Russia Grapples with Western Hydrocarbon Sanctions
Russia Grapples with Western Hydrocarbon Sanctions
Executive Summary:
- In late October, the United States and the European Union introduced tougher sanctions targeting Russia’s hydrocarbon sector, aiming to curb energy revenues that fund Moscow’s war against Ukraine.
- The new U.S. measures feature secondary sanctions—which penalize companies for dealings with sanctioned Russian entities—and added Russian energy giants LUKOIL and Rosneft to the list.
- The European Union’s 19th sanctions package targets Russian LNG, shadow-fleet operations, and third-country facilitators of sanction circumvention, though Moscow intends to continue rerouting its supply chain to mitigate the impact of the updated EU measures.
- Most Russian experts assert that the new sanctions will cause damage but not eliminate Russia’s oil and LNG exports, which will rely on middlemen, alternative currencies, and an expanded shadow fleet to avoid debilitation.
- The United States and European Union must persuade buyers of Russian goods to comply with sanctions to avoid repeating the pattern observed between 2014 and 2024, when international sanctions initially appeared highly threatening but ultimately had limited effects on the Russian economy.
In late October, the United States and the European Union introduced a new set of economic sanctions targeting the Russian Federation. The fuel and energy sectors emerged as the primary focus of these measures (see EDM, October 27). Western governments justified this approach because the sector—which is estimated to account for approximately 30 percent of total revenues in the Russian state budget—remains a crucial financial pillar sustaining Russian President Vladimir Putin’s regime and enabling its ongoing war of aggression against Ukraine (see EDM, March 24; Freedom, October 26; see EDM, February 27, November 4). There are numerous measures Russia may employ to circumvent these measures and mitigate their economic effects (see EDM, January 27, April 28). These include defensive and countermeasures that the Russian government could implement to reduce the intended harm of the sanctions and impose reciprocal costs on the principal architects of these policies.
Washington Hits Russian Oil Sector
On October 22, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed further sanctions “as a result of Russia’s lack of serious commitment to a peace process to end the war in Ukraine” (U.S. Treasury Department, October 22). Washington added two Russian corporate energy giants, LUKOIL and Rosneft, to the specially designated national sanctions list, along with a broad range of Russia’s energy-related entities. The United States sanctioned both corporations in 2014, but the new sanctions feature a greater scope and reach. These sanctions have a “secondary effect,” meaning that foreign companies may also face sanctions if they deal with sanctioned Russian entities. Russia’s key buyers of oil include India and the People’s Republic of China (PRC), which jointly purchases around 90 percent of Russia’s seaborne oil (3 million barrels per day); Türkiye, which purchases 300,000 barrels; Syria, which purchases 70,000 barrels; and Slovakia and Hungary, which continue to purchase Russia’s pipeline oil (The Moscow Times, October 23).
According to Kremlin-affiliated media, Russia exports around 47 percent of its extracted oil—240 million tons out of 516 million tons went for export in 2024 (Kommersant, October 23). LUKOIL and Rosneft jointly produce around 50 percent of Russia’s oil. Since January 2025, when Washington sanctioned Gazprom Neft and Surgutneftegaz, Russia’s entire oil-exporting industry has become toxic. Working with these sanctioned companies could expose third parties to U.S. sanctions (U.S. Treasury Department, January 10).
The response of Russian officials and subject experts to this development was quite reserved and lacked pessimism. Igor Yushkov from the Financial University under the Government of the Russian Federation, for instance, stated that new sanctions against LUKOIL and Rosneft will likely result in new expenses and shrinking profit margins due to the restrictions. Russian firms would have to extend the chain of middlemen involved in transportation and export, but, according to Yushkov, the new sanctions are unlikely to have a devastating effect on the companies or Russia’s oil exports.
Kirill Bakhtin from BCS Company LLC shares Yushkov’s view, adding that Russian firms expected this scenario and “had plenty of time to get ready” (Kommersant, October 23). Deputy Russian Prime Minister Alexander Novak also expressed confidence in Russia’s ability to withstand any oil-related sanctions, noting that Russia has managed to successfully reorient the export of its oil to so-called friendly countries of the Indo-Pacific region, which buy 81 percent of Russia’s oil exports (TASS, October 14).
