Czech imports of Russian oil remain unchanged even after two years of sanctions as Poland’s Orlen continues to exploit a loophole to earn billions in profits. More could be done to make sanctions more effective, as several recent reports highlight.
In July, Viktor Orban, the Hungarian prime minister who maintains the warmest relations with the Kremlin in the EU, lashed out at Poland for its hypocrisy in continuing to trade with Russia while criticising others for doing likewise.
“The Poles are pursuing the most sanctimonious and hypocritical policy in the whole of Europe. They lecture us on moral grounds, they criticise us for our economic relations with Russia, and at the same time they are blithely doing business with the Russians, buying their oil – albeit via indirect routes – and running the Polish economy with it,” Orban claimed in a speech.
A highly critical report published on Monday by analysts at the Center for the Study of Democracy (CSD) and the Centre for Research on Energy and Clean Air (CREA) suggests Orban was not totally wide of the mark.
Given the importance of oil and gas to the Russian economy – exports accounted for 32 per cent, or 97 billion euros, of the country’s federal budget revenues in 2023 – the EU introduced an import ban on Russian oil and the introduction of a 60-dollar-per-barrel price cap in December 2022 following the Kremlin’s full-scale invasion of Ukraine that year.
Landlocked states Hungary, Slovakia and the Czech Republic were granted an exemption, or derogation, from this ban on Russian oil imports in order to give these member states more time to substitute alternative sources to the Russian oil flowing through the southern branch of the Druzhba (“Friendship”, ironically) pipeline.
Yet in reality, the report notes, Russian oil purchases by these EU states in the subsequent almost two years have barely budged. “Pipeline oil exports contributed 2.5 billion euros to Russian export revenues in the first half of 2024 alone, around a fifth of that coming from the Czech Republic,” it says.
In 2023, Czechia’s reliance on Russian crude oil actually rose to 60 per cent despite government intentions to phase it out. By early 2024, this reliance had fallen back, but only to pre-invasion levels of 50 per cent. In fact, the report calculated that since the start of Russia’s invasion in February 2022, the Czech Republic has spent over 7 billion euros on Russian oil and gas, more than five times the 1.29 billion euros it has provided in aid to Ukraine. Czechia’s oil imports have resulted in over 2.3 billion euros in tax revenues for the Kremlin since the start of the invasion.
The main beneficiary of these imports of discounted Russian crude – on average 21 per cent cheaper than Azeri crude in 2023 – has been the Polish company Orlen Unipetrol, the sole processor of crude oil in Czechia and a subsidiary of the Polish energy giant PKN Orlen. The report says this strategy has contributed to surplus profits of around 1.2 billion euros for the Polish company.
“Czechia’s decision to delay the Russian oil phaseout is a typical reaction for many European governments, who aim to preserve Russian energy supply serving concrete domestic business interests,” the report’s authors declare.
Costs of evasion
The CSD/CREA report, titled “Tapping the Loophole”, will come as some embarrassment to Czechia and Poland, the two countries that, more than most, have been particularly hawkish on Russia amid the 14 rounds of EU sanctions imposed on the country.
“For a country [Czech Republic] and society that prides itself on its support to Ukraine, the statistics showing it has effectively sent five times more to Russia than to Ukraine come as a shock,” reads a working paper on recommendations to strengthen the implementation of sanctions against Russia in the Czech Republic, produced by the Association for International Affairs (AMO), Lobbio and the Prague Security Studies Institute (PSSI).
The CSD/CREA report also provides grist to the mill for sanction critics like the Hungarian prime minister, who believe that the EU’s sanctions don’t work and merely hurt the people of the countries imposing them through rising energy prices or deteriorating living standards.
Notwithstanding the CSD/CREA report, those arguments are refuted by many Western government officials, experts and analysts.
Several argue that the benchmark of sanctions working should not be the collapse of the Russian economy. Rather, the aim of the sanctions is to reduce Vladimir Putin’s ability to wage war and in many aspects they are doing just that. Furthermore, if the sanctions aren’t biting, then why would Russia be spending so much on evading them, they ask?
The lack of official data makes it difficult to quantify, but the cost of creating sanctions-busting networks, higher costs on shipping and commodity trading, higher currency and financial transaction costs, and payments of premiums or discounts on resources and goods are estimated to cost the Kremlin billions of dollars annually.
Nevertheless, the CSD/CREA report does provide pointers on where the sanctions coalition of Western nations could go further in the months ahead, particularly with regard to Russian exports of oil commodities.
Just stop (Russian) oil
Looking at the specific case of Czechia’s Russian oil imports, the CSD/CREA report and others dismiss Orlen Unipetrol’s claim that the country cannot quickly switch to non-Russian oil due to the need for refinery modifications to process other crude and inadequate pipeline capacity.
Cutting off Russia’s fossil fuel supplies is both a technical and political process. On the technical side, the expansion of the TAL oil pipeline needs to be completed and certified, a process expected in early 2025. And on the political side, the government needs to get rid of the exceptions on receiving oil imports from Russia via the Druzhba pipeline, as well as the re-export of oil products from Russia.
