Tag: Dmytro Kuleba

BRUSSELS — In early August, Bulgarian officials spotted something they weren’t sure was legal.

Barrels of Russian oil were arriving in the country priced above a $60 limit allies had adopted to sap Moscow of critical revenue for its war in Ukraine.

Bulgaria was in an unusual position among its partners. It had been given an exemption to European Union sanctions barring most imports of Russian oil, ostensibly to ensure the country wouldn’t face acute energy shortages even though the EU’s broader policy aimed to crush Russia’s main cash artery following its full-scale assault on Kyiv.

But could Bulgaria still import Russian oil if it was above the price cap? Customs officials in Sofia wanted to know for sure, so they reached out to EU officials asking for “clarification,” according to a private email exchange dated August 4 and seen by POLITICO. 

The answer: Let it in. 

“Crude oil imported based on these derogations does not need to be at or below $60 per barrel,” came the EU’s reply. 

Green light in hand, Bulgaria proceeded to import Russian crude exclusively above the price cap from August until October, according to confidential customs data seen by POLITICO. The shipments were worth an estimated €640 million, according to calculations by the Centre for Research on Energy and Clean Air (CREA) think tank. The cash went to Russian energy firms, which pay the taxes helping fill the Kremlin’s war chest. 

The sanctions gap is emblematic of the broader flaws that have corroded the EU’s attempt to stymie the billions Russia earns from energy exports. Roughly a year after adopting the initial penalties, legal loopholes have combined with poor enforcement and a mushrooming parallel trade to keep Moscow’s fossil fuel revenues flowing, and feeding almost half of Vladimir Putin’s war-hungry budget.

Russian oil is likely winding up as fuel in Europe via new routes. Enforcement across the Continent is scattered and reliant on inconsistent data. And a whole new black market has sprung up to insure, ship and hide Russia’s fuel as it travels the world.

The sanctions, in other words, have come up short. Russia’s oil export earnings have dropped just 14 percent since the restrictions were imposed. And in October, Russia’s fossil fuel revenues hit an 18-month high.

It also appears the EU has run out of steam to do much about it. The latest EU sanctions package, set to be finalized at a leaders’ summit this week, is mostly focused on administrative tweaks that experts say will do little to curb widespread evasion. Absent are any efforts to drop the level of the oil price cap further.

“The whole sanction mechanism works only if you keep adopting on a regular basis decisions that close loopholes and impose new sanctions,” Ukrainian Foreign Minister Dmytro Kuleba told POLITICO. “Every actor in the world has the capacity to adapt.”

The Bulgarian oversight

The reason behind Bulgaria’s price cap loophole is arguably a clerical oversight.

When the EU wrote the G7 nations’ price cap into law, officials expressly forbade EU shipping firms and insurance companies from trafficking Russian oil above the $60 threshold to non-EU countries. The aim was to squeeze the Kremlin’s revenues while keeping global oil flows steady.

But officials never thought to impose similar rules on shipments to EU countries, partly because Brussels had banned Russian seaborne crude oil imports that same day.

Except for Bulgaria.

The backdoor has meant millions in extra revenue for Moscow. According to CREA, Russian oil export earnings from Bulgarian sales between August to October — a third of which came from sales above the price cap — raised around €430 million in direct taxes for the Kremlin. All Russian-origin shipments delivered during this time — priced between $69 and $89 per barrel — relied on Western help, including from Greek ship operators and British and Norwegian insurers.

And it was all technically legal.

The situation “reveals that Bulgaria has aided Russia to exploit this glaring loophole to maximize the Kremlin’s budget revenues from these oil sales without any apparent benefits for Bulgarian consumers,” said Martin Vladimirov, a senior analyst at the Sofia-based Center for the Study of Democracy (CSD) think tank, which has studied the issue.

More broadly, Bulgaria’s exemption from the Russian oil ban has been lining the pockets of both Russia’s largest private oil firm, Lukoil, which dominates Bulgaria’s fuel production with its sprawling Black Sea refinery, and the Kremlin itself. 

More broadly, Lukoil’s crude oil imports to Bulgaria raked in over €2 billion in export revenues for Russia since the sanctions went into effect in February, according to a new CREA and CSD analysis. And the Kremlin has made €1 billion in direct taxes from the sales, POLITICO revealed last month. 

There is now mounting pressure to mend these money-making fissures.

Bulgaria has vowed to cut short its opt-out from the Russian oil ban by six months, provisionally moving the deadline up to March.

And Kiril Petkov, the former prime minister who leads one of two parties controlling Bulgaria’s current governing coalition, told POLITICO the price cap workaround should “absolutely” be closed too. He vowed to pressure the government and ask the European Commission, the EU’s executive in Brussels, to do so, while insisting that Bulgaria is accelerating its efforts to shake off its Russian energy ties, unlike nearby countries like Slovakia. 

“We do not like the $60 loophole that was created by the EU Commission derogation,” Petkov said. “We don’t want Putin to receive any euro that he doesn’t have to.”

The Bulgarian case “highlights one of the many loopholes that make sanctions less effective at lowering Russian export earnings used to finance the Kremlin’s war chest,” according to Isaac Levi, who leads CREA’s Russia-Europe team.

Bulgaria’s finance ministry and Lukoil didn’t respond to requests for comment.

‘Not all rainbows and unicorns’ 

A major challenge is poor monitoring and enforcement. 

In October, a report commissioned by the European Parliament found EU sanctions enforcement is “scattered” across over 160 local authorities, while capitals have “dissimilar implementation systems” that include “wide discrepancies” in penalties for violations.

