A tanker with Russian crude oil sailing off Ceuta, Spain
After Russia's full-scale invasion of Ukraine began in Feb. 2022, Western countries implemented sanctions against Russia in an effort to limit its ability to fund the war in Ukraine.
In Dec. 2022, both the European Union and the UK imposed bans on the import of Russian oil by sea. Two months later, restrictions on petroleum products were also put in place. A mechanism designed to control the sea transportation of these energy products based on a specified price limit was also introduced.
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An analysis conducted by the Center for Research on Energy and Clean Air (CREA) revealed that, at the outset of these sanctions and price restrictions, the daily income of the Russian Federation was reduced by €160 million. To mitigate these losses, Russia opted to maintain its necessary levels of oil and petroleum product exports by utilizing "shadow" tankers.
Role of intermediaries
"Shadow" vessels refer to ships registered in countries not participating in sanctions against the Kremlin, used for transporting Russian oil to global markets. This term broadly encompasses ships Russia uses to evade sanctions.
Media often mentions the Russian "shadow fleet," but an analysis of how Russian oil is transported reveals that there isn't a single entity managing this fleet. Instead, individual oil traders and intermediaries operate the tankers. They strive to acquire more ships not registered in countries which are actively enforcing sanctions against Russia.
Some vessels pose a threat of oil spills and potential environmental disasters.
In practice, these are usually old tankers that have reached the end of their service life and lack internationally recognized marine protection and insurance.
With the imposition of sanctions, the Kremlin increasingly relies on such vessels. Among all tankers described as "shadow," 89% are involved in transporting Russian oil products, while only 11% are used for other countries.
Russia's state shipping company, "Sovcomflot," controls only 30% of these "shadow" tankers, while the rest are in the hands of opportunistic traders primarily interested in quick profits.
Russia seeks more ships
Until Feb. 24, 2022, only 13% of oil departing from Russian ports was transported using "shadow" tankers. But by July 2023, this had risen to 42%.
In the case of petroleum products, "shadow" tankers play a somewhat smaller role than they do with crude oil. Prior to the onset of the war, only 10% of Russian fuel was transported by such ships. As of July 2023, this figure had increased to 35%.
In 2021, 51 "shadow" tankers were employed for oil transportation from Russia. By the end of 2022, their count had risen to 103 vessels, and as of the first half of 2023, it had further increased to 146 vessels.
Circumventing sanctions
Russia is actively trying to secure the services of all available tankers in the global "shadow" fleet, even those that were previously involved in transporting Iranian oil. However, many third-party owners of these vessels are hesitant to provide their ships to Russia on a permanent basis or for leasing.
As a result, Russia is maximizing the use of the available "shadow" fleet. Following the imposition of sanctions on oil imports in Dec. 2022, the number of "shadow" tanker voyages surged by 82% by July 2023, averaging around 60 voyages per month. The volume of oil transported also increased by 78%, reaching 6.4 million tons per month.
Despite Russia's vigorous efforts to attract as many "shadow" tankers as possible and increase their frequency of operations, there remains a shortage. Consequently, traders are resorting to supply arrangements involving the transfer of Russian oil from one vessel to another, known as ship-to-ship transfers (STS), including those involving vessels registered in Western countries.
The diverse range of supply destinations reflects the evolution of Russian oil trade due to sanctions.
By blending and concealing the origin of some of the oil at the final destination port, traders can sell it at prices higher than those restricted by sanctions.
Surveillance results in the Mediterranean Sea, particularly in the Laconian Gulf near Greece's territorial waters and the coast of Malta, uncovered 33 STS operations involving 66 vessels engaged in transshipping Russian oil between July 30 and Sept. 23.
Of these vessels, 52 are 15 years old, and 43 lack Western insurance. This poses a threat of oil spills and potential environmental disasters. Yet, the EU has largely ignored these risks. Additionally, such vessels often disable their Automatic Identification Systems (AIS) to conceal their movements and participation in STS operations.
Currently, Russia relies on an ephemeral group of opportunistic traders with old, uninsured tankers who employ complex oil transfer schemes at sea. This system is not reliable and could be dismantled through stricter enforcement of sanctions by the G7 and Ukraine's allies.
Singapore's Eastern Pacific Shipping has bought 4 LNG carriers previously owned by Russia's Sovcomflot, from Dutch ING Bank.
Logistics
Before the onset of the war, it took just 11 days to deliver Russian oil from Russia’s Arctic ports to EU countries. However, following the invasion, this delivery time stretched to 28 days. Once sanctions were introduced, it further extended to 35 days. A similar increase was seen in shipments from Russia’s Baltic and Black Sea ports.
The prolonged delivery times for Russian oil are primarily a result of the shift towards Asian markets, particularly India, China, Turkey, the UAE, and Egypt. This shift was prompted by the EU embargo and the price cap imposed by the G7.
In total, 29% of petroleum product cargoes were destined for Turkey, 9% for territorial waters of countries enforcing price limits, where ship-to-ship transshipment occurred, 8% went to China, and 6% to Brazil. This diverse range of supply destinations reflects the evolution and complexities of Russian oil trade due to sanctions.
What can be done?
Allies must take more substantial measures to prevent Putin from funding the war against Ukraine through unrestricted sales of oil on the global market. To curtail the increase in the number of "shadow" tankers, restrictions should be imposed on the sale of vessels to owners who do not comply with sanctions.
Experts also suggest prohibiting the provision of all types of insurance and related services to vessels meeting certain criteria, for example, if the vessel is transporting Russian crude oil or petroleum products, the vessel owner or management company changed after February 24, 2022, or if the shipowner cannot confirm that the source of funds for the purchase is unrelated to Russia.
Steps should be taken to strengthen sanctions against those who finance and facilitate Russian oil exports.
Countries within the sanctions coalition can exercise their right to prohibit the movement of "shadow" tankers through their territorial waters, reserving this privilege only for vessels adhering to the price limit for Russian oil and possessing reliable insurance.
Currently, there are discussions among U.S. and UK officials regarding the need to reevaluate the sanctions policy concerning Russian oil, given that the price cap is not effectively enforced.
To mitigate the risk of abuse and circumvention of price restrictions, it is essential to enhance monitoring and enforcement of the sanctions policy. Following this, steps should be taken to strengthen sanctions against those who finance and facilitate Russian oil exports.
Once these measures are in place and avenues for Russia to use "shadow" tankers are blocked, the G7 countries can assert greater control over Russian oil exports by implementing a periodic review of the price limit.
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