Assessing the impact of oil sanctions on Russia 

Abstract

The West has imposed significant sanctions on Russia since its full-scale invasion of Ukraine in 2022, with the most impactful being energy sanctions targeting Russia’s oil exports. This paper evaluates the effects of the two most important oil sanctions—the EU import embargo and the G7 price cap. Using data on prices, discounts, trade patterns and transport, the analysis simplifies and assesses the relationship between these sanctions as well as their individual and combined impacts.We conclude that the import embargo is likely the most consequential sanction, it reduces Russian crude oil income through the buyer’s discount. In addition, the import embargo yields significantly higher transportation costs for Russian Urals crude oil. We also conclude that the price cap does not primarily function as a binding price cap, but as a partial transport embargo, and plays an important role in reinforcing the effect that the import embargo has on Russia’s transport costs. The analysis finds that Russian oil revenues are determined by three factors.First, the world oil price is determined by the global supply and demand for oil. Then, the buyer’s discount is deducted, which gives the price of Russian oil at the buyer’s port. Finally, transportation cost is deducted, which provides the selling price in Russian ports, i.e. Russia’s oil revenue. Importantly, while all these three factors are in theory determined as one equilibrium, we conclude that in practice they can be treated separately.To reduce Russian oil income, policies can thus aim to lower the global oil price, increase the buyers’ discount on Russian oil and increase its transportation cost. The paper provides several practical policy options to achieve these goals. Russia, on the other hand, has the opposite three aims and employs policies towards this end. Many of the Western policies we outline are therefore aimed at countering the Russian countermeasures.

Keywords: Russia, Price cap, Import embargo, Trade, Tanker, Conflict, Economic warfare, Sanctions, Oil