The West’s oil war against Russia is starting to lose momentum

Russia's oil revenues rebounded in March and April to reach the highest level since November last year, according to a new report, bolstering President Vladimir Putin's ability to finance the Kremlin's onslaught in Ukraine.

Analysis published Wednesday by the Centre for Research on Energy and Clean Air, an independent Finnish think tank, found that Russia's revenues from oil exports have recovered from levels reached in January and February.

The findings show that Moscow has recently been able to successfully claw back earnings from fossil fuel exports despite the imposition late last year of import bans from the European Union and a broader G7 oil price cap.

It comes less than a week after Group of Seven leaders said at the conclusion of the Hiroshima Summit in Japan that a price cap on Russian oil and petroleum products was working, Russian revenues were down, and falling oil and gas prices were benefiting countries around the world.

Energy analysts at CREA suggested the failure from the so-called Price Cap Coalition to revise price levels and enforce the policy had resulted in the measures "losing traction, integrity and credibility."

"Russia's export revenue in April was down substantially year-on-year, mainly due to the impact of the EU import ban and lower oil prices. This means that Russia's budget will likely stay in deficit, constraining military expenses," said Lauri Myllyvirta, lead analyst at CREA and co-author of the report.

"However, Russia was able to export its main crude oil variety, for the first time, at prices that were systematically above the price cap level set by the U.S., EU and allies," he added, saying this had exposed "major gaps" in the enforcement of the price cap policy.

"Unless gaps in enforcement are fixed urgently, this risks breaking the price cap mechanism for good. That, in turn, would raise Russia's expected tax incomes and make the invasion that much easier to sustain. So, the developments in April were, above all, a warning of what's to come unless action is taken," Myllyvirta said.

A spokesperson for the European Union declined to comment when contacted by CNBC.

At the start of the year, data showed Russia's revenue from fossil fuel exports had collapsed in December. It appeared to underscore the effectiveness of policymakers targeting Russia's oil revenues and sparked calls for even tougher measures to help Kyiv prevail.

CREA's latest findings, however, show that Russia's oil tax revenues rose 6% month on month in April due to the increase of export revenues in March.

To be sure, the Kremlin's revenues were significantly below levels recorded in April last year, when oil prices jumped.

The increase of export revenues in March resulted in a 5% month-on-month rebound in Russia's mineral extraction tax receipts in April, the report said — and an even larger rise is expected in May.

It means that after bottoming out at the start of 2023, Russia's oil tax revenues have since recovered due to increased sales.

"The Kremlin's tax revenue has closely followed prices for Russian crude oil, highlighting the importance of the oil price cap. The state is also changing its tax regime to diminish the impact of the price cap," said Isaac Levi, energy analyst at CREA.

"Unless the price cap coalition takes action to lower the price cap level and plug the enforcement gaps, changes to Russia's oil taxation structure will force the price of Russian crude oil closer to international benchmarks, leading to further recovery of Russia's oil revenue and wholesale failure of the price cap system," he added.

CREA's analysis said that since the EU's import bans and the G7 price cap on Russian oil, Moscow has earned an estimated 58 billion euros ($62.5 billion) in export revenues from seaborne oil.

The majority of which was transported on European insured or owned tankers, it added. Russia's revenues could be slashed by a further 22 billion euros if the price cap for crude oil was reduced to $30 per barrel and price caps for oil products were revised accordingly, CREA said.

The G7, Australia and the EU implemented a $60 per barrel price cap on Russian oil on Dec. 5. It came alongside a move by the EU and U.K. to impose a ban on the seaborne import of Russian crude oil.

Together, the measures were thought to reflect by far the most significant step to curtail the fossil fuel export revenue that is funding Russia's war in Ukraine.

In February, the Price Cap Coalition followed up its crude oil price cap by imposing a $100 per barrel price limit on Russian petroleum products such as diesel and a $45 per barrel cap on Russian petroleum products such as fuel oils that trade at a discount to crude.

The aim of the price cap policy is to restrict Russia's oil revenues while maintaining the supply of Russian oil. The U.S. Treasury Department said in an update last week that nearly six months after the implementation of the price cap, the policy was achieving both goals.

The Treasury estimates that Russia's oil revenues have fallen to just 23% of the Russian budget this year, down from 30% to 35% of the total Russian budget before Moscow launched its war in Ukraine in February 2022.

The U.S. said this decline in revenue occurred at a time when Russia was exporting as much as 10% more crude oil in April 2023 when compared with March of last year.