U.S. sanctions against Russia’s oil sector raise a critical question about how Russia’s major buyers will respond. This particularly pertains to India, Russia’s second-largest oil importer. India imports between 1.6 to 1.9 million barrels of oil daily, with Rosneft and LUKOIL supplying up to two-thirds of Russian oil imported by India (The Moscow Times, October 23). New Delhi’s purchase of Russian oil has been a key factor in mitigating the effects of economic sanctions imposed on Russia’s energy sector since 2022. Following the October 22 U.S. sanctions, India’s largest oil companies and refineries—such as Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp, and Mangalore Refinery and Petrochemicals—have reportedly declared their interest in revising contracts with Russian companies or have already reduced purchases of Russian oil (Vkpress.ru, October 23; MK.ru, November 7).
The opinions of some in the Russian expert community and anonymous Indian oil-related officials regarding scenarios in which India continues to import Russian oil have diverged. Indian experts noted that U.S. sanctions could jeopardize oil imports from Russia, and admitted that such operations could become impossible altogether in the future. Russian experts, however, refused to believe that India would discontinue imports of Russian oil, calling such a scenario “unrealistic.” Energy and commodities expert Vladimir Demidov said:
Even if India were ever to decide to refuse to buy Russian oil, it will continue doing so still, it is just that those operations would be conducted through other countries … The only outcome would be that India would have to pay a higher price for the same oil (Lenta.ru, October 23).
Some Indian experts agree with this. They assert that, though New Delhi is likely to ostensibly reduce or stop direct imports of Russian oil, imports will continue through an extended chain of middlemen. According to one source, “For now the main task for Indian importers is to find such middlemen that would hide the origins of Russian oil,” so no secondary sanctions are applied (Novaya Gazeta Evropa, October 23).
Russian experts generally acknowledge that India’s resolve to openly challenge U.S.-imposed sanctions is lower than the PRC’s. In India, where the role of the state is less pronounced and private firms have more power to act on their fear of secondary sanctions, at least partial rejection of Russian oil is possible. Moscow hopes that over time, Indian oil companies will demonstrate greater elasticity and find ways to evade U.S. sanctions. Some Russian experts have argued that already sanctioned Indian operators—such as Nayara Energy, where Rosneft owns a stake—will continue buying Russian oil since they “have nothing to lose anyway” (Vzglyad, October 24).
The effectiveness of U.S. sanctions—and Russia’s real economic losses—will depend significantly on whether Washington can convince its allies and strategic partners outside the so-called “Big Seven,” such as India, to join and abide by its restrictions. Otherwise, Russia’s financial and logistical isolation will remain incomplete (Focus.ua, October 24).
There are at least three confirmed results of the new U.S. sanctions. First, Finnish media have reported that Teboil (Oy Teboil Ab)—a LUKOIL-affiliated Finnish oil and fuel retail company engaged in the marketing, sale, and distribution of petroleum products and the operation of filling stations and service stations across Finland—has started to wrap up its activities in the country under the influence of U.S. sanctions (Hs.fi, November 7).
Second, Gunvor Group—a multinational energy commodities trading company registered in Cyprus—withdrew its offer to buy LUKOIL’s foreign assets. The Gunvor Group was founded by Russian oligarch Gennady Timchenko and his Swedish partner Torbjörn Törnqvist in 1997. While Russian experts argue that the deal cannot be pronounced completely dead, the development could further complicate LUKOIL’s ability to manage its foreign activities (Forbes.ru, November 7).
Third, Saudi Arabia has reduced the price of its oil for customers in India and the PRC (The Economic Times, November 7). Russian experts do not believe that this price reduction will cause the PRC to reject Russian oil imports, but “there are questions” about India’s response, according to Alexey Gromov, the principal director for Energy Studies at the Institute for Energy and Finance (Hoviye Izvestiya, October 28; The Moscow Times, November 7).
European LNG Sanctions
In late October, the European Commission also announced a broad spectrum of anti-Russian restrictions in the European Union’s 19th sanctions package. The European Union’s main energy-related measures include the following sanctions and restrictions (European Commission, October 23):
- Ban on imports of Russian LNG under short-term contracts within six months of the new sanctions package entering into force, and as of January 1, 2027, for long-term contracts.
