How Western curbs on Russian oil revenue benefit China

By Harry Stevens, Paul Saunders - October 4, 2024
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An oil tanker is moored at the Sheskharis complex, part of Chernomortransneft JSC, a subsidiary of Transneft PJSC, in Novorossiysk, Russia, on Oct. 11, 2022. A Russian official says the country will will cut oil production by 500,000 barrels per day next month in response to the West capping the price of its crude over the war in Ukraine. According to multiple Russian news media reports, Deputy Prime Minister Alexander Novak said Friday, Feb. 10, 2023 that “we will not sell oil to those who directly or indi

Article originally published in Russia Matters. 
Paul Saunders, Harry Stevens

Russia’s decisive turn toward China—politically, economically and technologically—has been among the most notable geopolitical consequences of President Vladimir Putin’s decision to invade Ukraine. Yet Moscow and Beijing had been edging closer for over a decade before the invasion and, regardless of their relationship with one another, American officials have seen each as a major national security and foreign policy challenge for some time. From this perspective, the best policies to address each challenge must avoid making the other more difficult to manage. U.S. efforts to damage Russia economically demonstrate that Washington has yet to internalize this strategic logic. Continued failure to do so will likely have escalating costs.

Since Russia’s Invasion of Ukraine in February 2022, the United States has worked closely with European Union (EU) and other allied nations to impose wide-ranging economic sanctions on Russian government agencies and companies as well as on individual officials and business leaders. The results are mixed.Some policies have demonstrably constrained Russia’s resources, obstructed trade, slowed investment and blunted not only innovation, but also maintenance of Western equipment. Freezing over $300 billion in Russian assets has considerably reduced Moscow’s financial maneuvering room. Denying several major Russian banks access to the SWIFT network has complicated Russia’s effort to settle transactions, as have sanctions that limit Russia’s ability to use U.S. dollars and Euros. An oil price cap mechanism that limits the sale price of Russian oil when buyers or sellers use Price Cap Coalition shipping or insurance services has reduced Russia’s earnings from oil exports.

Technology sanctions have made life difficult for Russia’s defense and energy sectors as well as a variety of microchip-dependent businesses.Nevertheless, the sanctions have thus far fallen short in their formal objective—changing Russian behavior—despite U.S. President Joe Biden’s February 2022 statement suggesting that then-unprecedented sanctions might have an impact within “another month or so.” Two and a half years in to the war, Moscow, Russian companies and their customers are increasingly adapting to life under sanctions. Earlier ad hoc workarounds are becoming routine, opportunistic actors are finding and exploiting loopholes, whether legal or not, and U.S. and Western officials have focused largely on identifying new organizations and individuals to add to existing sanctions lists.The fundamental challenge in working to damage Russia’s economy is that Russia’s economy is important to the global economy, especially in the energy and mineral sectors. While Russia’s GDP was about one-twelfth that of the United States in 2021—the year before Russian President Vladimir Putin’s invasion of Ukraine—it was still the world’s tenth largest when measured in current U.S. dollars.
More importantly, however, Russia was producing one-eighth of the world’s oil and one-sixth of its natural gas in 2021. Russia was also providing 15% of the world’s grain exports as well as many other commodities. (Ukraine generated 9% of grain exports that year.)Steps targeting Russia’s reliance on energy exports, and on banking, thus inherently also affected Russia’s customers and global markets for key commodities with tightly balanced supply and demand. The reorientation of Russia’s oil exports following U.S. and (partial) European Union oil import bans, and the collapse of Russia’s natural gas exports, have likely been among the war’s most consequential global impacts. Yet while the oil price cap and the unraveling of the EU–Russia pipeline natural gas trade have been undeniably expensive for Moscow, each has its own costs for the United States and its Russia-sanctions coalition, too.
Soaring energy prices in Europe, Japan and South Korea have received wide attention. The high costs reflect the collision of high reliance on imported energy, competition for limited supplies of liquified natural gas and policies in Germany, Japan and elsewhere that have simultaneously limited both coal and nuclear power, critical alternative sources of “firm” electricity supplies. Variable solar and wind power are not viable substitutes in many industrial applications.The United States is uniquely able to avoid similar problems as the world’s largest producer of natural gas and of oil. That said, at a time when U.S. political leaders are justifiably looking to many allies to boost defense spending, weaker economies burdened with high energy costs—and, in Germany’s case, with a lack of energy that is shutting down long-established industries—are ill-positioned to deliver.
And even as America’s closest allies struggle with high natural gas prices, and pay market prices for oil, Washington’s principal geopolitical rival is reaping substantial economic gains from discounted Russian oil. According to Russian Deputy Prime Minister Alexander Novak, China bought 45–50% of Russia’s oil and fuel exports in 2023. Due to the combination of the oil price cap with the Western oil import bans, China was able to secure much of this at below-market prices.

