How Russia skirts sanctions on energy

There's a big global sale on Russian oil right now if you're able to buy — with prices at least $30 less per barrel than European Brent crude, according to some estimates. (Russia is keeping a tight lid on price information.)

Why it matters: Yes, the sanctions against Russia were swift and severe, but all this time Russia has been selling a whole lot of oil. The country has been able to offset a decline in oil sales to the West by increasing its sales to Asia.

• "Energy is a huge soft spot in the sanctions regime," says Elena Chachko, a fellow at Harvard Law School who specializes in sanctions law. "The Russians have been able to compensate for a lot of the damage brought by the other sanctions through their continued revenue from energy exports."

Details: India is importing 1.1 million barrels of Russia crude a day, according to data provided by Kpler, an analytics firm that tracks oil shipments. This time last year, the country was buying 173,000 barrels a day.

• India effectively stopped buying crude from Nigeria, Angola, Mexico and the U.S. in favor of the cheaper Russian stuff. They haven't stopped buying from the middle east — they don't want to antagonize that region, says Viktor Katona, lead crude analyst at Kpler.
• Meanwhile, China is importing more from Russia as well, but its demand is low as COVID-related lockdowns have resulted in a domestic stockpile.
• The cheap oil gives India and China a real edge at a time of soaring energy inflation — they can turn that crude into refined products and see higher profit margins than manufacturers who aren't buying the cheaper oil.
• The lower priced oil is also tamping down inflation in the two countries, Katona says.

The intrigue: The fact that Russia is able to sell its oil is actually keeping energy prices from going even higher than they already have.

• Right now one of the reasons oil prices are so high is because political risks are driving up costs — not because of a decline in supply coming out of Russia.

What to watch: The next big shift in the market will come toward the end of the year, when the EU stops importing seaborne Russian crude. Meanwhile, as the Chinese economy recovers from COVID lockdowns it could increase its imports —offsetting some of the EU's decline.

• Meanwhile a plan to cap the price of Russian oil, floated by the G7 this week, could further disrupt that equation. The Group hasn't yet offered details on how it would work, but the broad idea is that the coalition sets a maximum price for Russian oil — just slightly above the cost to produce it. They'd enforce the cap by penalizing the companies that ship the oil around the world.

• This piece in Foreign Affairs lays out the details of how a cap could work — the authors note that a similar scheme was used in the Obama era to slash Iran's oil exports by more than 60%.

It's unclear what the cap would mean for oil prices. Edward Fishman, who worked on sanctions policy during the Obama administration and cowrote the Foreign Affairs column, tells Axios he believes Russia would continue to sell at the lower price — and that would bring down prices.

• "There's a lot to love about it in theory," he says.
• But Katona says Russia could cut sales, driving prices higher. "This no one talks about because they don't want to admit it might happen."