- Full transaction ban on Rosneft and Gazprom Neft, eliminating Rosneft’s and Gazprom Neft’s exemption from sanctions on Russian oil and gas imports into the European Union. Oil from third countries, such as Kazakhstan, and the transport of oil compliant with the Oil Price Cap are exempt from sanctions.
- Sanctions against important third-country operators enabling Russia’s revenue streams, including PRC entities—two refineries and an oil trader—that are significant buyers of Russian crude oil.
- An import ban on a variant of liquefied petroleum gas (LPG), which has been used to bypass existing LPG restrictions.
- The addition of 117 vessels on the list of Russia’s so-called “shadow fleet” that now totals 557 vessels. New sanctions across the shadow fleet value chain, including on Litasco Middle East DMCC, Lukoil’s prominent shadow fleet, as well as on maritime registries providing false flags to shadow fleet vessels. Two oil trading companies in Hong Kong and the United Arab Emirates have also been added to the transaction ban.
As stated by Estonian Minister of Foreign Affairs Margus Tsahkna, the European Union is already working on the 20th sanctions package. He said, “We [the European Union] will not settle for half-measures. Each new package reinforces our message: Ukraine is not alone, and Russia will not go unpunished.” The next EU sanctions package reportedly will include measures targeting Russia’s largest energy companies and focus on third countries that assist Russia in circumventing sanctions (Estonian Ministry of Foreign Affairs, October 23). Hungary, Slovakia, and Austria—countries that are usually quite vocal about anti-Russian economic restrictions—did not block the European Union’s 19th sanctions package (Novaya Gazeta, October 23).
Russian public figures and representatives of the expert community reacted to the new EU sanctions package. Deputy Chairman of the Committee on Energy of the State Duma, Yuri Stankevich, noted:
The structure of the global hydrocarbons industry has been forming for decades, and it does not indicate drastic changes—all major players are known. Sanctions will not change the balance of supply and demand. What is likely to happen is the inclusion of new middlemen in supply chains between the seller and the end user. No one is surprised by the increasing exports of oil and oil products from India or Singapore [given that they are not crude oil producers]. The same thing will happen with LNG (TASS, October 23).
Dmitry Suslov, the deputy director of the Center for Comprehensive European and International Studies at the National Research University Higher School of Economics and deputy director of Research Programs at the Council on Foreign and Defense Policy, highlighted the “simultaneous” nature of U.S. and EU sanctions. He argued that European sanctions are concerned with convincing the United States to take a tougher stance on Russia, and Brussels’ desire to demonstrate its commitment to end energy reliance on Russia to Washington. Suslov believes that the European Union’s principal interest is to avoid Russia’s victory at any cost, which “is viewed in Europe as a by far a much more existential threat to European elites rather than any economic damage sustained by Europe itself from its sanctions” (Expert.ru, October 23).
Sergey Shein, associate professor at the Faculty of World Economy and World Politics at the National Research University Higher School of Economics, assumes that the European Union’s decision to reject imports of Russian LNG has primarily “internal purposes.” In his view, this is “a kind of a kick directed at Hungary and Slovakia” and an attempt to “overcome internal [EU] differences” (Expert.ru, October 23). Shein wrote that Hungary and Slovakia may be able to “buy” more favorable conditions within the European Union by rejecting Russian natural gas. He also argued that the European Union “is less interested in concrete results; rather, it is the process itself that matters.” Shein, who does not believe in the serious gravity of EU sanctions, asserts that the European Union has neither the mechanisms nor the political will for effective sanctions. As evidence, he referenced that the EU did not include the confiscation of Russia’s frozen assets in the 19th sanctions package and, based on publicly available information, will not add it to the 20th package (Expert.ru, October 23).
Russia’s Potential Response
Russian sources argue that over time, Russia will overcome and evade sanctions because of the inelasticity of global supply and demand of oil and LNG. These commentators believe that Russia has acquired immunity to sanctions since it has been adapting to them since 2014 (Nn.ru, October 24). In the worst-case scenario, pro-regime Russian experts—such as Igor Yushkov from the Financial University under the Government of the Russian Federation—say that Russian firms would bear additional expenses and reduced profit margins, but that Russian hydrocarbons will not disappear from the global market (OIL.Expert, October 24).