Western policymakers have focused on the price cap’s economic damage to Russia. Yet from another perspective, the oil price cap is taking oil profits from Russia and handing the money to the countries still willing to buy its crude, especially China and India, the latter of which accounted for about 40% of Russia’s oil and fuel exports in 2023.

We estimated China’s savings by comparing the price of Russian crude to oil from a basket of OPEC nations (Saudi Arabia, Iraq, the United Arab Emirates, Oman, Angola and Kuwait). This basket of nations accounts for nearly half of Chinese oil imports, and prices for oil from these countries and Russian oil tracked each other closely before the war. Drawing on information from China’s General Administration of Customs about the quantity of oil imported and the dollar value of that oil, we divided the latter by the former to calculate the price of oil from different countries, giving us a sense of the discount that Russian oil was sold at relative to prices from China’s other suppliers. Multiplying the discount by the quantity of Russian oil imported each month creates a rough estimate of total Chinese savings. Between March 2022 and June 2024, those savings amounted to nearly $16 billion. Because this figure only accounts for oil shipments that were officially registered, the actual savings could be greater. In either case, this is a sizable boon to China’s economy at a time of slowing growth.

Nor is China the only country to benefit from the price cap. From a near-zero starting point, Russia has become India’s largest oil supplier. Based on calculations from Indian analysts, India likely saved between $10.5–13 billion between 2022-2024 by importing Russian oil. With India also a major exporter of refined oil products, cheap Russian crude has helped India make money on both ends.

The price cap reflects an effort to reconcile the U.S. and Western desires to reduce Russia’s oil revenue, on one hand, with the reality that Russia’s oil supplies are essential to the stability of the global economy, on the other. Yet the global oil market is a closed system; when combined with Western oil import bans, reductions in Russia’s oil price must yield a discount for someone other than Western consumers.

Considering that China consumed about 15% of the world’s crude oil in 2021—and a larger share of the remaining global market after bans or deep cuts in U.S. and European Union imports from Russia—it is hardly surprising that China would be among the principal beneficiaries of a price cap policy. And it should have been predictable, especially in view of Beijing’s combination of high demand and high import dependence with its unusual willingness and capability to defy Washington.

This is not a call to eliminate the price cap or, for that matter, for lifting the oil import bans. Either step would look like an admission of defeat at this time. It is, however, an urgent call for policymakers to adapt to the reality that the United States is competing simultaneously with China and Russia. Perhaps a $16 billion windfall to China is an acceptable price to pay for denying the funds to Moscow. But U.S. officials and members of Congress should weigh decisions like this in advance rather than discovering them afterward. To date, there is scant evidence that policymakers in the administration or on Capitol Hill assessed this possibility. Moreover, had they done so, widespread concern about Beijing’s capabilities and aspirations would almost surely have prompted leaks from such deliberations during a two-and-a-half-year war.

The United States faces daunting national security and economic challenges in today’s rapidly evolving international system. Many—such as the changing nature of warfare and the growing roles of autonomous systems, military and otherwise, across our societies—will remain difficult to assess in advance. In view of this growing uncertainty, U.S. officials would benefit from efforts to anticipate the “knowable” consequences of their policy options (or at least justify the outcomes—in this case a large economic windfall for China—in terms of national interests). Failing to do so further multiplies not only the world’s uncertainties, but also its dangers.

Paul Saunders is president of the Center for the National Interest and a senior advisor at Energy Innovation Reform Project. He was a State Department political appointee from 2003 to 2005.

Harry Stevens is a University of Chicago graduate, a researcher with the Center for the National Interest and a writer specializing in defense economics and Russian affairs.

Opinions expressed herein are solely those of the authors. AP Photo, File.