American sanctions fail to screen out Russian

Russian oil has been banned fromthe United States since April, and the EU and UK are set to follow suit. But whilethe US takes credit for attempting to cut off Russia's fossil fuel trade, Americansare still filling their tanks with gasoline originating in Russia. How?

On March 8, before grim evidence ofthe massacres in Bucha, Irpin and Borodyanka emerged, President Joe Bidensigned the first executive order addressing Russia's war on Ukraine. E.O. 14066 establisheda ban on the import of Russian oil, coal, and liquefied natural gas. With it,the president said,"the American people will deal another powerful blow to Putin's war machine".The import ban was codified by Congress a month later.

The United States did end importsof those fossil fuels many months before the Europeanand Britishbans on Russian crude oil are set to go into effect next year. And the ban hasheld: no one seems foolish enough to risk trying to sneak Russian oil into Americanports.

As it turns out, though, no sanctionsevasions are necessary. Once that oil has been refined into other products suchas gasoline, the US officially doesn't care if it came from Russian wells. Anapparent loophole has allowed petroleum products originating in Russia to keepflowing to the US – a cycle that has kept funding the war on Ukraine.

Sanctions against Russia have sofar failed to materially dent the fossil fuel trade funding its war onUkraine. Even as Russian oil sales to Europe dropped by half a million barrels perday after the invasion, buyers in Asian markets madeup the gap.

This has helped Russia earn record-highoil revenues since it invaded Ukraine – exactly the opposite of what Westernsanctions were intended to solve.

But global petroleum markets move in sometimes unexpectedways. The US refines and exports petroleum products distilled from crude oil: gasolineand diesel, jet fuel and naphtha. It also imports these products from dozens ofcountries around the world. In June this year, tankers unloaded nearly 40 millionbarrels of refined petroleum at American ports, according to financial dataprovider Refinitiv.

India, Russia's new star customer, is a net exporter ofpetroleum products, thanks to its refining power. The fourth largest refiner globally,after the US, China, and Russia, it has been especially swift to dial upimports of Russian crude. In its first fiscal quarter of 2022, the countryimported about682,000 barrels per day, compared with 22,500 barrels per day in the sameperiod of 2021.

Much of this has been unloaded at Jamnagar port, in westernIndia, a major refining hub. In June this year, more than a fifth of the port'simports of crude and fuel oil came from Russia. The same month, India exported 2.7million barrels of refined fuels to the United States on seven different ships.Five of those loaded in Jamnagar.

After crude oil is drilled out of the ground—in WesternSiberia, perhaps, or an Arctic offshore oil field—it may travel by tanker,train, truck or pipeline to a refinery, where it is distilled into productslike diesel and kerosene. Both incoming crude and finished products are stored intanks throughout this process, which mixes petroleum products from differentlocations.

There is therefore nofeasible way to tell where a particular gallon of gasoline came fromoriginally. That means any shipment of fuels from a refinery using Russian oil maycontain molecules from a Russian oil well.

This dynamic has been heavilyscrutinized inrecent weeks in Western media, portraying it as India undercutting Westerncountries’ sanctions by selling refined fuels made from Russian oil.

But that's not the whole picture.

The EU has enacted six packages of sanctions against Russia,including measures aimed at kneecappingits oil and coal export trade. (Gas, which the EU relies on heavily, is so fara different story.) By 2023, most imports of Russian crude willbe banned. For now, however, Russian oil imports to EU countries remainlegal.

In June this year, just over 16 million barrels of Russiancrude and fuel oil flowed into the Netherlands. The same month, the countryexported just over four million barrels of diesel and gasoline to the UnitedStates: half as much again as India did. As with shipments from Jamnagar, fuelfrom Rotterdam may well have been made using Russian oil.

This transformation into a refined product appears to meanUS sanctions no longer apply.

E.O. 14066 bans the import of fossil fuels "of Russianorigin" and "products of their distillation". But, the US Treasury wrote,this definition excludes "any Russian Federation origin good that has beenincorporated or substantially transformed into a foreign-made product".Refining crude oil into gasoline is considered a substantial transformation, inthe language of customs offices.

With that sleight of hand, American imports of fueloriginating from Russian oilfields are evidently washed of sanctionsrestrictions. Oil money can continue to flow to the Russian state, and so longas it does, Russia can continue to wage its war against Ukraine.

This global laundering is why the first tier of sanctionsthat Western governments have imposed on Russia is not enough to end the war.There is noindication from the Treasury Department that the US is prepared to ban theimport of fuels that have been made, or may have been made, from Russian oil.There is no feasible way to segregate those flows within the global petroleumsystem.

Global Witness is calling for theUS to close this refining loophole by banning the import of any refined fuelsthat are made, or may have been made, with Russian crude. If President Biden'sexecutive order banning Russian oil is to be anything more than a PR exercise,this must apply to imports from all countries accepting and refining thatcrude. The UK and EU must follow suit.