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EU sanctions have yet to sever Russia’s sinews of war

The ban on Russian clean petroleum products kicks in on Sunday. It looks unlikely to prove any more damaging to the Kremlin than the crude ban has been to date

It will be some time yet before we can know the consequences for certain. Whatever they are, there is little alternative to living with them

THE sinews of war, Cicero’s aphorism observed nearly 2,000 years ago, are infinite money. With the second round of sanctions on Russian oil set to kick in on Sunday, February 5, many shipowners will spend this weekend pondering how successfully the measures have been in severing the Kremlin’s tendons.

The restrictions are overtly intended to destabilise the Russian economy, in retaliation for the invasion of Ukraine, a conflict that will see its first anniversary later this month.

There is no quibble with their moral intent. The attack was and is a murderous assault on an independent sovereign state, characterised by multiple atrocities directed against civilians, and deserving of appropriate retribution.

The question is the efficacy of the scheme. Unless they actually work, sanctions remain purely at the level of symbolic gesture. They have not to date achieved the damage their advocates had been expecting.

Sanctions commenced in December 2022 with a ban on shipowners carrying Russian crude to Europe, and a price cap of $60 a barrel on sales to the rest of the world.

European marine insurers were prohibited from providing cover for the shipments, and European bankers from financing the trade.

But the rest of the world — led by India and China — has so far been happy enough to pick up the oil Europeans can no longer touch.

Exports of Russian oil averaged 3.7m barrels per day in the four weeks to January 29. That is more than in any four-week period in 2021.

Greek owners were among those making best advantage of the last remaining window for legal business.

If volumes are unconstrained, how about revenue? That’s harder to say, as Asian refineries are more secretive about pricing.

The most optimistic surmise is that Russian crude appears to be trading at a discount of almost 40% to Brent, the global benchmark grade. But that is probably an overestimate.

Russia has so far proven adept at finding workarounds, including the use of tankers that are free to disregard EU stipulations.

As Lloyd’s List reported this week, secondhand prices for older tankers have risen by around 50% in the past six months, often to anonymous owners who are not averse to port calls in Russia. The world’s dark fleet now numbers at least 320 units.

Currency inflows, then, may be curtailed somewhat short of the Ciceronian ideal. But given prevailing local production costs, adequate money seems to be serving the Russian war machine almost as well.

Things are now ratcheting up, with clean petroleum products joining the list of sanctioned cargoes. The market for these commodities is always more complicated — and thus harder to read — than crude.

The diesel market is already tight, not helped by the widescale closure of refining capacity in the first world driven by environmental considerations.

Russia current exports about 1.9m barrels per day of CPP, of which around 90% has until now been purchased by Europe.

Owners of the relevant vessel types have been licking their lips at the prospect of longer voyages — and thus more lucrative freight rates — occasioned by the displacement of the sales to more geographically distant markets.

But as brokers’ reports point out, Russia has the option of cutting refinery output if margins turn negative, selling the crude instead.

In that scenario, Braemar predicts CPP exports could drop to more like 1.4m bpd, with enough Russian-owned and “Russia-legal” MRs out there to do the work.

On the battlefield, the war shows no sign of reaching an imminent conclusion. Marine insurers have been sanguine about the hit to their top line.

Owners of ships trapped alongside in Ukraine will be able to make constructive total loss claims after being deprived of use of the vessels for 12 months. War risk insurers are bracing themselves for payouts that will inevitably reach hundreds of millions of dollars.

Hopes for any kind of peace, any time soon, are rapidly fading. Hostilities may rumble on for months, perhaps even years. The oil and products export bans will be a fixture for the duration.

It may some time yet before we can know the consequences for certain. Whatever they are, there is little alternative to living with them.

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