That assumes you can find a breach to begin with. Even those involved in shipping oil get only limited access to information on trades, according to Viktor Katona, chief crude analyst at the Kpler market intelligence firm.

Insurers, for example, rely on a single document from firms buying and selling oil cargoes pledging the sale is not above $60 per barrel, which amounts to a “declaration of faith,” he said. 

The EU’s upcoming 12th package of sanctions is trying to crack down on this problem with new rules forcing traders to actually itemize specific costs. The goal is to prevent buyers from purchasing Russian oil above the limit and then hiding the extra costs as insurance or transport fees. But few in the industry have high hopes the added paperwork will stop the workaround. 

Several EU countries with large shipping industries are also reluctant to tighten the price cap, making things even trickier. During the latest round of sanctions, Cyprus, Malta and Greece once again raised concerns over calls to strengthen the restrictions, according to two EU diplomats, who like others in the story were granted anonymity to speak freely.

A diplomat from a major maritime EU nation said stricter sanctions would only push Russia to use more non-Western operators to ship oil. Instead, the diplomat argued, the focus should be on broadening the countries adhering to the price cap. Currently, the G7, the EU and Australia are on board.

“It would be stupid to push for price caps, and then other shipping registers do not abide by it because they are not EU members,” the diplomat said, adding that “all that will be achieved is the total destruction of the shipping industry.”

Meanwhile, EU countries are still allowing Russian oil cargoes to cross their waters on their way elsewhere.

CREA research on behalf of POLITICO found that 822 ships transporting Moscow’s crude transferred their cargo to another ship in EU territorial waters — the majority in Greek, but also Maltese, Spanish, Romanian and Italian waters — since the oil sanctions kicked off last December. The volumes were equivalent to 400,000 barrels per day.

A Commission spokesperson defended the EU sanctions, noting Russia has been forced to spend “billions of dollars” to adapt to the new reality, including on new tankers, and its oil extraction and export infrastructure as Western demand shriveled.

That has caused “serious and ongoing economic and policy consequences,” the Commission spokesperson said. And CREA did find that the oil price limit has stripped the Kremlin of €34 billion in export revenues, equivalent to roughly two months of earnings this year.

Others point out that teething issues are normal — it’s the first time the EU has deployed sanctions at such a scale.

“Let’s be fair … all of the sanctions measures are unprecedented, so there’s an element of learning by doing it, as well,” said one of the EU diplomats. “We don’t live in a perfect world: it’s not all rainbows and unicorns.”

Deep dark waters 

Instead of accepting the tough rules designed to drain its finances, Moscow has sparked a sanctions circumvention arms race, looking for loopholes as part of what one senior Ukrainian official has described as a “cockroach strategy.”

To ensure it can sell its fossil fuels at whatever price it can get, in violation of the oil price cap and other restrictions, Russia has presided over the creation of a parallel shipping market that, through a mixture of law-breaking and law-bending, is lining the pockets of its state energy firms and oligarchs.

A “shadow fleet” of aging tankers has emerged, mysteriously managed through a network of companies that obscure their ownership, frequently trading their cargo of fuel with other ships at sea. To help them escape the jurisdiction of Western sanctions while meeting basic maritime requirements, a cottage industry of murky insurance firms has sprung up in countries like India.

“When they were introduced, the sanctions seemed to be having an effect for a very short time. But now the state of play is most of the sanctions that have been in place have not really worked — or they’ve been very limited in terms of what they’ve been able to do,” said Byron McKinney, a director at trade and commodity firm S&P.

As Russian trades move increasingly away from Western operators and traders, that makes tracking them even more difficult, said Katona, the Kpler oil analyst.

“Every single” Russian type of oil now trades above the price cap, he said, while CREA estimates only 48 percent of Russian oil cargoes were carried on tankers owned or insured in G7 and EU countries in October. 

“It’s like coming to a party and telling everyone not to drink alcohol, but not coming to the party yourself,” Katona said. “How do you make sure that no one’s drinking?”

At the same time, countries like India have increased their imports of cheap Russian crude by 134 percent, CREA found, processing it and then selling it everywhere. That means European consumers could unknowingly be filling up their cars with fuel produced from Russian crude, bankrolling Moscow’s armed forces at the same time.

The waning West?

The EU is well aware of the problem. 

“Unless you have big players like India and China as part of it, effectiveness sooner or later fades away,” conceded one senior Commission official. 

“It shows us the limits of what the tools of Western players can achieve at a global level,” the official added, noting it’s “a lesson in how much the [global] power balance has changed compared to 10 or 20 years ago.”

Expectations are low, however, that India or China — or Turkey, another critical shipping country — will come around to the price cap any time soon.

And back in Brussels, political leaders seem to be throwing up their hands. When EU leaders gather for their summit on Thursday, the sanctions package they’re expected to endorse will do little to stanch the flow of Russia’s energy cash, omitting any measures targeting Russian oil or lowering the price cap.

Until such steps are taken, Russia’s finances won’t truly wither, said Alexandra Prokopenko, an economist and nonresident scholar at the Carnegie Russia Eurasia Center.

“The oil price is now the only real channel of transmission for external risk,” she said. “Russia will feel extremely bad if the average price on its oil is $40 or $50 per barrel — that would be painful for its budget and for Putin’s ability to finance expenditures.”

Getting to that point, however, was never going to be easy.

“The Russian economy was quite a big animal,” Prokopenko said, “that makes it hard to shoot it with a single shot.”

Victor Jack and Giovanna Coi reported from Brussels. Gabriel Gavin reported from Yerevan.

Claudia Chiappa contributed reporting from Brussels.