EU to tackle Russian sanctions 'busting' as lawmakers call for tighter enforcement

The EU has pledged to clamp down on circumvention of the G7 oil price cap on Russian oil exports and other sanctions measures against Moscow, as EU lawyers reiterated calls for a complete closure of the EU market for Russian-origin fossil fuels and NGOs said Lukoil may be skirting the oil curbs in Bulgaria.

The EU is shortly expected to roll out a 12th Russian sanctions package set to include actions to tighten the G7's $60/b "price cap" on Russian crude exports, European Commission President Ursula von der Leyen has said.

"We are working on another round of sanctions," the EU Commission's deputy chief spokesperson Arianna Podesta told a press briefing Nov. 9. "The package we're going to propose will have elements that will allow us to tackle sanctions busting."

Her comments follow the Nov. 9 publication of a report by a group of NGOs led by Global Witness claiming that Russia's Lukoil -- the owner of Bulgaria's largest refinery Neftochim Burgas -- may have circumvented EU sanctions by exporting fuels made from imported Russian crude outside of Bulgaria's specific country exemptions.

Citing tanker tracking data, the report claims Lukoil may have exported fuel oil from Burgas to Rotterdam this year, which was "likely derived in part from Russian crude".

Lukoil did not immediately respond to requests for comment but the report cited its trading subsidiary, Litasco, as saying that it was complying with all applicable laws and regulations, including the G7 price cap rules.

Bulgaria exemptions

Lukoil's Burgas refinery has been processing almost exclusively Russian Ural crude since the start of the Ukraine war, the price of which has traded at a discount of up to $40/b to the global Dated Brent benchmark in the wake of Moscow's invasion. Discounts for Urals have contracted since their mid-2022 peak, however, and the Urals DAP West Coast India discount to Forward Dated Brent stood at $4.45/b on Nov. 8, almost the tightest margin since Platts began assessing the spread at $19/b in January.

Platts is part of S&P Global Commodity Insights.

Under EU sanctions, Bulgaria was granted an exemption to import and process Russian oil until the end of 2024. Further derogations also allowed Bulgaria to export certain refined products made from Russian crude to Ukraine. They also allowed Lukoil to export fuels to other countries as long as the exports were based on historical trade quotas and needed to be exported for environmental and safety reasons.

A third derogation also allows Burgas to export the same volume of refined fuels as its sources of non-Russian crude feedstocks.

"Since refineries function with a mix of crudes, exports are handled using a principle called mass balance. This principle means that Bulgaria may export to the EU up to the same amount of refined product as the total amount of non-Russian oil it has imported over the course of one year," EU spokesperson for EU-UK agreements and financial services Daniel Sheridan Ferrie said.

"It is for Member States to implement EU sanctions," he said. "We are in close contact with the Bulgarian authorities."

Bulgaria's National Assembly in September voted to phase out the country's imports of Russian crude by November 2024, following months of political wrangling over the whether the European member state should drop its exemption from EU sanctions on Moscow's oil.

Tougher enforcement

Political pressure on the US and the EU to rethink its oil sanctions on Russia have been growing since spot prices for Russia's Urals crude traded above the $60/b price cap in July. Russian oil revenues have also been rising this year as Moscow has been successful in redirecting its oil to non-Western customers through a growing shadow tanker fleet. Until recently, sanctions enforcement by the US and EU had also been tepid, emboldening shippers to trade more Russian oil.

The EU's latest comments also came as members of the European Parliament backed a resolution calling for better EU oversight on Russia's ability to bypass international sanctions.

Noting that EU imports of petroleum products made with Russian oil from countries such as India have soared since price caps began in December 2022, the resolution -- which is not legally binding -- states that the "loop hole" has created a "backdoor route for the Kremlin's oil into the EU."

"MEPs are concerned about the lack of proper enforcement and attempts to undermine the effort to strategically weaken the Russian economic and industrial base, and hindering the country's ability to wage war," the EU Parliament said.

The resolution calls for the EU to work together with the G7 to "substantially lower" the price cap on Russian oil and on petroleum products, to impose a full ban on Russian LNG and LPG imports as well as on imports of fuel and other petroleum products from non-EU countries if those products are produced using Russian oil.

The EU Parliament said also wants the EU to prohibit the shipment of Russian oil and LNG exports through EU territory and to introduce price and volume caps on EU imports of Russian and Belarusian fertilizers.

It follows a move by the UK on Nov. 8 to target more individuals and entities linked to Russia, including a Dubai-based oil trader, in a crackdown on oil and metals networks said to be "propping up Russia's war economy."