These experts cite the examples of Surgutneftegaz and Gazprom Neft, which survived the same sanctions as Rosneft and LUKOIL, as demonstrations of how to evade new sanctions. Similarly, Russian experts are skeptical of public statements by foreign importers that claim they will stop importing Russian oil. The outcome of these sanctions and the extent to which the United States will be willing and able to execute them remain to be seen. Russian experts are particularly hopeful that India, given its weaker economy and lack of alternatives—unlike the PRC, which has a well-balanced energy mix with a rapidly growing green energy component—will try to assist Russia in evading sanctions. Russian commentators, such as economic reviewer Kirill Rodionov, however, also acknowledge that the most recent sanctions could produce a growing sense of frustration and a “feeling of hopelessness” (chuwstvo tupika; чувстуво тупика) among the Russian elite (Telegram/@kirillrodionov, October 25). Despite Russia’s official bragging about the “uselessness of sanctions,” U.S.-introduced sanctions have hindered the development of Russia’s LNG industry, with Arctic LNG-2 remaining the only large-scale success of the entire industry (see EDM, July 26). Some Russian experts argue that the Kremlin should take the European Union’s LNG-related sanctions seriously. Furthermore, Western refusal to supply critical equipment for Russian oil refineries—given the damage they have sustained in Ukrainian strikes—could have a significant negative impact on Russia’s export capabilities and its domestic petroleum production market (see EDM, May 15; Noviye Izvestiya, October 26).
Russia is likely to try to use loopholes to mitigate the effect of sanctions and avoid detrimental consequences for its economy and ability to wage war against Ukraine. With Moscow’s war against Ukraine continuing, however, the room for maneuver is gradually shrinking, but several options for sanctions evasion remain. First, Moscow may seek political support from the Kremlin’s Western partners, where Hungary and Serbia could be seen as the key actors. For example, Hungarian Prime Minister Viktor Orbán recently stated that Budapest was working on how to evade these sanctions (24tv.ua, October 24). Furthermore, during the recent meeting with U.S. President Donald Trump, Orbán complained that due to its geographic position, Hungary has no other alternative but to continue purchasing Russian oil. Following the meeting, Trump granted Hungary a one-year exemption from the U.S. secondary sanctions, allowing Hungary to continue its purchases of Russian oil (RIA Novosti, November 7).
Russia sees Serbia as another partner in the West. The situation, however, may be changing. For example, the European Union has drastically increased pressure on Belgrade, demanding that it fully harmonize its foreign policy with the European Union’s norms and standards, which primarily means joining European sanctions against Russia. According to Serbian President Aleksandar Vučić, sanctions are the only remaining point of contention holding Serbia back from becoming an EU member state (RBC, October 15). Depending on its trade-off measures, Serbia is likely to eventually have to join EU sanctions against Russia. Russian commentators have expressed grave concern over U.S. pressure—through energy sanctions on Serbia—to join the West in its sanctions campaign against Russia. In early October, for example, the United States imposed sanctions on Serbian NIS (Naftna Industrija Srbije), where Gazprom Neft is reported to hold a 44.85 percent stake. Russian experts have argued that by doing this, the West is reducing Serbia’s ability to export oil and related products and purposefully puts Serbia’s domestic energy security in jeopardy. Unstable energy security, a backbone of the local economy, could result in mass protests and political turbulence in Serbia (Svobodnaya pressa, October 21). While Russia could theoretically rely on its “Western assets” to evade sanctions, its options are being curtailed.
The second strategy Russia may use to evade sanctions is the maintenance and expansion of its highly effective “shadow fleet.” Russia could acquire new vessels and use them under different flags, rapidly changing their registration (TASS, October 23). Russia could also resell and change the registration of some previously sanctioned vessels to nominally remove them from the sanctions list. For example, several vessels that the European Union previously sanctioned—such as Audax (IMO 9763837), Pugnax (IMO 9763849), Pier (IMO 9273442), and Page/Blage (IMO 9275763)—have been excluded from the list of sanctioned vessels, which, according to Russian sources, is because they changed their formal owners and registration (Neftegaz.ru, October 23). Aside from sanctions-related considerations, the quality of the vessels Russia uses for the seaborne transportation of its oil is very poor. The vessels’ condition poses multiple security and environmental risks to all areas traversed by Russia’s “shadow fleet.”
