The government did two things at once on Tuesday evening. It legislated, for the first time in binding form, the long-promised ban on imports of refined petroleum products made in third countries from Russian crude. This was the ‘refining loophole’ that Chancellor Rachel Reeves had championed back in October. Simultaneously, it carved diesel and jet fuel out of the new ban under an indefinite trade licence.
The government’s framing has been a masterclass in misdirection
Petrochemicals, naphtha, heating oil and fuel oil made using Russian crude oil in third countries are now prohibited in UK law. The two products that account for the overwhelming bulk of the refined petroleum trade are not. The government has said it is tightening sanctions against Russia. On the question that actually matters to the Kremlin’s budget, the opposite is true.
The government’s framing has been a masterclass in misdirection. The press release led with ‘a new wave of tighter restrictions on Russia’. Sir Keir Starmer, under questioning at PMQs, insisted he was not lifting sanctions ‘in any way whatsoever’. Trade Minister Chris Bryant subsequently apologised for what he gracefully described as a ‘miscommunication from his department’.
Strictly speaking, none of them were lying. The new regulations do introduce real prohibitions – on uranium, on Russian LNG maritime services, and on most refined petroleum products made from Russian crude in third countries. This legislation is, by any technical measure, a tightening. The difficulty is that the products carved out of it – diesel and jet fuel – happen to be the two that make the biggest difference.
This makes the long, slow economic decline that the Kremlin is now resigned to a little less steep
Emily Thornberry, the Labour chair of the Foreign Affairs committee, was less diplomatic than the Prime Minister. She told the BBC that the Ukrainians ‘don’t understand, given that we promised that we would stop this loophole in October’. Tory leader Kemi Badenoch called the move ‘insane’. Both were reacting to what the licence actually does, not what the press release said it did.
Almost the entirety of the refined petroleum trade revolves around diesel and jet fuel. Indian refineries – principally Reliance Industries’ colossal Jamnagar complex, plus the state-owned Indian Oil, Bharat Petroleum and Hindustan Petroleum – buy Russian Urals crude oil at a discount, process it into diesel and jet fuel, and ship the products west.
Last year, India absorbed around 80 per cent of Russia’s seaborne crude exports. Reliance’s Jamnagar refinery alone exported just over 900,000 barrels a day of refined products last year. Their diesel cargoes to Europe peaked above a quarter of a million barrels a day in August as buyers stockpiled before the EU’s January ban took effect. Turkish refineries, principally STAR at Aliağa, account for most of the remainder. Nayara Energy, the Indian refinery part-owned by Rosneft, was itself sanctioned by Britain in October and cannot supply refined products; the other refiners can and now will.
The immediate revenue impact on Russia is, however, the least important part of the Starmer government’s carve-out. When a cargo of jet fuel arrives at Fawley refinery in Southampton, refined from Russian crude in Jamnagar, the crude has long since been paid for. Moscow will not receive a second cheque when the product clears UK customs. But sanctions work by shrinking the universe of buyers willing to handle Russian molecules at any stage of the chain – and by forcing those still willing to demand a discount for the legal and reputational risk involved.
For nearly two years that discount on Urals crude has done quiet, unglamorous work. It has ranged from $5 (£3.72) a barrel in calmer periods to as much as $25 (£18.60) after the autumn sanctions on Rosneft and Lukoil sent Indian refiners scrambling. It exists because Indian and Turkish refiners know the products they make from Russian crude have fewer and fewer legal homes.
Reopen the United Kingdom as one of those homes and the calculus shifts. The risk premium falls. Refiners pay a little more for the crude. The discount narrows. Russia gets paid – not immediately, not visibly, but reliably, on every barrel sold for months to come. At the volumes Russia actually exports – about five million barrels a day – every $10 (£7.44) narrowing of the discount is worth roughly $1.6 billion (£1.2 billion) a month to the Russian budget.
That narrowing has already happened, dramatically. By April, with the Strait of Hormuz closed and Asian buyers competing for Russian barrels, Urals briefly traded at parity with Brent crude oil – an outcome unimaginable for the past three years. The war in Iran is the main driver for this; US Treasury Secretary Scott Bessent’s rolling 30-day waivers, which keep Russian crude flowing legally to India, are the supporting act. The British licence is the closing curtain: it reopens a meaningful end-market for the products Indian refiners make. None of this required formally lifting a single sanction.
The signal this sends to Russia compounds the financial one. The British wording is unusually open-ended. There is no sunset clause, no defined emergency window. ‘Indefinite duration’ and ‘periodically reviewed’ mean exactly what they say: the licence remains in force until a future minister musters the will to revoke it – against the resistance of British refiners, airlines and motoring groups who will by then have built supply contracts around it. The American extensions, by contrast, are 30 days at a time, requiring a fresh political decision every month. Britain has chosen the form of waiver that is hardest to unwind, while presenting it as the temporary exception that proves the rule.
There is also the awkward question of how Britain will know what it is importing. The EU introduced new regulations in January, which on paper ban exactly the same trade. This measure requires positive proof that European-bound product comes from a refinery that physically segregates Russian crude – separate pipes, separate tanks, a 60-day washout period. Brussels explicitly refused to accept what is known in the trade as ‘mass-balancing’: the practice of treating Russian and non-Russian crude as interchangeable on a refinery’s books even when they are physically blended, and attributing the Russian molecules to whichever customers happen to be in countries that do not care.
The British legislation says nothing on the question. No segregation requirement, no attestation. A UK importer commits an offence only if he ‘knew or had reasonable cause to suspect’ the product came from Russian crude – a standard so weak that a vaguely worded sourcing letter would probably satisfy it. Britain has not only exempted the main products from its ban; it has set the evidentiary bar so low that the rest of the sanctions package will struggle to bite.
And then there is Europe. The EU’s regulation lists Britain as a ‘partner country’ – meaning EU importers do not need to verify the origin of crude in products arriving from the UK. That exemption was granted in January on the reasonable assumption that British and EU policies were aligned. They no longer are.
British refineries, traders and storage hubs can now legally handle product that an EU refinery cannot. Brussels has already noticed: at this week’s G7 finance ministers’ meeting, Economy Commissioner Valdis Dombrovskis bluntly observed that this was ‘not a time to ease pressure on Russia’. He was talking about America’s waivers. The British announcement came the next day.
For Vladimir Putin, this is the second gift handed to him by the war in Iran, after the price of oil itself. The Kremlin’s own Ministry of Economic Development conceded earlier this month that Russia faces two more years of stagnation, and priced Urals at $50 (£37.24) a barrel from 2027 onwards. Every dollar shaved off the sanctions discount is a dollar that does not have to be cut from a civilian budget already being eaten by the war.
The British decision will not, on its own, save the Russian economy. But it makes the long, slow decline that the Kremlin is now resigned to a little less steep – and it does so courtesy of a government that, more than any other in Europe, built its policy on the claim that it would back Ukraine ‘whatever it takes’.
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