Bloomberg: sanctions against oil from the Russian Federation have finally begun to work

 The Russian oil export machine that finances the Kremlin's war in Ukraine is finally starting to suffer from Western sanctions.

Indian refineries - Moscow's second-biggest customers after China following the 2022 invasion - will no longer accept tankers owned by state-owned Sovcomflot PJSC due to the risk posed by sanctions.

Since early October, the US has stepped up sanctions on a wider fleet of tankers carrying Russian crude oil. Since then, dozens of tankers that have come under pressure have languished at sea idle, idling a record number of barrels of Russian diesel since 2017, according to analytics firm Kpler.

Taken together, these steps could gradually limit Russia's oil revenues, a key policy goal of the United States and its allies as they seek to prevent President Putin's military aggression.

The G7's approach to sanctions against Russia is characterized by a refusal to cause any harm to its own economy in the form of higher oil prices. Washington came up with the so-called price cap policy precisely in order to soften the sanctions being prepared in Brussels. And since the war began two years ago, Russia has continued to export huge volumes of oil.

While a sharp supply cut is not expected at this stage, the question is how far Western regulators will go in tightening the screws as oil prices approach $90 a barrel and President Joe Biden begins a grueling election campaign with US voters are still concerned about painful inflation.

"This is a growing constraint on Russian export flows, particularly to India," said Richard Bronze, head of geopolitics at consultancy Energy Aspects Ltd. “We are at a point where the tensions associated with sanctions are becoming very apparent.”

Since October, the US has imposed sanctions on 40 individual Russian oil tankers. Four of them continue to make deliveries, but no sanctioned vessel has picked up cargo since being placed on the U.S. Treasury Department's sanctions list, tanker tracking data compiled by Bloomberg shows.

Now the increasingly tough trading environment has dealt a powerful symbolic blow to the Kremlin as India - a staunch trading ally throughout the war - shuns the Russian tanker fleet. At the same time, Ukraine began blowing up Russian oil refineries, although it is unclear how much support this strategy has in Washington.

“We are definitely seeing increased US sanctions pressure on both Russian oil and exports,” said Greg Brew, an analyst at Eurasia Group in New York. "This comes at a time when the US is struggling to send more aid to Ukraine, when Ukraine's successes on the battlefield are beginning to deteriorate and when Russia appears to be gaining the upper hand."

Last year, state-owned Sovcomflot transported about a fifth of all oil supplies from Russia to India. That figure appeared to be falling even before it was announced that the country's refineries would no longer accept ships.

“We expect and welcome that global oil buyers will be much less willing to deal with Sovcomflot than in the past,” a U.S. Treasury official said, adding that the measures should not have any impact on the oil market because Russia will retain incentive to sell oil."

Now that fleet will have to look elsewhere for work - and there are signs it is struggling. Bloomberg tanker tracking shows that at least seven vessels have stopped in the Black Sea and disappeared from digital monitoring systems. This week Sovcomflot admitted that the sanctions had harmed its operations.

“The pressure on Sovcomflot represents a significant tightening of US sanctions against Russia,” said Janis Kluge, senior fellow for Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin. “This will not solve the problem of circumventing sanctions, but will lead to an increase in delivery costs and a decrease in discounts on Russian oil.”

Despite this, Russia may still be using the so-called "shadow fleet" of ships accumulated shortly after the 2022 invasion (often old ships without proper insurance and with unclear ownership) to carry out its supplies. By some estimates there are around 600 of these carriers in operation, as well as Greek tankers that continue to service trade within the G7 price cap.

The cost of delivering Russian oil is enormous. According to Argus Media, the cost of shipping cargo from the Baltic Sea to China is about $14.50 per barrel. According to experts, more than half of this amount is related to sanctions.

“Whether this translates into real supply losses will depend on how quickly workarounds are found for the shipping problems and whether Russian sellers are willing to increase discounts,” said Bronze of Energy Aspects.

Another setback for Moscow was the sale of refined fuel. An average of 6.2 million barrels of Russian diesel were floating in the 10 days leading up to March 17, according to Kpler. This is the highest figure since at least 2017.

While it is unclear whether sanctions are causing the stockpiling, it is striking that so much product is piling up at a time when drone strikes should have limited supply.

“Washington still has powerful tools to hurt Russian oil exports, but it has used them cautiously for fear of an election-year price spike,” Kluge said.