Many claim sanctions have been ineffective in constraining Russia’s ability to wage war against Ukraine and are therefore the wrong mechanism to use. However, this paper argues that sanctions have not targeted the most vulnerable points of President Vladimir Putin’s regime with sufficient precision. One way of increasing the impact of sanctions would be to address weaknesses in the implementation of one particular measure: the oil-price cap introduced by the G7 countries, the European Union (EU) and Australia (referred to subsequently as the ‘coalition countries’) in December 2022.
The current cap – intended to reduce the oil revenues that help to sustain both Russia’s war effort and its wider economy – has proven less effective than envisaged. Russian market participants and their counterparties have been able so far to find workarounds (for example, on insurance requirements in the shipping industry) that allow Russian oil to be traded at prices above the coalition-determined cap. This paper will focus on how to reshape the sanctions regime to achieve the desired outcome – particularly, on how to deny Russia’s ability to find workarounds – and to ensure that the oil-price cap is fully enforced.
The objective of sanctioning a country’s exports is to reduce its GDP and foreign currency inflows. If properly applied, such measures can have several negative effects on the target economy. One is to limit that country’s ability to finance its imports, thus preventing it from acquiring raw materials or goods necessary to continue the sanction-incurring activity (in Russia’s case, its war on Ukraine). Balance-of-payments problems created by export sanctions can also place broader pressure on the target economy. Perhaps most significant, in the case of Russia, is the fact that oil exports are the single most important source of federal budget revenues and play a vital role in supporting the country’s informal power structure.
Russia’s oil-related export revenues come from the sale of crude oil, premium-to-crude oil products (such as petrol and diesel) and discount-to-crude products (such as fuel oils). Traditional sanctions on commodities exports typically aim to restrict export volumes. For instance, as a result of Russia’s attempts to blackmail ‘unfriendly nations’ by cutting natural gas supplies and trying to ‘freeze Europe’ in the winter of 2022–23, followed by deliberate EU policies aimed at ending its dependence on an unreliable and hostile supplier, the EU has drastically cut its reliance on Russian natural gas. Because Gazprom, Russia’s main gas producer, lacks sufficient pipeline infrastructure to redirect these supplies to other markets, reduced trade has significantly curtailed Russia’s gas export revenues and brought Gazprom to the brink of bankruptcy.
However, such an approach is less effective when it comes to curtailing oil exports. Oil is predominantly transported by sea. Shipments are therefore highly flexible in terms of destination. If sanctions close one market to the seller, supply can be reallocated to others where the sanctions are not observed. In 2022, even before the coalition countries (mainly those in the EU) imposed embargoes on Russian oil imports, expectations of such restrictions contributed to rising global oil prices. When the embargoes came into effect, other countries – primarily China, India and Türkiye – swiftly replaced coalition members as the primary buyers of Russian oil and petroleum products. As a result, instead of experiencing a decline in its oil revenues, Russia benefited from these higher prices to achieve record-high receipts, while coalition countries unintentionally suffered the negative effects.
Instead of experiencing a decline in its oil revenues, Russia benefited from higher prices to achieve record-high receipts.
The intent behind an oil-price cap, such as the one imposed on Russia since late 2022, is that targeting the price rather than the volume of exports should avoid the disruptive market dynamics described above. In principle, it should allow Russia’s oil to continue flowing to global markets but at a discounted price, reducing Moscow’s earnings without significantly disrupting global supply. The only scenario in which the price cap would lead to a sharp drop in export volumes would be if the cap were set below operational costs, making production uneconomical even in the short term – this should be avoided. In contrast to the inflationary effect of a conventional embargo on oil markets, a price cap should be able to exert downward pressure on global oil prices.
Because the Russian part of the supply would be sold at artificially low prices, other suppliers should be compelled to compete on price. Even if Russia were able to increase its export volumes – despite sanctions on its oil and gas sector preventing this in theory – the extra revenues would support its balance of payments but would not provide the rents that finance the elite, as a lower price would result in a much lower, potentially even zero, profit margin. As this paper explains, it is these rents that matter more than anything else.
In practice, the primary challenge with the oil-price cap used against Russia has been enforcement. In an ideal scenario, if a sufficiently broad and powerful buyers’ cartel agreed among all its members to observe the cap, Russia would be left with few or no markets into which it could sell at prices above the cap (the specific price varies according to which category of oil product is being capped – see below). However, China is the world’s largest oil importer and not only buys a large proportion of Russia’s oil, but would be able to absorb all Russian exports if it so wished. As such, China ideally needs to be an indispensable member of the sanction-imposing coalition. For now, instead, it remains Russia’s geopolitical partner in the latter’s confrontation with the West. China has rejected using any sanctions and instead has actively helped Russia to circumvent those imposed by the West. As a result, enforcement remains essentially indirect: via the concentrated markets for oil transportation and insurance, where most key players operate under the jurisdiction of coalition members. These jurisdictions have prohibited shipping and insurance companies from handling Russian oil if it is priced above the cap.
Russian exporters have employed a number of workarounds to circumvent these restrictions. Mostly, these workarounds have involved the use of vessels owned by obscure companies registered in non-coalition countries. In many cases, Russian entities have directly acquired ageing tankers to build a so-called ‘shadow fleet’. However, securing credible insurance for these vessels is still challenging. Most reputable providers of protection and indemnity (P&I) insurance, which is essential for covering the substantial risks associated with oil spills, are based in coalition countries or adhere to those countries’ regulations. Consequently, many ‘shadow fleet’ tankers operate without proper P&I insurance, under mere paper certificates issued by obscure firms and reinsured by unreliable ones.
A key enforcement measure so far has been for coalition authorities to ‘delist’ vessels found to be transporting Russian oil above the price cap. Delisting means that these tankers are barred from coalition-country ports, while companies worldwide that engage with them risk secondary sanctions. Additionally, the US and EU have imposed sanctions on Russia’s state-owned shipping company, Sovcomflot, as well as on key Russian oil exporters and certain insurance providers. These measures have led some major buyers – such as Indian state-owned oil companies and some Chinese ports – to refuse dealings with sanctioned entities, periodically disrupting Russian oil exports. However, Russian exporters have adapted to this by shifting to other methods of sanctions avoidance, such as selling via intermediaries. The use of workarounds like this has prompted some experts and policymakers to question the long-term effectiveness and enforceability of the oil-price cap.
The price cap is currently set at $60 per barrel for crude oil, $100 per barrel for premium-to-crude oil products such as petrol and diesel fuel (well above their market prices) and $45 per barrel for discount-to-crude oil products such as fuel oils. The shipping of these products at above-cap prices and the insurance of such shipments are prohibited for all firms that are subject to the jurisdiction of the coalition countries.
The 18th, and most recent, sanctions package, introduced by the EU in July 2025, envisages a ‘lowering of the Oil Price Cap for crude oil from $60 per barrel to $47.60, and the introduction of an automatic and dynamic mechanism for its review in the future. The new system will ensure that the cap is always 15 per cent lower than the average market price for Urals crude in the previous period of six months, resulting in both predictability for operators and downward pressure on Russian energy revenues.’
But it is not entirely clear what is meant by a ‘market price for Urals crude in the previous period of six months’. If the cap is observed, there is effectively no market price and this new mechanism would just steadily drive the price down. Such a mechanism is a workable solution, but only if Russian circumventions are sufficiently minimized. In other words, the price cap must be rendered watertight or ‘sealed’ to be truly effective.
