gasoline of around 1 million barrels to the High Seas (in Greek and Maltese waters) and will be transferred to other tankers for final sale in the U.S., Africa and Asia.

The export data assessment reveals that in 2023 Lukoil has sold exactly these low-quality gasolines via STS (around 3.5 million barrels) in the High Seas without naming a final destination for the cargoes. Although in the past 10 years there has not been any fuels exports via STS, Lukoil has facilitated one-third of its total exports in 2023 using exactly this scheme (see Figure 1). At least three fuel tankers involved in the STSs have exported gasoline to U.S. ports in Florida, Texas and New York.

The export of low-octane gasoline, made from processing Russian crude oil, will generate $360 million in additional revenues for Lukoil in 2024.

As Bulgaria has increased Russian crude oil imports in parallel to rising non-Russian oil (around 20% of the total), Lukoil has generated a large surplus of oil (between 4 and 5 million barrels) in its reserve on site in Burgas. these additional volumes can be processed in final fuel products and then sold to the Bulgarian market and exported to non-EU countries in 2024. This would provide Lukoil with additional revenues worth around $360 million.

Based on a preliminary estimate of the total Bulgarian imports of Russian crude oil in 2023, Russia will have sold 43 million barrels of crude oil to the Lukoil Neftohim refinery on the Black Sea coast, worth $2.9 billion. This is close to the value of Russian crude exports to Bulgaria in 2022 despite the fact that since February, 2023, Lukoil Neftohim can no longer export fuels to the EU and countries that have imposed the Russian oil ban.

Figure 2. Crude oil imports in Bulgaria by origin in million barrels*

Source: CSD based on official customs data; *Based on a preliminary estimate extrapolating the average Russian crude oil import volumes in August, September, October and until mid-October, the total Russia crude oil imports in Bulgaria will reach 42,81 million barrels in 2023, generating $2.9 billion in Russian oil revenues

Allowing Lukoil to continue the export of refined products contradicts Bulgaria’s government declared objective to reduce the price of fuels on the domestic market. If Lukoil is not allowed to export refined products, the company would have to sell them to Bulgarian consumers. This would increase the supply in the country leading to lower prices.

In January and February, 2024, Lukoil will import at least 3.5 million barrels of Russian oil.

The second loophole in the law is the lack of a requirement for Lukoil to import crude oil below or at the oil price cap of $60 per barrel. Assuming that the Russian company will import around 3.5 million barrels of Russian oil in the first two months of the new year, the oil purchase will generate additional tax revenues for the Kremlin worth $168 million from natural resource extraction and export duty taxes.

The oil price cap on the seaborne sale of Russian oil aims to reduce the Russian revenues from selling oil in non-EU/G7 countries. The derogation for Bulgaria from EU Regulation 833 does not forbid the purchase of Russian oil above this price but the European Commission does not encourage the derogation to be used for maximizing the Kremlin’s tax revenues, and only in cases where the security of oil supply is under threat.

The two glaring loopholes in the law will not only compensate Lukoil for the early lifting of the derogation but could create risk for the national budget.

The import of Russian crude oil above the price cap in the second half of 2023 eliminates Lukoil’s surplus profit based on the lower price of Russian oil before August, 2023.

As the average Russian crude oil import price after August 2023 increases to reach parity with the price of alternative crude blends, Lukoil’s pre-declared 2023 annual profit of around $500 million will shrink significantly and the advanced payment of around $224 million will be returned to the Russian company by the Bulgarian government in 2024.

Figure 3. Crude oil revenues from the export to Bulgaria by origin of the supply ($ million)

Source: CSD based on official customs data.

What’s Next: The Bulgarian MPs must not allow this national exemption on fuel exports to stay as to prevent Lukoil from maximising its profit and, by extension, the Kremlin’s oil budget revenues. In addition, the law must prohibit the violation of the oil price cap for seaborne imports of Russian crude, still permitted under the derogation from EU Regulation 833/2014. The sooner this derogation is lifted, the faster Europe can close the most significant loophole in the Russian sanctions regime.

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