The Right Way to Sanction Russia

When Russia invaded Ukraine in 2022, Western countries responded with aggressive economic restrictions, freezing Russia’s official foreign exchange reserves, placing export controls on critical technology, and sanctioning scores of its political, military and business leaders. Yet more than four years later, the war is still going on, and Western sanctions have inflicted only limited pain on the Russian economy. Russia continues to trade oil and other commodities, recently receiving a massive windfall as the closing of the Strait of Hormuz caused global oil prices to soar. These profits are raising the government’s tax revenue at a critical time, helping it fund the war in Ukraine and stabilize the country’s financial markets. If sanctions were looking ineffective before, Russia’s economic rebound since the start of the United States’ and Israel’s war with Iran have only strengthened that perception.

But it is wrong to write off sanctions as a policy tool. When Western policymakers portray them as a wasted effort or counterproductive, their governments are playing right into Moscow’s hands. And they are discounting the enormous strain that sanctions could still place on the Russian system if properly enforced. By reducing the flow of hard currency into Russia, sanctions have the potential to send the ruble into a spiral of depreciation, which in turn would send inflation soaring and destabilize the country’s broader economy.

It is not too late to make sanctions effective. One-fifth of Russia’s GDP is directly linked to oil and gas extraction, and exports account for nearly one-third of government revenues. Russia evades Western oil sanctions primarily by using a shadow fleet of oil tankers, and that fleet is vulnerable to European pressure. It passes through European-controlled waterways, replenishes its numbers with European-owned ships, and can be forced to engage with a Western-dominated insurance industry. All of this gives Europe the power to restrict the fleet’s operations, and thereby drastically reduce Moscow’s ability to finance its ruinous war.

THE RISE OF THE SHADOW FLEET

The sanctions that the United States, the European Union, the United Kingdom, and Canada placed on Russia in early 2022 ran the gamut. They included export controls on sensitive goods such as semiconductors, computers, and lasers as well as the freezing of Russian foreign exchange reserves held by Western central banks. Yet efforts to curtail Russia’s oil exports back then were limited. The world economy was still rebounding from the COVID-19 pandemic, oil demand was strong and rising, and Russian oil accounted for roughly one-tenth of global supply. Western countries did not want to drive up prices by embargoing Russian oil, but the mere fear that they might do so caused oil prices to surge anyway, delivering enormous profits to Moscow. Russia’s current account surplus, or the amount by which its export receipts exceeded its import payments, soared to an all-time high of $235 billion in 2022. Within one year, Russia had nearly recouped the foreign exchange reserves that were frozen by Western countries.

Western countries needed to figure out a way to prevent Moscow from generating large amounts of cash from oil exports without causing global prices to spike. Many oil and commodity analysts worried that any attempt to take Russian oil off global markets could lift crude prices from their prewar baseline of around $75 per barrel to $200 or higher, allowing Russia to make enormous profits from its remaining exports even if the volume of exports were lower. Such a substantial price increase would almost certainly drive the world into recession.

The solution the G-7 came up with in December 2022 was an oil price cap. Around 70 percent of the vessels shipping Russian oil were Western-owned and close to 90 percent used Western insurance, financing, and brokering services. G-7 members, Australia, and the EU agreed to allow Russian exporters to use those services—but only if the crude oil they were selling was priced below $60 per barrel. There were also separate price ceilings for high-value refined products, such as diesel, and low-value refined products, such as naphtha, which is used in refining and in the production of plastics. The idea was to set the caps high enough that Russia would continue to export oil but low enough to constrain its revenue.

Together with a European ban on purchasing any seaborne Russian oil regardless of price, the cap immediately reoriented the global oil trade. Suddenly, Russia was selling most of its crude oil to Asian markets, especially China and India, where buyers were able to negotiate prices well below those of Western grades. By January 2023, Russian crude was selling for almost 40 percent less than the global benchmark, depriving Russia of billions in profits each month. The country’s current account surplus began to decline, falling to $50 billion in 2023 and bouncing back only slightly to $63 billion in 2024.

Yet Russia found ways around the cap as time wore on. Because enforcement depended on Western ownership of the vessels shipping Russian oil, Russia could evade the restrictions by loading crude exports onto ships flying third-country flags but controlled, through a labyrinth of shell and holding companies, by Moscow. By 2023, the shadow fleet was expanding by about seven oil tankers per month. Around half the ships were purchased from Western owners, most of them based in Greece. The EU attempted to block such transfers in a December 2023 sanctions package, but the sales continued, although they are now routed through shell companies before reaching Russia.

Western countries eventually cracked down on the shadow fleet, sanctioning large numbers of vessels known to carry Russian oil subject to the price cap. The United States led the way, placing almost 200 ships on its sanctions list in the final days of the Biden administration, and the EU and the United Kingdom followed suit soon after. When a tanker is on Washington’s sanctions list, in particular, any entity that does business with it risks exclusion from the U.S. dollar payment system. Losing access to that system would be so debilitating that the mere threat of these secondary sanctions is enough to deter most companies from doing business with sanctioned entities.

Yet this success proved short-lived. The United States stopped sanctioning additional ships under President Donald Trump, even as the EU’s and the United Kingdom’s sanctions lists grew to more than 600 vessels. Without the threat of U.S. secondary sanctions, the 524 vessels that currently are subject to EU and British but not American sanctions have continued to ship Russian oil unimpeded. As of today, the shadow fleet constitutes around two-thirds of the tanker traffic out of Russia’s Baltic ports, which makes up about half the country’s seaborne oil exports.

