• Existing price cap is failing to erode the Kremlin’s war chest
• Cutting Moscow’s funds needs action to reduce fuel shipments

Falling oil prices and an impending period of over-supply could create the perfect opportunity to toughen sanctions on Russian supplies to the point where they actually start to bite into the Kremlin’s war chest, writes Bloomberg oil strategist Julian Lee.

The existing price-cap mechanism, which really hasn’t crimped Moscow’s oil income, was introduced at the urging of a US administration concerned that actually hitting Russia’s exports would send prices rocketing.

That’s no longer the worry that it was two years ago when the measure was being crafted.

Even with geopolitical tensions in the Middle East at the most intense for decades, Brent crude is still meandering beneath $75 a barrel and dipped below $70 in September. That’s down by more than a quarter from where it was when the price cap was devised.

Sanctions imposed on individual tankers for breaches of the price cap were moderately successful. Those ships initially sat idle for months after being listed by the US, the UK or the European Union.

More recently Moscow has begun to put them back to work. Their reactivation has brought no repercussions for those accepting the vessels into their ports. Perhaps it’s time it did.

Sanctioned Ships at Work

The number of Russian cargoes carried on sanctioned vessels has jumped since initial shipments were delivered without issue.

There are now 90 oil tankers that have been sanctioned by one or more of the three administrations.

Greatly increasing that number — the shadow fleet used to haul Russia’s oil is estimated at about 600 ships — and imposing real costs on using them would hit Moscow hard.

If Indian, Chinese and Turkish refiners were persuaded to stop, or reduce, their imports of Russian crude hauled on shadow fleet ships, inevitably Moscow’s oil exports would fall.

Taking, say, 1 million barrels a day of Russian crude off the market might actually do little more than balance supply and demand in the first half of 2025, according to the International Energy Agency.

In a weak market, the price impact would be manageable. The effect on the Kremlin’s war chest would be far more damaging.

There’s also plenty of spare production capacity that could offset any loss of Russian barrels.

The OPEC group of oil producers theoretically could boost supply by more than 5 million barrels a day, if they chose. That’s almost twice Russia’s seaborne crude exports.

Of course, they could choose not to step in.

Relations between Riyadh and Moscow are a lot closer now than they were in March 2020 when the Kremlin refused to toe the Saudi line on production policy.

Back then, a brief production free-for-all was brought to a sudden and dramatic end by the collapse in oil markets triggered by the Covid-19 pandemic.

Now it’s far from clear whether Riyadh would choose Washington over Moscow when it comes to oil policy.

Outgoing US President Joe Biden has shown in recent days that he’s prepared to step up support for Ukraine ahead of his departure from the White House. Effective sanctions targeting Russia’s oil exports would be a boon for Kyiv.

If the West is serious about hitting President Vladimir Putin’s oil income it may have no better opportunity than the weeks before President-elect Donald Trump takes office.