The EU has ramped up the pressure on the Russian oil industry with its latest sanctions package
On July 18, the EU announced its 18th package of sanctions against Russia, targeting the oil, banking and military sectors. The new package introduces a floating oil price cap at a 25% discount to average market prices and sanctions 105 vessels as part of Russia’s so-called ‘shadow fleet’. The package also bans any transactions through the Nord Stream gas pipelines, and any imports into the EU of refined oil products from Russian crude via third countries.
What’s next
The Russian oil industry has adapted to sanctions but the combination of low prices, targeted sanctions on intermediaries and tighter control over refined products imports into the EU will push Russian oil further into discount-driven Asian markets. That will erode the profitability of the sector. Although this will not result in immediate fiscal distress, declining margins and disinvestment will erode the industry’s infrastructure and future revenue-generating potential.
Subsidiary Impacts
- US support for the floating price cap would eliminate “cap arbitrage” and make enforcement more effective.
- Some member states were reluctant signatories of the package; these divisions will limit the EU’s sanctions toolbox in the future.
- Establishing how much of the imported refined products is derived from Russian crude will prove difficult.
Analysis
The Russian oil industry will continue to adapt to the sanctions environment in two main ways:
- first, by reorienting exports as much as possible; and
- second, by sending oil exports to prohibited markets through the use of opaque intermediaries in shipping, banking and oil refining.
Russia is helped by the EU’s reluctance to impose a full embargo on Russia, partly to avoid inflicting excessive harm on the Russian population, but mainly because the interests of member states are at stake.
The piecemeal approach makes it easier for Russia to find ways around each package of sanctions.
China and India take most Russian oil exports
Exports of oil have gradually shifted towards China and India, which together are estimated to purchase around 85% of Russian crude oil exports (see RUSSIA: Risks to oil sector will remain high – March 24, 2025). In the meantime, Russia has deepened relationships with intermediaries in the Middle East, Africa and South-east Asia.
Russia builds a shadow global network
These global networks have helped Russia to set up alternative payment and insurance mechanisms, and to transport oil worldwide through a fleet of vessels engaged in operations that circumvent sanctions (see RUSSIA: ‘Shadow fleet’ will prove resilient – December 16, 2024).
According to the United Kingdom’s National Crime Agency (NCA), Russia’s network is deliberately split into two sides, “blue” and “red”: the “blue” side is Western-facing, while the “red” Russian-facing side comprises complex ownership structures and shell companies that are easily dismantled and replaced with others in the event of detection.
As sanctions continue to tighten, hitting the “blue” side of the network, there are signs of increased cooperation between Russian entities and non-Western partners, including some Middle Eastern and Asian shipping and insurance firms; for these companies, the regulatory vacuum left by Western withdrawal presents a sizeable business opportunity.
Meanwhile, the flexibility of its “red” side gives the network the necessary resilience to survive successive rounds of sanctions, while the shadow fleet — which has been growing steadily since the start of the sanctions regime — has also continued to adapt.
These ‘shadow’ or ‘ghost’ ships — many reflagged, repurposed or operating under opaque ownership structures — have become crucial for Russia’s efforts to maintain oil exports. Russia and its network of partners are continually finding new jurisdictions with limited transparency requirements from which to operate these vessels. West Africa, in particular, is emerging as a hub for bunkering and ship-to-ship (STS) transfers of Russian crude.
Shadow fleet targeted
The expansion of Russia’s shadow network, and the key role it plays in keeping Russian oil moving, is the reason for the EU’s crackdown on these vessels and third-country intermediaries in its 17th and 18th packages of sanctions (see RUSSIA: EU will reduce price cap on oil exports – July 18, 2025).
The EU’s increased targeting of this network is intended to close loopholes and make it harder for Russian oil to reach global markets through a range of measures, such as advanced marine tracking systems, restrictions on insurance and financial services and tighter controls on STS transfers.
The impact of measures targeting the shadow fleet is likely to be modest
These measures are difficult to implement, and the Russian oil industry is likely to maintain its export volumes through ongoing market reorientation, regulatory arbitrage and, of course, the shadow fleet. However, the costs and risks of operating through this network are mounting.
Higher shipping and insurance costs, combined with deep discounts to buyers, have reduced profit margins for Russian oil companies and the government. The threat of further sanctions and secondary measures targeting third-country buyers and enablers also dampens the attractiveness of the market opportunity for these intermediaries.
Baltic squeeze
Some areas will also be easier for the EU to police than others. Most notably, the Baltic Sea has emerged as a focal point in the confrontation over shadow operations. Russia has used a growing fleet of shadow vessels to ferry oil from its Baltic ports of Primorsk and Ust-Luga. In these busy sea lanes, Russia’s ghost ships use a variety of tactics, such as disabling transponders or falsifying documentation to obscure origin and destination.
However, the 17th package passed in May quickly altered patterns of shipping in the region, and increased scrutiny will lead to further delays and rerouting, driving up logistical costs for Russian oil exporters.
Germany has added to the challenge by increasing checks on tankers heading out of the Baltic Sea through the Fehrmarn Belt, an 18-kilometre-wide strait between Germany and Denmark. Ships will be required to provide proof of insurance compliant with EU regulations, and failure to do so could lead them to be sanctioned.
Europe is succeeding in limiting Baltic Sea access for the shadow fleet
Faced with increased checks, some insurers and financiers, wary of running afoul of Western regulators, have withdrawn services from even marginally risky transactions.
The Baltic Sea used to account for around 60% of Russia’s seaborne oil exports as late as 2024, according to independent estimates. While the tactical choke point is unlikely to stop exports entirely — as long as the price cap is or appears to be respected, ships will continue to be allowed through — the checks will raise costs for Russian oil exporters and force further adaptations within the shadow network, including the need to find additional eastern outlets for Russian oil.
Asian markets less profitable than European
The loss of Baltic trade would compound the effects of severing one of the few remaining connections between Russian crude and European markets. On June 30, Polish oil company PKN Orlen ended its long-term contract with Russia’s Rosneft. This, together with the ban on refined imports from Russian crude stipulated in the 18th package of sanctions, all but eliminates Russia’s ability to sell oil into Europe and forces Russia to increase its reliance on Asian markets.
This raises risks for Russia. While Russia’s pivot to Asia is well under way, there are signs that major buyers like India are beginning to push for even steeper discounts, exploiting Russia’s need for alternative markets.
Meanwhile, China faces its own economic headwinds, potentially limiting further growth in demand. Additionally, some Indian and Chinese companies wishing to work with Western partners will likely prove reluctant to risk engagement with Russia for fear of being sanctioned, limiting the range of partners available to Russia, and thereby further weakening the latter’s bargaining position.
