US, global partners step up Russian crude price cap enforcement amid efficacy concerns

US officials for the first time imposed sanctions on entities violating the $60/b price cap on Russia seaborne crude exports Oct. 12, while a broader international coalition announced its intentions to beef up enforcement as the price cap policy's impact appears to be fading.

Price caps on Russia-origin crude oil and refined products were devised as a carve out for EU and G7 maritime service providers to continue aiding with the seaborne transport of Russian fuels as long as they are sold at or below the cap levels.

But a "shadow fleet" of typically older ships engaged in high-risk shipping practices, including the falsification of registration, concealment of ownership and cargo, and manipulation of vessel tracking systems, has emerged in an effort to circumvent the caps. Further, three-fifths of Russian crude exports are now being shipped by tankers not required to comply with the G7 oil price cap, according to S&P Global data.

Though US officials continue to point to the novel price cap regime as a success, noting that Russian oil tax revenue has slid 45% from January-August this year compared with the same year-ago period, Treasury Secretary Janet Yellen last month signaled concerns about the policy's continued effectiveness.

"Russia has spent a great deal of money and time and effort to provide services for the export of its oil," Yellen told reporters Sept. 29. "They have added to their shadow fleet, provided more insurance, and that kind of trade is not prohibited by the price cap."

But earlier this week she foreshadowed plans to ratchet up enforcement measures.

New sanctions

The first-ever US sanctions targeting violations of the price cap hit UAE-based Lumber Marine SA and Turkey-based Ice Pearl Navigation, the Treasury Department said.

According to Treasury, Lumber Marine's SCF Primorye carried Novy Port crude oil priced above $75/b from a port in Russian while Ice Pearl Navigation's Yasa Golden Bosphorus transported ESPO crude oil priced above $80/b. Both vessels used US-based service providers subject to the price cap while transporting the Russian origin oil.

In addition to the sanctions, their respective vessels were identified as blocked property.

"Today's action demonstrates our continued commitment to reduce Russia's resources for its war against Ukraine and to enforce the price cap," Treasury Deputy Secretary Wally Adeyemo said in a statement Oct. 12.

Adeyemo expressed the US' unwavering support for reducing Russia's oil profits while also keeping global energy markets stable and well-supplied.

State Department spokesman Matthew Miller added that "nearly 10 months into implementation of the price cap, we are confident it is achieving" those twin goals.

International support

But analysts and market watchers continue to debate whether the policy is hitting Russia's coffers as much as initially hoped.

Russia pumped 9.43 million b/d of crude in September, according to the latest Platts OPEC+ survey by S&P Global Commodity Insights. That is down from 10.11 million b/d in February 2022, when Russia launched its invasion of Ukraine, but far more resilient than many analysts had forecast at the start of the war.

And a tightening global market has pushed oil prices up, with the discount of Urals against Dated Brent narrowing to the smallest value since before Russia's invasion of Ukraine.

Urals FOB Primorsk was assessed by Platts at $75.465/b Oct. 12, remaining above $60/b since July 11. The Urals FOB Primorsk discount to Dated Brent was assessed by Platts at $12.20/b Oct. 12, having tightened from $40.55/b Jan. 12.

The coalition behind the price cap, namely the G7 and Australia, came out in strong and unified support of the policy and committed to cracking down on violators.

"Where we have evidence that companies or persons have engaged in illicit or deceptive practices related to shipments of Russian-origin crude oil and petroleum products, we will respond in accordance with the respective restrictive measures established by the coalition members," they said in a joint statement, adding that "the coalition stands behind US initiatives to enhance compliance with the price caps."

Shadow fleet

The coalition also issued a new advisory to the maritime oil industry with best practices for preventing sanctioned trade and limiting exposure to the ramifications of working with a burgeoning shadow oil trade network.

The advisory warns of a litany of increased safety, environmental, economic, reputational, financial, logistical and legal risks the maritime oil trade faces from entities partaking in evasion and illicit activities.

For instance, "vessels in the shadow trade may fabricate or neglect the appropriate surveys or inspections and lack regulatory certificates required under international conventions," according to the advisory. And "ships involved in the shadow trade may rely on unproven Protection and Indemnity (P&I) insurance providers that operate in jurisdictions with opaque or limited regulation, and insufficient capital, reinsurance arrangements, and/or technical expertise to handle a major claim in the event of a marine casualty."

The advisory offers seven recommendations that industry stakeholders can adopt to reduce their exposure to possible risks, including requiring appropriately capitalized P&I insurance; continually broadcasting Automatic Identification Systems; monitoring high-risk ship-to-ship transfers; and reporting ships that trigger concerns.