"Shadow Fleet" of the Russian Federation. Who and how helps the Russians in the sale of oil and oil derivatives

After February 24, 2022, Western countries imposed sanctions on the Russian Federation so that the Kremlin would have fewer opportunities to finance an aggressive war in Ukraine.

In December of last year, the European Union and Great Britain banned the import of Russian oil by sea, and two months later restrictions on trade in oil derivatives came into force. At the same time, a mechanism was introduced that limits the maritime transport of these energy products above the established price.

The last measure was aimed at reducing the Russian Federation's income from oil exports and stabilizing world fuel prices. Most countries have decided to set an upper limit of 60 dollars per barrel of oil or petroleum products.

Those who buy Russian raw materials more expensively than the set limit have lost access to key services provided by companies in the civilized world. This includes internationally recognized ship insurance as well as the possibility of using the European tanker fleet, including vessels owned by Greece and Cyprus.

Analysis by the Center for Energy and Clean Air Research (CREA) showed that at the beginning of the sanctions, together with the maximum prices, the daily income of the Russian Federation was reduced by 160 million euros. In order to reduce losses, the Russians decided to maintain the necessary quantities of oil and oil derivatives exports with the help of shadow tankers. Do they succeed?

 

Is there a "shadow fleet" of the Russian Federation?

 

The "shadow fleet" is defined as vessels registered in countries that have not joined the Kremlin sanctions, and which transport Russian oil to international markets. The term "shadow tankers" is used to identify ships that the Russian Federation can use to circumvent sanctions.

 

In 2022, after the introduction of sanctions for Russian oil and oil derivatives, "shadow tankers" focused on the transport of these energy products from the Russian Federation, and only a small part served other suppliers.

Mass media often mention stories about the "shadow fleet" of the Russian Federation. However, as the analysis of the Russian oil transport structure shows, there is not a single entity that manages this fleet. These tankers are operated by individual oil traders and intermediaries. They are trying to take ownership of several ships that are not registered in countries that have an active policy of sanctions against aggressors.

In practice, these are old tankers that have reached the end of their service life, and do not have internationally recognized maritime protection and compensation insurance.

After the introduction of sanctions, the Kremlin began to use such ships more and more often. Of the entire group of tankers that can be classified as "shadow tankers", 89 percent of sailings are related to the transport of Russian oil products, and only 11 percent are for other countries.

The state shipping company of the Russian Federation "Sovcomflot" controls only 30 percent of the "shadow tankers", the rest is subject to a series of opportunistic traders who are only interested in quick profits.

 

An increasing number of tankers in the "shadow"

 

By February 24, 2022, only 13 percent of oil shipped from Russian ports was transported by "shadow tankers." In July 2023, this number increased to 42 percent.

After the introduction of sanctions, these vessels began to sail more than tankers whose owners adhere to the price cap policy. That is, in the structure of Russian marine oil exports, the share of the gray market is greater than the "white" one.

In the oil derivatives segment, the role of "shadow tankers" is somewhat smaller. Before the war, such ships transported 10 percent of Russian fuel, and in July 2023, that figure was 35 percent.

In absolute numbers, the situation looks like this. In 2021, 51 "shadow tankers" were used to transport oil from the Russian Federation. By the end of 2022, their number increased to 103, and in the first half of 2023 to 146.

The number of smaller vessels also increased, but not so significantly. In 2021, there were 154, in 2022 – 183, and at the end of June 2023 – 223.

 

Methods of circumventing sanctions

 

Russia is trying to engage all available "shadow tankers," including those that once carried Iranian oil. However, many third-party owners of such vessels are reluctant to give the ships to the Russians for permanent use or lease.

That is why the Russians use the available ships as actively as possible. After the introduction of oil import sanctions in December 2022, the number of "shadow tanker" sailings by July 2023 increased by 82 percent, to an average of 60 sailings per month. The volume of transport increased by 78 percent to 6.4 million tons per month.

Despite Russia's efforts to attract the maximum number of "shadow tankers" and increase the frequency of their flights, there is still not enough capacity. Therefore, traders resort to supply schemes, when oil from the Russian Federation is transferred from one vessel to another (ship-to-ship transfer, STS ), including those registered in Western countries.

Blending and concealing the origin of some oil at the final port of destination allows traders to sell it at prices higher than those imposed by sanctions.

 

How the West will lose energy sanctions to Russia

 

Surveillance from July 30 to September 23 in the Mediterranean Sea, particularly in the Gulf of Laconia, near the territorial waters of Greece and the coast of Malta, revealed 33 STS operations and 66 vessels involved in the transshipment of Russian oil.

Of these, 52 ships are 15 years old, and 43 ships do not have Western insurance. This poses the threat of oil spills and accidents with catastrophic environmental consequences, but the EU has so far turned a blind eye. The risks are compounded by the fact that such vessels often turn off their Automatic Identification Systems (AIS) to hide their involvement in STS operations.

