A Missing Billion per Month in Russian Oil Money

India appears to be paying close to market price for Russian oil in spite of price cap

There was an interesting bit mentioned in passing in this NYT coverage of the Russian oil cap, an alleged gap between the famed `Urals discount' and customs data.

I have both supported the imposition of the Russian price cap and been skeptical that it is working as well as the Urals discount would suggest. There’s just so much money at stake that evasion efforts are likely to be extremely lucrative. It would take an overwhelming penalty and likelihood of being caught to deter evasion, yet I have not seen a single mention of cap violations actually being detected or enforced. The Biden administration seems most proud that Russian oil is still coming out of the ground and that compliance merely requires filing an attestation in a drawer. This does not inspire confidence that we’ve enacted a meaningful program to reduce the Kremlin’s revenues.

And yet “The Urals discount” is a convincing rejoinder: the difference between how much Russian (Urals) oil fetches on the market against the world (Brent) price.

One little-known fact about this figure, however, is that oil price quotes are based on interviews with GRU officers “market participants.” These are not exchange prices. Reporters call up traders and ask what’s new. That’s the price (more or less).

So how might one validate that Russian revenues are actually taking a hit from a reliable source?

The Indian Department of Commerce publishes monthly import-export statistics by commodity and trading partner.

Confirming the widely-cited reshuffling of Russian exports toward Indian markets, there has been an enormous reorientation of oil markets. Russia produces around 300 million barrels per month, so within 6 months India has gone from purchasing relatively small amounts to over 10% of Russian production (and 15% of Russian exports).

How about prices? If you ask Indian customs officials, the Urals discount from March-December of 2022 has been about $5/barrel, not the $25-35/barrel seen when comparing commonly-used Brent and Urals prices. It may have been more like $10/barrel over the summer, but the gap has vanished entirely since the oil price cap was implemented in December 2022.

To better illustrate how the price of Indian oil imports are unmoored from the price cap, here is the price figure over time, comparing Russian and non-Russian sources. The red line represents the quantity-weighted average price of oil from the other major countries exporting oil to India. That’s a good $30/barrel above the price cap, and right at market rate.

Contrast this figure with the purported Urals price:

The Urals price would have us believe there has been a collapse in prices over 2022, with a notable divergence from world prices in the second half. Yet according to Indian customs, importers are not paying anything near $52/barrel. Of course one might raise questions about the quality of customs data, but I’m not familiar with reasons to systematically report higher shipment values than actually paid. (Unless they’re planning to lose it and collect insurance).

Importing 35 million barrels per month, and paying about $30/barrel more than the purported Urals price adds up to about a $1 billion monthly gap—for oil imported by India alone. If a similar gap exists in other countries importing Russian oil that would make the total $6.7B per month (i.e. scaling up from India’s 15% of Russian exports).

Who might be collecting this wedge? If it is some unaffiliated market participant, I tip my hat to their savvy regulatory arbitrage. I know of some Indian importers who are keen to learn their secrets. Perhaps shipping firms are charging a premium to carry Russian oil. Buying at a discount and selling at market prices would certainly help induce the shift we are seeing among the `ghost fleet' that would normally be selling Iranian product. This would satisfy the G-7's twin goals of keeping Russian oil coming out of the ground while reducing Kremlin revenues. But I would be quite surprised if the shipping premium added up to $30/barrel.

I do not think it is wild speculation to attribute the lion’s share of the wedge between the Urals price and customs data to accounting shenanigans. An apparatchik/oligarch “buys” oil “under the cap” to provide otherwise unexamined compliance attestations to shippers, then sells at the market price at the final destination. The people with a comparative advantage in exposing themselves to sanctions are those already under sanctions, after all. The shipper holds an attestation and is absolved of liability. If this seems too easy, my understanding is that regulatory authorities cannot even rule out this basic scam, which requires having looked at the attestations sitting in shippers’ filing cabinets.

There appears to be an unfortunate dynamic at the moment. As long as the West thinks that the cap is working, there’s no need to lean into enforcement, ratchet pressure, or reach for more effective tools. Too many of those who want the cap to work have been lulled into believing the cap is working. I very much want the cap to work, but recognize we are imposing it against actors who have overwhelming resources to prevent its success. The safest assumption is that this entire wedge is adding to Putin’s war chest.