The Refinery Loophole

Russia’s 2022 invasion of Ukraine highlighted the importance of Russian exports of fossil fuels to Russia’s economy and for the energy security of the countries that import these fuels. Designed to hit Russia’s oil revenues, the UK and EU’s oil sanctions package has fallen short. Our research and conversations with industry contacts indicate why:

On 6 April 2022, then-UK Foreign Secretary Liz Truss announced that “by the end of 2022, the UK will end all dependency on Russian coal and oil, and end imports of gas as soon as possible thereafter.” However, a major loophole in the sanctions’ regime is preventing this.

Despite wide-ranging Western sanctions on the Russian energy industry, the UK continues to purchase oil of Russian origin via India and other third countries, such as Turkey, Bulgaria and the UAE.

This has been possible due to a much-exploited loophole, whereby it remains legal to import oil made from Russian crude, provided it has been refined elsewhere. In the UK, Aramco, Shell, BP and PetroChina are among the primary energy traders of this Indian-refined, Russian-origin fuel.

Indeed, UK energy companies may have imported the equivalent of 2 million barrels of Russian oil in 2023, particularly from the Indian “laundromat refineries” of Jamnagar, Mangalore and Vadinar. The latter is majority-owned by Russian entities, meaning the UK is directly supporting a Russian-owned oil business. This is, however, legal according to the letter of the sanctions, as they do not prevent British entities from transacting in third countries. These refineries can be called laundromats since, by obscuring the Russian origin of the oil and repackaging it as produce of a third country, they are in effect layering and integrating the commodity as clean and free from sanctions risk.

According to analysis from Global Witness, the UK’s purchases of Russian fuel contributed between GBP 40 million and GBP 60 million in tax revenue to the Russian budget in the first half of 2023, based on the Russian Finance Ministry’s own figures. This would have allowed Russia to purchase 2,500 Iranian drones, to target Ukrainian civilians during the war. Put another way, 1 in 20 UK flights over those six months ran on Russian oil.

The UK government has stated that no Russian oil has entered the UK since the ban came into effect in 2023, but specified that the process of refining oil in a third country changes its ‘legal origin’.

As such, oil extracted in Russia still enters the UK, posing major reputational risks to import / commodity companies and financial institutions involved in trading, and a supply chain risk for corporates should the Western sanctions regimes tighten.

If you want to hear more about Orbis’ corporate intelligence investigative work and how we could assist you, please get in contact at [email protected].