- The war is causing Russia to spend much more than it is making in revenue. Moscow cannot afford to block sales to countries complying with oil price caps, but will try to undermine the cap by building up a fleet of crude vessels.
- The resumption of Venezuelan oil shipments to the United States represents a temporary alignment of interests for both parties. Should Maduro appear to violate human rights, the US can reimpose sanctions at any time.
- China is becoming the testing ground for another US economic statecraft tool: outbound investment screening. An executive order is likely to come out after Secretary of State Antony Blinken’s visit to China.
In this edition of the Global Sanctions Dashboard, we cover the most pressing economic statecraft issues: the effects of sanctions on the Russian economy, Venezuela’s pursuit of lifting energy sanctions, and the plans for screening EU-US investment going into China. We find that, contrary to Moscow’s claims, the Russian economy is not sanctions-proof and the war is in fact draining Russia’s budget. Russia has used band-aids to prop up its economy, but 2023 could be the year it comes crashing down, leading to slashing funding for schools and hospitals.
Beyond Russia, Chevron recently made the first shipment of Venezuelan oil to Texas, while the White House is likely to announce an executive order on outbound investment screening after Secretary of State Antony Blinken’s visit to China in February.
Russia’s draining budget
Western capitals imposed sanctions to run the Russian economy to the ground. But sanctions’ initial effects fell short of expectations. The ruble, rather than being reduced to rubble, reversed its initial depreciation and even became the best performing currency of 2022. It is misguided to use exchange rates as the main indicator of an economy’s health. However, the ruble’s good health tells us something about the relative value of Russia’s imports and exports, and the record-breaking balance of payments surpluses of Q2 and Q3 last year.
Even with high energy prices and additional income, Russia’s surging budget deficit shows that the invasion is causing Russia to spend much more than it is making in revenue. The Russian budget had a deficit of forty-seven billion dollars in 2022, one of the highest since the breakup of the Soviet Union. Although the Russian government conveniently decided not to publish data on the government spending this year, it is safe to assume that military spending contributed to the bulk of the increase in spending.
Going into 2023, Russia’s budget deficit may be higher than Russia claims. Moscow anticipates its budget deficit in 2023 to be 2 percent of gross domestic product (GDP), based on the assumption that Russia’s flagship crude blend Urals is traded at seventy dollars a barrel. However, if the oil price cap lowers the Russian oil price to the maximum of sixty dollars while spending remains the same, the deficit would be closer to 4.5 percent, according to Financial Times estimates.
To keep filling in the budget deficit and financing the war in Ukraine, Moscow will have to redirect funds from other domestic programs. In 2022, additional budget revenue came from Russia’s sovereign wealth fund, the one-time taxing of Gazprom, and issuance of largest-ever Federal Loan Obligations. However, in 2023, as the European Union (EU) works hard to diversify away from Russian gas, Gazprom is likely to have less revenue, therefore less tax revenue. Meanwhile, diverting sovereign wealth fund money toward the war takes away Russia’s rainy day fund and might result in slashing funding for schools and hospitals next year.
Oil price caps: Working for now, likely to face challenges
The price cap on seaborne Russian crude oil came into effect on December 5, 2022. It stipulates that unless buyers can prove that they have paid below sixty dollars for Russian oil, they will be denied Western maritime services, such as insurance and brokerage. The Russian flagship crude blend Urals price has not reached sixty dollars since December. Even Russian government officials admit that freight costs for Russian oil have increased.
Russia cannot afford to follow through on the promise of blocking sales to countries complying with the oil price cap, but it will attempt to undermine the cap. Since the policy came into effect, at least seven Russian oil tankers with Western insurance have left from Russia’s Baltic ports for Indian refineries. These tankers would not be able to insure their cargo if they were selling above sixty dollars. Some assert that the price cap will continue to work because sixty dollars is an acceptable price for Russia. However, we should not reach premature conclusions as Russia will be actively looking for options to sell above the capped price. One of the options in the short term is for Russia to self-insure and use Indian or Chinese vessels not subject to US or EU jurisdictions, and build up a fleet of crude vessels in the longer term.
Despite even more daunting enforcement challenges, Group of Seven (G7) partners will expand the price cap to Russian refined petroleum products, such as diesel and kerosene on February 5. Sanctioning Russia’s fuel exports is likely to cause the rerouting of Russian diesel to India from the EU. But the EU still needs diesel supplies and it will be purchasing them from the United States and India. Thus, Russian diesel supplies may travel a lot more before finally reaching the EU again, creating inefficiencies in the market. However, the EU is prepared to take this step while it is simultaneously banning almost all imports of Russian oil products.
New year, new deal: Resumption of Venezuela oil exports to the US
Since Russia’s invasion of Ukraine started in 2022, the United States and EU have been looking for alternative oil suppliers. This presented an opportunity to Venezuela—a heavily sanctioned country which happens to have the world’s largest oil reserves—to fill in the oil gap created by the sanctions against Russia. President Nicolas Maduro’s domestic political concession—resuming negotiations with the opposition party—has won him the issuance of General License 41 by the Treasury Department. The six-month license allows Chevron Corporation to resume natural resource extraction in Venezuela. In January, Chevron delivered its first oil shipment of half-million barrels of oil to the refineries in Texas.
The resumption of Venezuelan oil shipments to the United States is a temporary alignment of interests for both parties. The United States is trying to fill in the vacuum created in the world energy markets by banning Russian oil. Meanwhile, as oil export finances two-thirds of Venezuela’s budget, Maduro is capitalizing on the opportunity of reviving Venezuela’s dilapidated oil industry and bringing in much-needed revenue for his government.
However, the United States is treading carefully, as it should. The license is only for six months, and sanctions can be reimposed at any time within that period should Maduro appear to violate human rights or end dialogue with the opposition.
China may become the testing ground for another US economic statecraft tool: outbound investment screening
In contrast with Venezuela, US-China relations have only been on the downhill since last year. In addition to the tech export controls we discussed in the previous edition, the United States has recently issued sanctions on over 150 Chinese illegal fishing ships. Notably, for the first time, the Treasury sanctioned a Chinese company listed on a US stock exchange, Pingtan Marine Enterprise. But that’s not all.
The United States is considering screening outbound investment to China, to ensure that US companies aren’t transferring technology and know-how to Chinese military-civil fusion companies. In the United States, an executive order on outbound investment in China is likely to come out after Blinken’s visit to China in February, which is expected to be followed by legislative action later. The US Senate is actively engaging with experts to examine outbound investment screening. Explore our joint publication with the Center for a New American Security to find out how such a mechanism should be designed.
Meanwhile, in the EU, Germany is pushing for the creation of an EU outbound investment screening mechanism. The European Commission already included this issue in the 2023 agenda. However, at first, screening would happen on a small scale so the EU authorities would have a chance to observe the consequences. With close collaboration among the EU member states and both sides of the Atlantic, outbound investment screening has the potential of limiting the technology transfer to Chinese military-civilian companies.
Global Sanctions Dashboard
The Global Sanctions Dashboard provides a global overview of various sanctions regimes and lists. Each month you will find an update on the most recent listings and delistings and insights into the motivations behind them.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.