The Trump administration did sanction Russia’s two largest oil producers, Lukoil and Rosneft, in October 2025, which drove down the price of Russian oil. But it undid that progress a few months later by granting multiple waivers to buyers of Russian oil as global prices were rising amid the war with Iran. With these waivers in place and much of the shadow fleet operational, Russia was soon able to export oil on its own terms and profit from the price spikes. By April, the discount on Russian oil relative to global prices had all but vanished. Moscow’s oil tax revenues from April through July were $14 billion higher than they were a year earlier.

TIGHTENING THE SCREWS

To put real pressure on Russia’s oil revenues, Western countries must defang the shadow fleet. Washington has been dragging its heels on sanctioning additional vessels in the fleet, however, and a new piece of legislation, the so-called Lindsey O. Graham Sanctioning Russia Act—approved by a wide margin by the Senate in August and currently under consideration in the House of Representatives—will probably not make a significant difference. The bill would give the executive branch new authority to impose tariffs on importers of Russian oil, but there is little reason to think this would have much effect; the Trump administration’s 25 percent tariff on India has not stopped the country from importing Russian oil. Although the bill would pave the way for the United States to sanction shadow fleet vessels directly, the Trump administration has so far refused to enact such measures and may continue to do so.

That leaves the task of taking on the shadow fleet to Europe. Earlier EU and British sanctions on their own have not meaningfully restricted Russian exports, but that is only because Europe has left critical gaps in its enforcement regime.

It is now time to close those gaps, starting with the continued supply of Greek and other oil tankers to Russia. The ships in the shadow fleet are around five years older than the average operational oil tanker because their owners want to minimize their losses in the event the ships are sanctioned. As these vessels approach the end of their service lives, keeping the fleet’s numbers steady requires frequent replacements. Until now, the single largest source of those replacements has been Greek ship owners. The EU forbade sales of such tankers to Russian nationals and entities in a sanctions package introduced in December 2023, but European vessels are still making their way to Russian buyers. Brussels now needs to extend the prohibition to any transaction conducted through holding companies that ends in the transfer of a vessel to the shadow fleet. New regulations should oblige European vessel owners to sell only to reputable buyers approved jointly by the EU and the United Kingdom and to provide tracking information for vessels after they are sold. Of course, there are many other sellers from whom Russia can buy tankers, but finding alternatives for such a large number of its purchases would be more costly and take more time.

Europe has substantial economic power and a strong legal system, and it can use both to impose consequences on third countries that enable the shadow fleet’s operations. To hide their connection to Russia, ships in the shadow fleet are usually flagged in other countries—ones that do not require tankers to hold insurance. International maritime treaties, however, allow states to demand that vessels navigating their territorial waters adhere to certain requirements, including coverage by a reputable insurer. The EU and the United Kingdom should pressure flag states to enforce those rules. They could threaten to cut aid to countries that fail to verify the insurance coverage of the ships they register, for instance, or make clear that these countries could face legal action in the event of an oil spill or other accident. If flag states start enforcing insurance requirements, many of Russia’s aging tankers would be rendered obsolete because they are insufficiently seaworthy to be covered by reputable insurers. And because Western companies dominate the shipping insurance market, most of the ships that qualify for insurance plans would purchase them from Western firms, making it easier to enforce the G-7 oil price cap.

European countries would also have legal grounds to interdict old, poorly maintained ships that pose immediate environmental dangers. Such action is not as escalatory as it may sound. Countries including Estonia, Finland, France, Germany, and the United Kingdom have all stopped, inspected, and occasionally seized shadow fleet vessels over the past two years, but these interdictions have yet to invite any overt retaliation by Russia.

NO TIME LIKE THE PRESENT

Cutting off Russia’s supply of ships and forcing vessels to meet the regulatory requirements of Western insurers would go a long way toward reducing the shadow fleet’s evasion of price caps. Once those means of enforcement are in place, Europe can then go further in restricting Russia’s oil profits by lowering the price caps on refined products. Right now, the caps on high- and low-value refined products are set at fixed dollar amounts that are well below market prices, but the EU and the United Kingdom should have a plan in place for adjusting the caps after the Strait of Hormuz reopens and oil prices normalize. The preferred model should be the cap on crude prices established in 2025, set at 15 percent below the market prices over the previous six months. An automatic adjustment of this kind would allow Europe to offer consistent guidance to well-intentioned companies engaged in the oil trade and to accommodate frequent swings in energy prices without needing every EU member state to approve every change to fixed-rate price caps.

EU policymakers have little to lose from implementing these measures. They are designed not to confront Russia directly, but instead to focus Europe’s coercive power on flag states and on ship owners inside the EU. If applied correctly, they should not result in increased global energy prices, either, because they would preserve Russia’s volume of exports. But Moscow’s revenues from those exports would be limited, because more of the Russian oil trade would be pushed from the shadow fleet to legitimate tankers that are subject to European price caps. Until now, Europe has been reluctant to expand its sanctions on Russia, for fear that such steps could be escalatory. But policymakers’ appetite for bolder measures is growing amid the United States’ inaction, Russia’s increasingly effective evasion of sanctions, and rising concern that the war could spread beyond Ukraine.

The absence of action, meanwhile, hands Moscow an easy win. Russia will continue to replace aging tankers with newer ones and collect enormous oil profits from maritime trade that will feed directly into its war machine in Ukraine. Europe has policy levers it can pull to stop the shadow fleet, and that is an opportunity it cannot afford to pass up.

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