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21 February 2023

Double Win: How Russian Oil Companies Defied Sanctions and Paid Less Tax

Sergey Vakulenko

Western sanctions and boycotts targeting Russian oil exports to Europe meant that transparency over their routes vanished not only for Western watchers, but for the Russian government too, which was too preoccupied to see that the state budget was being deprived of a substantial share of oil revenues.

Within a few months of Russia invading Ukraine, the fiscal machine that had for decades been the foundation of the Putin regime was broken: not by international sanctions and boycotts, but by people inside the Russian system—including figures close to President Vladimir Putin himself. The international oil price—meant to serve as an independent benchmark defining the base for half of all Russian state revenues—was being manipulated, and as in the 1990s, oil revenues were once again being transferred to the offshore arms of Russian oil companies.

With the launch of its war against Ukraine in February 2022, Russia became a pariah state—at least in the West—and began facing immediate difficulties in maintaining its exports of oil and oil products. Russia’s flagship Urals crude blend was sold at substantial discounts, and the published Urals price stayed persistently low during 2022. The macro picture suggests a story of principled buyers refusing to buy blood oil.

Yet data that has recently become available allows us to peek into the micro picture, giving more insight into who exactly was pushing the official Urals price down, who managed to force the Russian oil majors to make price concessions that had wider ramifications for the Russian state, and who most likely captured the value from these unprecedented oil market dislocations.

International companies started announcing they would no longer deal with Russia almost immediately: long before the formal bans on Russian oil and oil product exports to Europe came into force in December 2022 and February 2023 respectively. Many European buyers continued to quietly deal with Russia, but the customer base shrank a lot and it was widely assumed that Russian sellers would have to agree to steep discounts. Publications of the Urals oil price supported this belief.

Official Urals to Brent differential, USD/bbl. Source: Neste.com

In fact, since the December introduction of the European embargo on Russian oil, and even for some time before that, European prices for Urals have been increasingly irrelevant, but until the fall, there was still a brisk trade in Russian oil in Europe. Cargos changed hands in North Sea and Mediterranean ports, and prices were measurable and meaningful.

There were three distinct groups of buyers of Russian crude, and only one of those groups’ purchases defined the closely watched European Urals price. The first group comprised refineries connected to the Druzhba pipeline that were in long-term contracts with Russian suppliers with prices linked to the published Urals prices in the Mediterranean and northwest Europe. These refineries did not have any viable alternatives to Russian supplies. The second group was made up of refineries fully or partially owned by the Russian oil giants Rosneft and Lukoil, from Romania to the Netherlands. Their volumes were supplied directly by their Russian owners, usually via European-registered trading arms, such as LITASCO for Lukoil and Energopole for Rosneft. The third group consisted of a few refineries that were still willing to buy Russian crude on the open market. Only their purchased volumes impacted the European Urals price.

From the early days of the war, there was a campaign to stop European oil companies buying Russian crude. After that, most publicly owned companies shunned it, but privately held oil traders jumped at the opportunity.


More light is shed by a closer inspection of the Fuelling the War data set assembled by the Investigate Europe consortium, which tracks tankers’ voyages from Russian ports. That data reveals that most of the voyages from Russia to Italy went to the ISAB refinery on Sicily owned by the Russian supermajor Lukoil.

Tankers going to the Netherlands, meanwhile, moored at the berth in Rotterdam harbor that feeds the Zeeland Refinery, in which Lukoil has a 45-percent stake. The standard operating model of European refineries owned by several parties is a tolling arrangement, in which shareholders supply their own oil and pay a processing fee to the refinery, then receive a products basket from the refinery to sell on. There was a steady tanker traffic from Russia to berths in Rotterdam, connected to ESSO refinery, and to VOPAK oil storage facility, connected to 10 refineries in Rotterdam.

Lukoil also owns the main Bulgarian refinery in Burgas on the Black Sea, as well as a refinery in Constanta, Romania. All the tankers carrying Russian crude to Romania and Bulgaria unloaded at the berths of these refineries.

Those refineries appear to have changed their oil basket to maximize Russian oil throughput. Since the beginning of the war, Italy doubled its purchases of Russian crude from 0.65 to 1.3 million tons per month, while Bulgarian volumes went up from 0.3 million tons in an average pre-war month to 0.7 million in October 2022.


