Before the Ukraine war, Russia’s oil exports were widespread, reaching Europe, China, and other regions. However, Western sanctions imposed after the 2022 invasion drastically altered this. The G7 and EU’s $60/barrel price cap in December 2022 was a turning point. European refiners stopped buying Russian crude, pushing Russia to sell primarily to China and India, who capitalized on the lower prices, reports Breakwave Advisors.
Impact Of Sanctions
Recent US sanctions, particularly those from January 10, 2025, have significantly disrupted the trade of Russian oil to China and India. The sanctions, targeting 183 vessels and key Russian energy companies, have increased transportation costs and risks.
- India: The sanctions have created uncertainty for Indian traders, who face rising freight costs and a limited number of vessels willing to transport Russian oil. Payment mechanisms are also affected, making transactions outside the US financial system difficult. Some Indian refineries are considering diversifying their crude oil sources to mitigate these risks.
- China: While China has stronger ties with Russia, it is not immune to the sanctions’ effects. Chinese refiners also face higher shipping costs due to the risk premium on sanctioned vessels. The threat of secondary sanctions also complicates payment processing through Chinese financial institutions.
Russian Oil Trade
Even though Russia’s oil trade with China and India continues, the increasing severity of sanctions is diminishing the cost benefits that once made Russian crude appealing. Higher shipping costs, increased regulatory oversight, and payment difficulties are compelling Asian buyers to reconsider their dependence on Russian oil. This could lead to faster diversification towards alternative suppliers from the Middle East, Africa, and Latin America.
Russia will likely continue using shadow fleet tactics and offer greater discounts to maintain its market share. However, stricter sanctions, particularly with enhanced enforcement, could make it difficult for Russia to sustain current oil export levels.
Data from the Signal Ocean Platform and recent downward revisions in reported oil flows from Russia to China and India suggest that the US sanctions are indeed having a noticeable impact.
Dirty Freight Market
The dirty freight market’s positive momentum waned toward the end of the month. VLCC rates for Middle East Gulf to China routes fell below WS60, a 14% weekly decrease. Suezmax rates from West Africa to Europe reached WS88, a 13% monthly decline. However, Suezmax rates on the Baltic-Mediterranean route remained above WS100, a 20% month-over-month increase. Aframax rates in the Mediterranean, after a bullish run, softened to WS130, a 4% weekly drop.
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Source: Breakwave Advisors
