Russian Diesel Found New Buyers Within a Year. The Product Price Cap Changed the Route, Not the Volume

In February 2023, the European Union and its G7 partners extended their sanctions on Russian oil from crude to refined products. The EU embargo on seaborne Russian products took effect, and the coalition set two price caps: USD 100 a barrel for products that trade at a premium to crude, such as diesel, and USD 45 a barrel for products that trade at a discount, such as fuel oil and naphtha. Western shippers, insurers and financiers could only handle Russian products sold at or below those prices.

Before the invasion of Ukraine, Europe was the natural market for Russian diesel, which travelled short distances from Baltic and Black Sea ports into a region that has long been short of middle distillates. According to the US Energy Information Administration, Russia's seaborne diesel exports did not fall in 2023. They rose 8 per cent, from 0.9 million barrels a day in 2022 to 1.0 million barrels a day, and diesel accounted for 40 per cent of Russia's seaborne petroleum product exports.

Europe excluding Türkiye took 67 per cent of Russia's seaborne diesel exports in 2022, around 626,000 barrels a day. Brazil received 13 per cent of Russia's seaborne diesel exports in 2023, around 136,000 barrels a day, and Saudi Arabia took 6 per cent, about 61,000 barrels a day. Brazil is a large diesel importer with a big agricultural and freight sector and limited refining capacity relative to demand. Diesel that once made a short voyage from Russia's Baltic ports to northwest Europe now goes to Santos, Jeddah or African ports.

The aim of the price cap was never to stop Russian oil reaching the market. Part of that decline reflects lower global product prices in 2023 compared with 2022's peak, so it would be wrong to credit all of it to sanctions. The pressure on Russian refining in early 2024 has added another layer. If outages persist, Russia faces a trade-off between supplying its domestic market and maintaining product exports. For global diesel markets, the main effect of sanctions has been longer supply chains rather than lost supply.