Putin rakes in extra €1B for his war chest via Bulgaria sanctions loophole – POLITICO

BRUSSELS — The Kremlin raked in an extra €1 billion for its war effort this year after Russia’s largest private oil firm exploited loopholes in EU sanctions rules — with help from Bulgaria.

Taking advantage of a unique exemption to the EU’s Russian oil ban, Bulgaria allowed millions of barrels of Russian oil to reach a local Russian-owned refinery, which then exported various refined fuels abroad including to EU countries, according to an investigation by the NGO Global Witness, the think tanks Center for the Study of Democracy (CSD) and Centre for Research on Energy and Clean Air (CREA) and independent reporting by POLITICO.

That loophole — raising enough revenue for Moscow to fund its Wagner mercenary group for a year, according to Russian President Vladimir Putin — also generated almost €500 million in profits for the refinery’s owner Lukoil since the exemption kicked on February 5, according to a classified analysis prepared for Bulgaria’s parliament and seen by POLITICO.

This doesn’t appear to violate sanctions directly, according to sanctions specialists, and both Bulgaria and Lukoil say it’s above board. Yet EU countries and lawmakers inside Bulgaria are now calling for Brussels to tighten rules that give the country special treatment as the European Commission readies its 12th package of sanctions against Russia — expected to be presented in the coming days.

“At the very least they should tighten the sanctions and tighten the derogation regime,” said Delyan Dobrev, who chairs the energy committee in Bulgaria’s parliament. “But the most optimal thing to do is just to get rid of this derogation.”

The issue is also shining a fresh light on the difficulties the EU faces in crafting effective sanctions against Moscow after its invasion of Ukraine, as local enforcement remains patchy while loose legal language has opened avenues for exploitation.

“The sanctions regime is so Swiss-cheese-like that whatever we’re doing we’re always three months behind the Russians,” said one EU diplomat, who like others was granted anonymity to speak candidly.

Seizing the opportunity

When EU countries agreed to ban seaborne imports of Russian crude last June after weeks of tortuous negotiations, Bulgaria won a “special derogation” from the measure until the end of 2024 due to its “geographical exposure.”

The Balkan country relies heavily on Lukoil’s sprawling refinery in Burgas on its Black Sea coast, which provides 80 percent of Bulgaria’s diesel and gasoline needs and accounts for a 10th of the country’s economic output — a reality that’s won the Moscow-based firm significant political influence in the country.

But after Bulgaria’s caretaker government implied it would continue selling Russian-origin oil products to the EU, the European Commission in Brussels cracked down, banning Sofia from doing so from February 5, given the measure was “exclusively meant to ensure [the country’s] security of supply.”

According to EU sanctions rules, Bulgaria cannot sell oil products abroad. But there’s a catch: Sofia can authorize exports if these products are for “exclusive use” in Ukraine or they “cannot be stored in Bulgaria due to environmental and safety risks” as long as their “sale, supply, transfer or export is not meant to circumvent” sanctions.

A Commission spokesperson told POLITICO only that these environmental risks “relate to the specific composition of the refined products” including possible fires and explosions but did not reference storage capacity.

Via these exemptions, Bulgaria has likely exported almost 3 million barrels of Russian-origin oil products by sea from March to July this year alone — equivalent to roughly one in five barrels of crude oil arriving at Burgas and then processed by the refinery, an analysis of shipping data shows from the Kpler market intelligence firm shows. 

Bulgarian Finance Minister Asen Vasilev told POLITICO this was because the refinery had only 10 days worth of storage capacity, adding that the sanctions exemption would also help raise up to €250 million in taxes for the government this year.

“We don’t feel responsible” for Lukoil’s exports and the resulting revenue for the Kremlin, he said. “The derogation is in place not only to help Bulgaria but to make sure the refinery works.”

Still, government statistics show Lukoil’s local storage tanks have a capacity roughly equivalent to three months of Bulgarian oil demand, said Martin Vladimirov, director of the energy and climate program at CSD, “making the need for refined products exports on environmental grounds unlikely.”

It’s possible the fuels exported from Burgas could be direct re-exports of ready-made fuels arriving at the refinery, or coming from Bulgaria’s smaller refineries. But Lukoil’s overwhelming market share and proximity to Burgas makes that unlikely, he said. 

“Whether or not Burgas ends up breaching the letter of the EU’s Russian oil embargo, its actions undermine the spirit of the ban,” said Chris Lambin, Global Witness’ data investigations lead.

And even if none of the refined products leaving Bulgaria come from Russian origins, the Kremlin still raked in plenty of money just from its ability to continue sending Bulgaria crude oil. Between February 5 and October 31 of this year, Moscow made €983 million off such shipments, according to calculations by Global Witness based on Russian crude import volumes, global oil prices and an average of the taxes usually levied on oil production and exports from Russia.

In a statement, Lukoil told POLITICO it “complies with all EU and Bulgarian laws” while arguing “compliance with [derogation-related oil] quotas is also under the strict control by the Customs authorities of Bulgaria.”

Slipping through the cracks

That’s not the only loophole. 

Bulgaria is banned from exporting Russian-origin oil products to EU countries unless they’re sending them to Ukraine. But there are ambiguities as to what counts as a “sale, supply, transfer or export” of the products. 

