The European Union (EU), Canada and United States (trio) governments placed sanctions on the sale of exported crude oil (oil), natural gas, liquefied natural gas (LNG), some refined petroleum products and coal originating in Russia starting in March 2022 to article publication date. The sanctions resulted from Russia’s invasion of Ukraine on February 24, 2022. Oil and natural gas are defined as hydrocarbons. The governments of Brazil, China, India, Saudi Arabia and United Arab Emirates did not participate in any trio sanctions on Russian hydrocarbon exports.
EU sanctions on Russian hydrocarbon exports were implemented in phases to soften the blow on EU countries industries when replacement hydrocarbon suppliers are simultaneously pursued. Russian natural gas is mostly exported by high pressure pipeline to EU nations. Russian oil is exported by pipeline and cargo ship. Sanctions also banned shipping insurance companies from insuring cargo ships transporting Russian oil and LNG. Russian hydrocarbon payments were limited by sanctions through nonuse of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Trio sanctions implemented an oil price cap where exported Russian oil cannot sell at greater than $60 per barrel on the open market starting December 5, 2022.
The trio thinking is apply sanctions to the bad actions/choices of a sovereign nation with the purpose of disciplining/punishing this nation. Sanctions would crimp the money Russia needs to finance the Ukraine war. History shows the everyday people in the sanctioned nation are economically hurt by these externally placed economic/trade sanctions. The top governing people in the bad nation find ways around sanction impacts.
One can apply Ohm’s Law defined as the current through a conductor between two points is directly proportional to the voltage across the two points. The equation is voltage equals current times resistance (V = I * R). Electricity naturally moves in the path of least resistance in a metal wire. Circumventing externally imposed sanctions applies this law of least resistance.
BBC news reported in January 2023, China and India increased Russian oil imports when Russia reduced its export oil sale price below the global benchmark Brent oil. Russia supplies approximately l.40 million barrels per day to India as of January 2023, where it is on course to become its largest single supplier. China’s imports of Russian oil have fluctuated and risen over 2022 as seen in the chart below.
A recent historical Russian oil dollar per barrel chart shows it sold above the trio sanctioned $60 per barrel price cap for several months after it started on December 5, 2022. The last closing price is on October 16, 2023. China and India benefit from buying Russian oil with Russia receiving revenue outside the trio sanctioned oil price cap and SWIFT payment system. Payments are made to Russia in the Chinese or Indian currency and not the U.S dollar. This payment method further undermines the global reserve currency status of the dollar.
In 2021, Russia supplied EU countries with 40% of their natural gas, with Germany the largest importer, followed by Italy and the Netherlands. This had dropped to around 17% by August 2022, according to EU figures. The EU plan in March 2022, was to cut reliance on Russian natural gas imports by two thirds by March 2023.
The EU’s phased in shutdown of Russian natural gas imports from sanctions was one of the most important and costly sanctions for the EU. Pipelines are the most economical way to ship natural gas and are difficult to quickly replace. Russia responded to these preparations and sanctions by repeatedly slowing and sometimes stopping natural gas pipeline exports to the EU.
The Federal Reservc Bank’s St. Louis District issued a report on February 16, 2023, entitled, “Reviewing the Impact of Energy Sanctions on Russia.” The opening line states, “This blog post reviews the recent costs and success of energy sanctions imposed on Russia.“ The report is very helpful to understand some unintended consequences of these sanctions. The blog post provides a brief history of EU dependence on Russian hydrocarbons and coal since 1990 and a helpful graph is below.
The Federal Reserve Bank report conclusions found:
- The trio sanctions on Russian hydocarbon exports have reduced Russian revenues but have also created costs for the sanctioning nations.
- The recently imposed price cap on Russian seaborne oil exports was initially successful. It is likely Russia will continue to find ways to evade the oil price cap over the long term, thereby reducing the effectiveness of that sanction. Buyers and sellers will collude to evade the oil price controls.
The physical evidence shows trio sanctions on Russian hydocarbon exports since March 2022 are not working. The path of least resistance to circumvent externally imposed sanctions continues to this day by a sovereign nation.