The Kremlin considers using Western collaborators or its “shadow fleet” to circumvent sanctions to be “defensive” in nature because these strategies are primarily designed to mitigate the impact of existing sanctions on Russia’s hydrocarbon industry and its state budget. Members of Russia’s more radical expert community encourage a more “offensive” approach designed to discourage Western countries from increasing pressure on Russia’s economy and its energy pillar. First, Russia could intensify the use of currencies outside of U.S. or EU regulation—such as the yuan, dirham, and rupee—in international trade as part of its broader strategy to accelerate the de-dollarization of the global economy. While the macroeconomic feasibility of this approach remains open to debate, Russia has already succeeded in concealing a portion of the monetary flows associated with its foreign trade transactions. At present, more than half of Russia’s external trade is conducted in rubles, a currency that falls outside the regulatory oversight of financial authorities in both the United States and the European Union (Novaya Gazeta Evropa, October 23).
Second, Russia could implement a price-suppression strategy. Under conditions of significant external pressure, the Russian state might reduce the selling price of its crude oil to—or even below—the production break-even point, challenging the market position of U.S. shale producers. This approach would, however, most likely result in direct competition not just with the United States, but with Organization of the Petroleum Exporting Countries (OPEC+) member states and other oil-exporting countries, such as Angola, for whom export revenues are critical to macroeconomic stability. Such dynamics could precipitate a regional price adjustment and have inadvertent effects stemming from the complex interdependencies of the global oil market.
Third, some of the most radical Russian commentators suggest cyberattacks on Western critical infrastructure or the reduction of palladium and titanium supplies to paralyze Western hi-tech industries (Bloknot.ru, October 24; see EDM, December 5). Another extremist suggestion from the authors of the telegram channel RIA Katyosha (РИА Катюша) included ideas to launch a “special operation [spetsoperatsiya; спецоперация] under someone else’s flag on the territory of one of the [North Atlantic Treaty Organization (NATO)] countries or unleash supplies of missiles for [Russia’s] foreign allies” (Telegram/@riakatysha, October 23; Dzen.ru, October 24).
Fringe ideas about the need to conduct a “special operation” on the territory of a NATO member are not new. In 2023, a prominent conservative military expert, Alexander Perendzhiev, suggested using private military companies or other similar groups in Alaska to distract Western attention from Ukraine (Ukraina.ru, May 17, 2023).
At present, these ideas remain largely marginal and detached from official policy. If Russia’s leadership were to perceive its survival as existentially threatened, however, more reckless or aggressive actions are possible under zero-sum strategic logic. This aggressive rhetoric requires close monitoring, distinguishing between fringe commentary and proposals with actual institutional backing, and considering the potential geopolitical and legal consequences should such ideas gain traction.
Conclusion
Analysis of Russian expert commentary and broader responses indicates that Moscow is significantly more concerned with U.S. restrictions targeting its oil sector—including secondary sanctions—than with European measures. While European sanctions carry political weight, they are widely perceived as less immediately threatening to Russia’s core energy revenues. Many Russian analysts, as well as several foreign experts, argue that a sanctions-hardened Russian economy could, over time, develop mechanisms to circumvent international restrictions through alternative payment systems, re-routing exports, and leveraging partnerships with non-Western markets (Inosmi.ru, October 24). In the short term, Russian experts assert that sanctions are likely to produce a temporary reduction in revenue, creating visible economic strain without causing systemic damage to the Russian economy.
To avoid repeating the pattern observed between 2014 and 2024—when international sanctions initially appeared highly threatening but ultimately had only a limited effect on the Russian economy—a more comprehensive and strategic approach is required. Beyond closing the legal and regulatory loopholes that have allowed Russia to evade restrictions within Europe, engaging key partners, such as India, whose continued energy purchases have significantly bolstered Russia’s resilience to sanctions since 2022, would be productive. Encouraging India to align, even partially, with Western objectives could further constrain Russia’s capacity to mitigate the effects of international restrictions and enhance the overall effectiveness of sanctions.
