Sanctions can be effective if they are proportional to the strength of their enforcement and the unity of global efforts. EU sanctions against Russia, its oil and natural gas industry, are not an exception to this rule. Whilst many suggest that sanctions have worked as planned, the surfacing data reveals that much more collective work is needed. With the growing number of economic restrictions on the controversial Russian energy sector, some countries face an apparent dilemma between the nations’ specific interests and the coordinated West alignment. Such divided standing at the government level creates opportunities to foster murky businesses, an interesting environment in which ambiguous trade deals, nations’ economic dependency and political neutrality enable sanctions evasion through “commodity laundering,” sheltered by geopolitics.
How did we get here?
Russia is the world’s second-largest producer of natural gas, behind the US, and is the third-largest producer of oil worldwide, accounting for over 12% of the global crude oil production.1 Besides financially benefiting from the energy sector, the Russian government, through the network of international companies created under the Gazprom corporate structure, has long been suspected of using its natural resources to enter into calculated favourable deals to create energy dependency (political pressure). There were speculations that Russian domination of the natural gas market was giving the Kremlin incredible leverage in its negotiations with its European neighbours and other countries since the Cold War era.2
A good example of Russia’s extended control by using energy resources was Ukraine’s desire to follow a pro-Western alliance in the mid-2000s, which triggered Russia’s demand for a full price for gas, formerly provided at a discounted rate to Ukraine as part of the former Soviet Union deal. When Ukraine refused, Russia restricted the flow of gas through the pipelines to Ukraine and proceeded with Norm Stream pipelines providing gas directly to Europe, leaving Ukraine scrambling to secure a continuous energy supply.
Nevertheless, Europe—with limited access to natural energy resources and close geographical proximity to Russia—saw an opportunity in Russian energy import, downplaying the security threats persistently raised by the US. With plans to phase out nuclear power, Europe’s goal was to pursue forward-thinking energy policies aimed at reducing coal consumption, thereby lowering greenhouse gas emissions and the depletion of domestic sources of gas.3 As a result, Europe gradually became one of the biggest importers of Russian gas and oil and heavily dependent on Russian energy supplies prior to 2022.4
What has changed?
Since the invasion of Ukraine in February 2022, Russia has faced an unprecedented number of economic sanctions, including sanctions imposed by the EU. Most notably, the EU approved a complete import ban on all Russian seaborne crude oil and petroleum products subject to certain exceptions. Then, in alignment with the so-called Price Cap Coalition (the G7 and Australia), EU members agreed to price caps on Russian crude oil and petroleum products, allowing EU shipping companies to facilitate the delivery of Russian crude to developing countries—only if the oil was sold at or below the agreed price cap. Lastly, the EU restricted trade of dual-used products that fuelled the Russian war machine.5
Such sanctions, including the timing of the price cap introduction and their consequent reviews, were designed to drive down Russia’s revenue, curtailing the Kremlin’s ability to finance the war in Ukraine whilst ensuring the security of energy supply and the stability of financial markets worldwide. Nevertheless, the measures imposed had a much broader double-edged meaning, urging EU countries to accelerate their transitions toward alternative energy sources whilst preparing for the challenges behind the implementation of new sanctions, including the apparent gap between East and West views.
Current challenges
Just as sanctions are enforced to further foreign policy interests, partnerships to circumvent sanctions can also buttress the goals of countries, their leaders and individual actors.
Europe’s decision to ban Russian crude oil and gas has caused Russia to find new customers in Southern and East Asia, who are happy to purchase discounted Russian energy exports at record levels. In fact, access to cheap Russian crude oil and profits at Indian refineries has boosted India’s capacity to refine crude into diesel and jet fuel output, enabling them to export refined products competitively to Europe and taking a bigger market share.6
The challenge with the crude oil import ban is that it is difficult to track on global markets. Crude oil can be mixed in tanks with crude oil from other exporters, such as those in the Middle East, making it hard to trace its Russian origin.7 Bloomberg has reported that Russian oil is being blended in Singapore and then re-exported globally allowing high-risk oil traders to reap huge profits.8 Thus, Russian oil can still be transported to the EU through thirsty intermediaries who attempt to disguise the origin of oil products.
Similarly, the downside of the price cap is that once Russian-origin crude oil or petroleum products are substantially transformed in a jurisdiction other than Russia, they are no longer of Russian origin, so the price cap no longer applies. Also, the price cap is only supported by G7 and Australia and does not impact other countries such as Saudi Arabia, India or China, which can negotiate a different price on crude oil directly with Russia.
Recently, Russia and Turkey collaboratively launched TurkStream, a natural gas pipeline that transports natural gas to Turkey and Europe (bypassing Ukraine). The pipeline has the capacity to carry 31.5 billion cubic metres of Russian natural gas to southern Europe, per year.9 Plans to expand the capacity of Turkstream have been discussed, which creates potential risks for bypassing EU sanctions on the purchase of natural gas. This is because EU customers would be unable to distinguish natural gas derived from Turkey versus natural gas of Russian origin.
Also, most sanctions do not apply to Liquefied Natural Gas (LNG), which is natural gas in its liquid form, produced by purifying natural gas and super-cooling it to turn it into a liquid. Whilst the EU has drastically cut its dependence on Russian pipeline gas, EU countries have increased their overall purchases of Russian LNG as well. For example, in 2021 the EU bought 16 bcm of LNG from Russia, and in 2022, this rose to 22 bcm.10
The increase in buying LNG somehow undermines the bloc’s pledge to end Russian fossil fuel use by 2027. But, enforcing the ban could also be challenging, given the difficulty of disguising LNG cargoes from other countries that do not include Russian volumes, especially through ship-to-ship transfers, subsequently having similar problems as is with seaborne crude oil. Europe’s energy needs are tremendous but resources are scarce, leaving Europe with limited choices of energy suppliers.
The invasion of Ukraine and the sanctions on Russian energy exports have created fault lines in the political world where the economic interests of some nations are at odds with the political motivations of the EU and its partner nations in North America and Australia. Freezing Russian assets by foreign authorities was an unprecedented move that caused other developing nations to question the legitimacy of sanctions and the safety in using US dollars. In fact, various countries have begun to settle significant volumes of trade in other currencies and even discussed creating a BRICS currency for global trade. Further, fear from China that an invasion of Taiwan could result in a similar shunning that Russia has experienced by the West. Laundering of commodities and heightened risks of de-dollarisation are unforeseen consequences of sanctions on energy exports of the commodity giant, Russia. It is clear that as real weapons, sanctions must be carefully considered and enforced because they can wind up hurting the wielder as much as the party in the cross air.
Tetiana Oliinyk, LLB, LLM, compliance lawyer, 