Currently in the Russian Federation there is only an ephemeral group of opportunistic traders with old tankers without insurance, who build complex schemes with the transfer of oil to the sea. This system is not reliable and could be dismantled by stricter application of sanctions by the G7 and Ukraine's allies.

The fact that Russian oil is transported either in accordance with international norms and safety standards on tankers of the sanctions coalition countries, or

without insurance and with enormous risks, can be used for this. Despite speculation, the Kremlin has no third option.

In order for Russia to be able to provide its own marine insurance for ships, huge funds are needed. In terms of managing the risks of potentially catastrophic oil spills, international traders want to be sure that insurance provides full protection. However, Russians cannot provide insurance at the level of Western companies.

The increase in the export of oil and oil derivatives from the Russian Federation is limited by the fact that all "shadow tankers" are occupied, and it is not easy to change the country of registration and/or insurance of a vessel in a country that is not subject to sanctions. All this indicates the importance of sanctions by the countries that control most of the maritime traffic and its insurance.

 

Logistics of Russian oil exports

 

Before the war, the shortest delivery time for Russian oil from Arctic ports to EU countries was 11 days. After the invasion, the period was increased to 28 days, and after the introduction of sanctions - to 35 days.

The invasion of Ukraine further affected shipping from Russian ports in the Baltic Sea. Before the war, the average time of oil delivery from them to the customer was 13 days, and after the invasion it increased to 40 days. Because raw materials started to be diverted from EU countries to India.

The delivery time from Russian Black Sea ports was 15 days on average, and after February 24, 2022 and the introduction of sanctions, it increased to 30 and 25 days, respectively.

The increase in the delivery term of Russian oil is mainly caused by the reorientation to Asian markets, especially India, China, Turkey, the UAE and Egypt, the EU embargo and the G7 price cap. In early 2023, India and China became the main buyers of Russian oil transported by “shadow tankers.” These countries benefited from lower Russian oil prices and increased imports.

A significant part of Russian oil is transported from ports in the Baltic and Pacific regions. From December 2022 to July 2023, "shadow tankers" transported about 23 million tons of crude oil from the Pacific ports of the Russian Federation and 21 million tons from ports in the Baltic Sea.

From the Far Eastern port of Kozmino, ESPO oil is exported to China at prices that exceed sanctions limits. In the first quarter of 2023, more than 95 percent of exports from this port were shipped at a price higher than $60 per barrel. In violation of sanctions, tankers owned by countries in the sanctions coalition or

with international insurance continue to transport Russian oil without respecting the price limit.

 

After the introduction of sanctions, logistics schemes became more complex. Most of the oil products transported by shadow tankers are transferred from ship to ship in the internal waters of the Russian Federation. This is due to the fact that ships were not supposed to enter Russian ports in this way.

It is predicted that Russia will experience a drop in oil production of 30 percent and GDP of 15 percent. But that didn't happen. What's wrong?

Trade routes have changed significantly: 29 percent of oil products were sent to Turkey, nine percent to the territorial waters of countries that limit prices (ship-to-ship transshipment was carried out there), eight percent went to China, and six percent to Brazil. Such diverse supply routes indicate the evolution and complexity of Russia's oil trade due to sanctions.

In addition, tankers carrying Russian oil may face delays in critical passages (Bosphorus, Suez Canal, Denmark Strait).

 

What can be done?

 

Allies should do more to prevent Putin from financing the war against Ukraine by selling oil on world markets without price limits. The increase in the number of "shadow tankers" should be prevented by limiting the sale of vessels to owners who do not comply with sanctions.

Experts recommend banning the provision of all types of insurance and other services to all vessels under the following conditions: the vessel is transporting Russian crude oil or oil derivatives; the vessel's owner or management company has changed after February 24, 2022; the shipowner did not confirm that the source of the funds for the purchase was not related to the Russian Federation.

The countries of the sanctions coalition can use the right to prohibit the movement of "shadow tankers" through their territorial waters and leave this possibility only to those vessels that transport Russian oil in accordance with the price limit and have reliable insurance.

For this, it would be sufficient to introduce mandatory insurance from Western insurance companies as a condition for passing through the Denmark Strait in the Baltic and other key points of sea routes that pass through the territorial waters of the countries of the sanctioning coalition, as well as apply a similar condition for access to their ports.

 

Currently, US and UK officials are talking about the need to revise the policy of sanctions against Russian oil, because the price cap does not work, and Russian oil is sold at prices significantly higher than 60 dollars per barrel.

In order to reduce the risk of abuse and avoidance of price restrictions, it is necessary to strengthen the monitoring and control of compliance with the sanctions policy. Sanctions against those who facilitate the export of Russian oil should be strengthened.

Once these conditions are met and the possibilities for the Russian Federation to use "shadow tankers" are closed, the G7 countries can stabilize Russian oil exports by conducting a regular review of price caps, as proposed in December 2022.