West hits ‘peak sanctions’ on Russia’s energy sector

Highlights:

• Number of Western sanctions surges following Russia's invasion of Ukraine
• Russian crude has traded above G7 price cap for most of the time
• China imports LNG from sanctioned Russian plant for first time in August

The complex web of Western sanctions targeting Russia's oil and gas industry has failed to impede Moscow's energy flows or its war effort, suggesting that time and overuse are blunting the force of US and European financial weapons.

Economic warfare by Western powers has expanded dramatically over the past decade, with the number of international sanctions surging almost 450% since 2017, according to LSEG Risk Intelligence. This includes both primary sanctions, which bar most activities between the issuing and targeted country, and secondary sanctions, which seek to cut off anyone who deals with sanctioned entities from accessing Western-dominated financial infrastructure.

The major sanctions spike occurred after Moscow's 2022 invasion of Ukraine. European Union sanctions on Russia rose from zero in 2013 to 2,534 in 2025. Washington put 3,135 new entities and individuals on its targeted list last year alone, 70% of them Russian, according to the Center for a New American Security.

This sanctions "hyperinflation" has created an expensive cat-and-mouse game.

Russian oil producers, traders, and buyers – especially those in China and India, who represent 80% of Russia's crude sales – have sought to bypass Western restrictions by building sophisticated alternative trading and financing networks using hundreds of tankers – which are called "dark fleets."

Iran and Venezuela, long under heavy sanctions, have developed similar systems.

Western governments, in turn, have sought to expand sanctions to target new entities, ships, and individuals. And as the scale of sanctions has increased, so too has the cost and complexity of enforcement, especially for multinational firms, which – wary of breaching the ever-growing list of rules – have invested heavily in compliance.

WEAK PRICE CAP

Another downside of piling on sanctions is that this also raises the risk of negatively affecting the economies of the countries doing the sanctioning.

To try to mitigate this, the US, Britain, and the EU have sought to structure sanctions so that the Kremlin's revenues take a hit but Russian oil and gas remain on the market, reducing the risk of price shocks.

To reach that end, in 2022, G7 countries introduced a $60 per barrel cap on Russian crude – a level that was recently lowered by the EU and other G7 members, excluding the US Under this scheme, Russian oil continues to flow, but companies are barred from providing tankers using Western insurance and services if the oil is sold above the cap.

This, and other energy sanctions, have taken a bite out of the Kremlin's revenue, given that oil and gas account for roughly a quarter of Russia's federal budget. Britain's Foreign Ministry estimates Moscow lost $154 billion in direct tax revenue from crude sales over the three years to February 2025.

But the impact has been less than expected. Russian Urals crude has traded above the $60 cap for 75% of the trading days since the measure took effect in December 2022, according to Reuters calculations, largely due to the use of dark fleets. And in August, the Urals discount to Brent narrowed to under $5 a barrel, the smallest since the war began.

The EU and some G7 members, but not the US, will lower the price cap this month to $46.50, though its effectiveness is in doubt.

Finally, it is hard to argue that these financial measures have worked, as they were intended to pressure Russian President Vladimir Putin to end the war, and the bloody conflict is still going three-and-a-half years later.

GROWING CRACKS

Recent developments suggest the cracks in the Western sanctions regime are widening.

On August 28, the sanctioned tanker Arctic Mulan docked in southern China with liquefied natural gas from Russia's Arctic LNG 2 plant, China's first import from the heavily sanctioned facility in Siberia.

The timing is notable, as it was only a few days before Putin's visit to China, suggesting that Beijing may be prioritizing its economic ties with Moscow over its relations with Washington.

And then came possibly the most damaging blow to Western deterrence.

In late August, US President Donald Trump introduced a novel tool: a 25% "secondary tariff" on India due to its purchases of Russian crude that doubled US levies on the world's fifth-largest economy.

This measure not only hasn't worked, at least thus far, but appears to have backfired. India has continued to buy Russian crude at scale, and the move may have helped start to thaw previously icy relations between India and China.

BLUNT WEAPON

For decades, financial sanctions have been the favoured tool of Western powers who seek to punish hostile governments without using military force. But what history has shown is that energy sanctions are most effective when applied over a limited period by a broad coalition of nations. If sanctions are kept in place too long, the industry simply finds workarounds, and the impact of the measures fades.

So the US and Europe may continue to ratchet up sanctions on Moscow, but the impact of these measures may have already peaked.