“This needs to be done as soon as possible to allow for the non-Russian oil to start flowing into the country in double the quantity,” says Pavel Havlicek, a research fellow at the Prague-based AMO.
For its part, Orlen told Politico in a statement that it has made efforts to make its Czech refineries independent of raw materials from the east: “Orlen is preparing for a full transition to non-Russian grades of oil; currently 90 per cent of the oil processed at Orlen Group refineries comes from outside Russia.”
Over the longer term, the Czech Republic and others need to make use of this opportunity to reprioritise decarbonisation and lower the consumption of these fossil fuels altogether. “Because if one believes that taking and paying for the oil from Azerbaijan or Libya is a better thing and helps our national or European interests, then they are mistaken,” Havlicek says.
Another aspect of the oil embargo that needs to be re-looked at, experts say, is the oil price cap. Enacted in December 2022, a G7-imposed $60 a barrel limit to what Russia can charge for its seaborne oil exports has, a report on Monday by the Kyiv School of Economics Institute, a Ukraine-based think tank, largely failed.
The report notes that Russia has invested heavily, to the tune of about 10 billion dollars, in the build-up of a so-called “shadow fleet” of tankers – consisting of ageing and inadequately insured ships – which allows Russia to evade the oil price cap.
“In recent months, close to 70 per cent of Russian seaborne oil exports were transported by shadow tankers and, therefore, do not fall under the price cap. This includes almost 90 per cent of crude oil which has traded above 60 dollars/barrel since mid-2023,” the report says, adding that “an environmental disaster is waiting to happen in European waters”.
The US, UK and EU have taken steps to crack down on these ships in recent months, with up to 90 percent of this shadow fleet designated for sanctions now sitting in ports, unable to transport Russian oil.
Shadow economy
A major port of call for tankers of this shadow fleet has been India, which is now one of Russia’s major oil importers (1.9 million barrels a day in September) and speaks to how Western planners underestimated the worldwide willingness of even partners to reject sanctions and continue doing business with Russia – something Jonathan Terra, a political scientist and former US diplomat and NATO analyst, calls “criminal arbitrage”.
Indeed, the reexport of Western goods, especially those that are dual-use, by third countries to Russia using shadow economic networks remains the biggest loophole enabling Russia to evade sanctions. Multiple pieces of research have provided “extensive evidence that economic sanctions expand shadow economies and how both the shadow economy and licit trade with neighbouring countries contribute to resilience against international sanctions,” notes a report by the UK’s Serious Organised Crime & Anti-Corruption Evidence (SOC ACE) program.
According to Eurostat, the EU’s exports to Russia in June were worth 2.4 billion euros, which was about a third of what they were prior to the war in June 2021, with the biggest reductions in the exports of machinery and equipment.
Yet at the same time, says Alexander Kolyandr, a non-resident senior fellow at CEPA, data for third countries that have never imposed sanctions on Russia shows a sharp rise in imports of goods that Russia once obtained directly from the EU. He cites increased imports of EU power generation equipment from Turkey by 42 per cent to 48.6 million euros, and from the United Arab Emirates more than fivefold to 54.8 million euros.
“It’s difficult to explain such growth as the result of inflation or increased internal demand,” Kolyandr writes in Carnegie Politika.
The EU’s latest package of sanctions, the 14th set, passed in June, was designed to limit the reexport of EU goods to Russia, including by forcing exporters to make their “best efforts” to establish the identity of end-buyers and take other steps, including risk assessments, to ensure the goods do not end up in Russia.
Yet stamping out these shadow exports will require much more political will, manpower, resources and, crucially for the EU, coordination. As the system stands, the EU issues sanctions, but member states implement and enforce them. The lack of powerful, central institutions means there are 27 ways of doing and not doing sanctions.
“A major source of weakness is the fragmentation and lack of responsibility/accountability for this agenda, which stems from the EU27-headed nature of implementation and enforcement of the measures by the member states,” says AMO’s Havlicek.
Boris Kalisky, director of operations at the Prague Security Studies Institute, says that while an EU-version of the US Treasury’s Office of Foreign Assets Control (OFAC) is something desirable, it is “far away”.
“There could be other forms of support for sanctions implementation at the EU level: a stronger AMLA [Authority for Anti-Money Laundering and Countering the Financing of Terrorism], which is a new agency in the making that could encompass sanctions if the scope of its mandate was adjusted,” says Kalisky. “It could at least advise Financial Analytical Units and help them enforce sanctions.”
“There could be a role for OLAF [the European Anti-Fraud Office] to investigate cross-border sanctions violations or for the EU prosecutor to prosecute. Again, it requires the political unity to transfer competencies from member states to the EU level,” he says.
Regardless, none of the existing or planned measures will fully prevent the reexport of sanctioned goods to Russia, experts say. A more realistic goal, they conclude, would be to continue to increase the costs associated with reexporting goods to Russia./balkaninsight.com/