How the West is helping Russia to fund its war on Ukraine

Despite sanctions, Russia continues to generate substantial revenue from fossil fuel exports, particularly to the EU, which is helping to finance its war in Ukraine; since the invasion began, Russia has earned €883 billion from these exports, exceeding the aid Ukraine has received from its allies. While volumes of exports have decreased slightly, revenues from crude oil and pipeline gas have increased, and LNG exports to the EU remain high, facilitated by loopholes like refining in third countries. Experts and campaigners argue for stricter enforcement of sanctions, including banning Russian LNG and closing refining loopholes, but some Western policymakers fear higher energy prices as a result.

Analysis

Despite Western sanctions imposed since February 2022, Russia has accrued over €883 billion in revenue from fossil fuel exports, with €228 billion originating from the sanctioning countries themselves, notably €209 billion from EU member states. This substantial income, which surpasses the total aid allocated to Ukraine by its allies, continues to finance Russia's war efforts. While overall Russian fossil fuel revenues saw a modest 5% decline in 2024 compared to 2023, accompanied by a 6% drop in export volumes, revenues from crude oil exports actually increased by 6% year-over-year, and pipeline gas revenues rose by 9%. The persistence of these revenues is facilitated by several factors, including continued EU imports of Russian pipeline gas via routes like Turkey (which saw a 26.77% volume increase in Jan-Feb 2025 YoY) and LNG, with half of Russia's LNG exports currently directed to the EU. Furthermore, a 'refining loophole' allows Russian crude, valued at €6.1 billion by CREA, to be processed in third countries like India and Turkey and then sold to sanctioning nations. The EU aims to phase out all Russian gas imports by the end of 2027, but immediate comprehensive bans, especially on LNG, face resistance due to concerns over energy price hikes and potential conflict escalation. Experts highlight the ineffectiveness of current measures like the G7 oil price cap and call for stronger enforcement, including targeting Russia's 'shadow fleet' and closing loopholes, though potential US administrative changes cast uncertainty on future enforcement rigor. The notion that lowering global oil prices via OPEC action could end the war is dismissed by analysts, who note Russia's low production costs.

Key Decisions for Investors

• Investors should factor in a persistent geopolitical risk premium in energy markets, given Russia's sustained ability to fund its war through fossil fuel exports despite sanctions, indicating continued market volatility.
• Monitor closely any upcoming policy shifts regarding stricter enforcement of sanctions, particularly targeting Russian LNG exports to the EU and the 'refining loophole', as such measures could significantly disrupt energy supply chains and impact prices.
• Evaluate exposure to energy assets considering the ongoing circumvention of sanctions and the mixed political will in the West to fully decouple from Russian hydrocarbons, which suggests current market dynamics may endure, alongside potential impacts from changes in sanctions enforcement due to political transitions like a new US administration.