One such instance was a recent tanker trip out of Bulgaria. After the vessel docked at Burgas on August 8 and was loaded with 265,000 barrels of high-sulfur fuel oil at the port, Kpler data shows the vessel undertook a 15-day journey before unloading its cargo at the Dutch port of Rotterdam.

Before that, Burgas did not receive any non-Russian crude for 21 days but imported four shipments of Russian crude oil, meaning the fuel on the Seaexpress was likely derived in part from Russian crude. The problem: It’s nearly impossible to prove. 

“That voyage … reveals a significant loophole in the sanctions,” said Isaac Levi, who leads CREA’s Europe-Russia and energy analysis team.

Another example is a trip from earlier this year. On March 5, a tanker was loaded at Burgas with 136,000 barrels of Naphtha — a by-product of the refining process — before heading to Maltese waters. There, it carried out a ship-to-ship transfer of its cargo with another vessel before eventually ending up in the Bahamas. The cargo likely had Russian origins as Burgas had received only Russian crude for six months.

The Commission said that both unloading a cargo at a port and ship-to-ship transfers, as seen in these two cases, “could” count as an export — in theory breaching EU sanctions — but that it “would need more information on the exact scenario to provide more of an assessment.”

Getting that information may be hard, however, given how Brussels determines compliance with the sanctions exemption. 

Under its rules, the EU executive doesn’t look at export data on a monthly basis but rather over an entire year as it assesses sanctions compliance. That means the Lukoil refinery could spend months exporting products derived from Russian crude before then stepping up non-Russian imports toward the end of the year. When Brussels then looked at the overall data, it would be almost impossible to determine where the refinery’s exports initially came from. 

The Commission spokesperson said only this “system has so far seemed sufficient.”

Stemming the flow

These vagaries are prompting calls to close loopholes in Bulgaria’s exemption.

“If the purpose of the exemption was to help [ordinary Bulgarians] survive, and we have proof the oil is re-exported and serves other purposes, then we have failed,” said a second EU diplomat. 

“Nothing has changed in the war, so we should tighten the sanctions and ask the Commission to oversee the effective implementation of packages agreed before,” they added. 

That comes as Commission President Ursula von der Leyen on Saturday said the EU executive would announce its 12th package of sanctions this week. Diplomats from three EU countries agreed the Commission should review Bulgaria’s opt-out ahead of that proposal.

The issue is also roiling Bulgaria’s domestic politics. After much political infighting, Sofia agreed last month to end its opt-out two months early, in October of next year, despite some calls to end it much earlier.

Vasilev, the Bulgarian finance minister, told POLITICO the extended timeline was necessary because the refinery needed “logistics upgrades” to phase down Russian crude and increase crude imports from countries outside the Black Sea region. Still, Kpler data showed Burgas has received crude shipments since 2020 from such countries as Iraq, Libya, Egypt and Croatia. 

Despite Bulgaria’s government claiming the special status was needed for Bulgarian consumers, Dobrev, the energy committee chair whose party controls the government alongside Vasilev’s party, said this “doesn’t make any … sense” since fuel prices haven’t fallen to other EU countries in relative terms. 

Despite claims by the finance minister, the refinery can process large volumes of non-Russian crude, Dobrev said, arguing that less than half the oil it received in 2021 came from Moscow, compared to the 90 percent that arrived from Russia since the start of this year. 

In its statement, Lukoil vowed to meet Bulgaria’s October deadline. The company said it is “working on its transition to non-Russian crudes processing from … day one of the derogation period, readjusting its production processes and logistics, facing the turbulent conditions on the global oil market.”

Whac-A-Mole

The issue is also putting fresh scrutiny on the effectiveness of the EU’s sanctions against Russia, nearly two years after Moscow launched its full-scale invasion of Kyiv.

Part of that comes from the complications involved in getting 27 countries on board with every sanctions package which require unanimous approval, according to Maarten van den Ende, the head of the Belgian Sanctions and Export Control Society non-profit. 

“The result of the process of compromises in this case is an exemption with a considerable scope and leaves room in its application,” he said.

“The sanctions are very porous and are specifically written to create as much flexibility … for Bulgaria or for whomever else it might be so that they don’t get stuck with not having crude to refine,” said Viktor Katona, Kpler’s lead crude analyst.

Another issue comes from the complexities of understanding the sanctions themselves.

One refined fuels trader, who was granted anonymity as they weren’t allowed to speak publicly, said they weren’t “aware” they should be cautious trading oil products from Bulgaria to Europe. 

“No one’s pointed out that that oil is actually not allowed to be shown to the market, at least to Europeans,” they said, adding that the risk of smaller trading outfits with limited legal departments breaching sanctions unintentionally was “pretty high.”

Enforcement also remains a glaring problem. 

A report commissioned by the European Parliament last month found a “mosaic of implementation and enforcement practices across the EU” was leading to “confusion and mutual misunderstanding” as well as “contradictions in Member States’ legal interpretations of key sanctions provisions.”

That’s also seen in Bulgaria’s case. EU sanctions laws required Sofia to report to the Commission on compliance with the exemption six months after it kicked in, but Vasilev said he didn’t know whether this had been done. The Commission declined to comment on its discussions with Bulgaria.

Asked about the tanker that travelled from Bulgaria to the Netherlands in August and the government’s broader obligation to inform the Commission every time it authorizes shipments of Russian-origin fuels to third countries, Vasilev expressed surprise. 

“It’s the first time I hear about that,” he said.