How about Targeting Russia's Energy?

A Strategy Worth Exploring

Image by Konstantin from Pixabay

When the international coalition of countries (the G7, the EU, and Australia) agreed to impose a cap on Russian-origin oil, I thought that was smart. It was not meant to destroy Russia’s economy or stop the flow of Russian oil onto the market, but to reduce Russia’s revenues from its energy sector, which have always been significant, and limit Moscow’s resources to conduct war.

These countries have also agreed to restrict a broad range of services related to the maritime transport of Russian crude and petroleum products unless that oil is bought and sold at or below the specific price caps established by the Price Cap Coalition or is authorized by a license.

Of course, with these limitations, Moscow immediately began to explore ways to evade the price cap, using every methodology it has learned over the years from illicit actors such as North Korea and Iran, as well as its own experience in evading the myriad of sanctions imposed on Moscow after it illegally annexed Crimea in 2014.

• Falsified documentation and attestations. Fraudulent documents are a universal way to evade the price cap and can be used to disguise the true price paid for Russian oil and oil products and obscure the origin of a vessel, its goods, destination, and even the legitimacy of the vessel itself, leading stakeholders to inadvertently engage in transactions that violate the price cap, according to the latest guidance from the Price Cap Coalition. A counterparty may also simply refuse to provide the necessary documents showing that the shipment of oil did not violate the price cap.
  

• Opaque shipping and ancillary costs. Russia quickly discovered that failure to itemize costs such as shipping, freight, customs, and insurance can allow it to charge more for its oil and claim that the increased price is simply ancillary costs added into the package. These costs should be at commercially reasonable rates, in line with industry standards, including any geopolitical risk premiums. The billing of commercially unreasonable or opaque shipping and ancillary costs

  should be viewed as a sign of potential price-cap evasion.

• Third country supply chain intermediaries and complex and irregular corporate structures. Entities attempting to evade the price cap are increasingly looking to third country supply chain intermediaries and the use of complex and irregular corporate structures to trade Russian oil and oil products. These are typical sanctions evasion methodologies, such as the use of shell companies, multiple levels of ownership, proxies and close associates of known Russian energy sector participants who establish opaque and recent corporate structures to disguise the ultimate beneficial owner of Russian oil and oil products, and frequent changes in the ownership or management of companies and vessels involved.
  

• Flagging and re-flagging activities that may indicate efforts to obscure ship ownership or links to Russia. There’s been reporting recently that Gabon has emerged as a country whose ship registry is increasingly associated with illegal activity, allowing Russian and other illicit actors to register their ships to obscure Russian ownership. News reports as early as May of last year suggested that Gabon’s ship registry had doubled in size because vessels transporting sanctioned Russian, Iranian, and Venezuelan oil were transferring flags from countries such as St. Kitts and Nevis and Panama, which faced pressure from Western countries to stop helping sanctions evaders..
  

• The “shadow” fleet. According to intelligence research firm Windward, the shadow, or dark fleet often uses “dark activities,” such as intentionally disabling of the automatic identification system (AIS) and ID and location tampering, to disguise shipments of prohibited or otherwise sketchy cargo, including Russian oil. The fleet is characterized by weak ownership structures and the use of multiple flags of convenience over short periods of time. This has become a popular way for Russia to evade the price cap, obscuring the origin of oil, so much so that the EU in November proposed a ban on the sale of tankers for crude oil and petroleum products to Russia to prevent Moscow bypassing western sanctions on Russian oil with a shadow fleet of ships, but the proposal was dropped before the 12th tranche of EU sanctions was released.

The Yermak-McFaul International Working Group on Russian Sanctions led by Andrii Yermak, the Head of the Office of the President of Ukraine, and former US Ambassador to Russia Michael McFaul, in a recent paper found that Russia remains highly reliant on energy exports for its budget revenues. That has been the case for years. But Russia’s oil and gas revenues fell dramatically last year—as was intended by the Price Cap Coalition—indicating that these critical revenues are vulnerable to disruption.

The International Working Group has long been advocating that the price cap should be further reduced until it eventually reaches $30 per barrel, but more can be done to cut Russia’s energy revenues.

Strengthening enforcement and completing the EU embargo on Russian hydrocarbons are just two strategies the Working Group recommends. Effective enforcement is especially vital to preventing Russia from undermining the price cap and increasing its energy profits, particularly by expanding its shadow fleet of tankers, which on paper are not subject to the price cap because they supposedly do not use restricted G7/EU shipping services.

Increasing investigations of the "ghost vessels" to deter their use by Russia's energy sector, closely monitoring signs that may indicate evasion, and following closely the guidance that’s regularly issued by OFAC and other regulators can help detect and deter illicit actors’ use of covered services to ship Russian oil above the price cap. Increasing investigations and enhanced due diligence can alter stakeholders’ risk calculations. By making shipping Russian oil illicitly more expensive, imposing sanctions on shipping companies and vessels that are used to ship Russian oil above the price cap, and prosecuting violators, Russia can be forced once again into using its mainstream ships to transport its oil.

Once enforcement makes illicitly shipping Russian oil too risky or costly, that’s when the price cap can be further reduced effectively.

In addition, the Working Group recommends targeting oil and gas-related services that Russia relies on for production and exports. A significant number of tech and other relevant companies continue to operate in Russia, and cutting those services off completely could restrict future energy production, while increasing costs for oil production by eroding tech-driven efficiencies. New technologies make work easier and more efficient in every sector. Depriving Russia’s energy sector of western tech advancements (and many western tech companies have already exited Russia after the invasion of Ukraine began) will stymie Russia’s energy production by forcing it to rely on less advanced technology and limited expertise, as technological experts continue to emigrate outside the country.

With the second anniversary of Russia’s invasion of Ukraine right around the corner, governments should act at once.

Governments love anniversaries! Whether it’s the third anniversary of the junta’s overthrow of the democratically elected government in Burma or the 75th Anniversary of the Universal Declaration of Human Rights, on which OFAC designated more than 150 individuals and entities across a dozen countries for issues relating to human rights abuses, governments have been acting in concert to hold illicit actors accountable.

This is the time to act.