Oil products are far more difficult to trace than a distinct oil grade like Urals, and managed to avoid the same level of scrutiny. But data from the EU COMEXT database shows that prices for diesel and naphtha from Russia did not take the same hit as the crude price when the war began, and that Russian sales of oil products to Europe increased.

This made trade in oil products extremely lucrative, both for lucky European refiners able to use the Russian feedstock, and for Russian exporters. In June there were reports of refining margins of $50-$70 per barrel (the average for a complex refinery is below $10 per barrel).

All the Russian-owned refining capacity was delivering similar profits to its owners, and facing no problems in placing the product on the market. The foreign-registered trading arms of Lukoil and Rosneft such as LITASCO and Energopole would buy the Russian crude from Lukoil or Rosneft, deliver it to the respective refineries for processing, and receive a basket of oil products labeled as EU-origin that could then be sold unencumbered on European markets. If needed, the profits could be repatriated to the parent companies.


After the beginning of the war, the free market sector of Russian-European crude trade became a marginal corner for distressed volumes, but it was still the source for official prices, which were important, as they served as the basis for the calculation of the mineral extraction tax on all the crude oil produced in Russia, and for export duties on oil and oil products exported from Russia to any global destination beyond the Eurasian Economic Union. Russia taxes its oil industry quite heavily, with the state collecting up to 80 cents or more per barrel when the oil price goes up by a dollar—and losing the same amount when the price goes down.

Since Russian oil companies were not just exporting crude oil, they were in fact capturing the true non-suppressed value of hydrocarbons when selling oil products to Europe, either from Russian refineries or from the likes of ISAB in Sicily. The market dislocation allowed them to capture these profits without sharing the rent with the state.

Oil industry taxation reform was one of the first major steps of Putin’s economic policy when he came to power, and oil revenues have been a key source of Putin’s power ever since, making it possible to finance a strong bureaucracy and security apparatus and to rein in powerful regional governors. The oil sector tax system put in place in 2001–2003 was designed to fight transfer pricing and shifting revenue to foreign subsidiaries of the oil companies by relying on an independent and observable indicator of the crude value: the international oil price.

The reduction in oil revenues to the Russian budget since the outbreak of war, therefore, is not just the result of sanctions and boycotts, but the work of Russian insiders. International measures merely created useful pretexts for the manipulation of the international oil price and transfer of oil revenues to the offshore wings of Russian oil companies.

Ironically, one of the actors behind this scheme is the mighty state-controlled Rosneft, whose CEO Igor Sechin is one of Putin’s most trusted aides. Sechin spent years gobbling up private Russian oil companies on the basis that private capital cannot be trusted, and only state control and devoted, patriotic managers like himself would align the companies’ interests with those of the country and prevent tax minimization and profit hiding.

Now the EU embargo on Russian crude and oil products that came into force on December 5, 2022 has put an end to this lucrative trade, with a few exceptions.

Rosneft Deutschland Gmbh and its shares in German refineries were taken into administration by the German authorities in September, like Gazprom Germania back in the spring. This time, however, the Russian government did not impose any countersanctions or prohibit any future dealings with the company and refineries. Rosneft might still have access to processing capacity: some of its shares have been sold to a subsidiary of a privately owned Estonian company long involved in shipping Russian oil products through Estonian ports, but without any other experience or assets in refining.

Lukoil is selling its Sicilian refinery, but keeping its Dutch, Romanian, and Bulgarian assets. Coincidentally, Bulgaria got an exemption from the EU embargo, and is allowed to import Russian crude until the end of 2024.

And from March 2023 the Russian government plans to ditch the Urals quoted price from oil tax calculations and use Brent with a fixed discount instead.

The obstacles put in the way of Russia’s main exports reaching Europe meant that transparency vanished not only for Western watchers of the Russian economy, but for the Russian government too, which was quite possibly too preoccupied to see that the tale of the suppressed Urals price was quite complicated, and only explained part of the Russo-European oil trade. But one way or another, the Russian state budget was deprived of a substantial share of oil revenue.

These circumstances created an enormous rent-capturing opportunity at the expense of Russian state coffers and European consumers, which was gladly shared by the largest and oldest international oil company, ExxonMobil, and state-controlled Central European oil companies from both the most Putin-friendly country (Hungary’s MOL) and from one of the staunchest opponents (Poland’s PKN Orlen), as well as Russian oil companies.

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