stories

A long shadow How Russia uses a covert fleet of ships to ferry oil around the globe and what the West is doing to stop it

Source: iStories

Seeking to evade sanctions and circumvent the G7’s oil price cap, Russia has begun using a shadow fleet of decrepit second-hand tankers to covertly move oil around the world. These ships, registered to overseas shell companies, ferry oil to buyers willing to flout the G7 cap. While this scheme has allowed the Kremlin to continue selling oil at higher prices, the choice might be more political than financial. The independent news outlet iStories dug into Russia’s reasons for creating its own shadow fleet and found out how the network works and what the West is doing to stop it. Meduza shares an abridged English-language version of the outlet’s findings.

A shell game

In December 2022, the G7 countries, the E.U., and Australia set a $60 per barrel price cap on Russian oil exported by sea. The aim was to reduce Russia’s export revenues without causing a sharp drop in the supply of Russian oil to the global market. After the start of the full-scale war, Western governments began to turn away from Russian oil, with the E.U. eventually banning seaborne oil products from the country. Western companies, however, continued to transport and insure shipments. Now, with the price cap in place, these companies face sanctions if that oil was purchased at $60 or more.

As soon as discussions about the price cap began, Russia declared it wouldn’t sell oil to anyone who adhered to it. Then, it started looking for ways to circumvent the restrictions. Russia’s main move was setting up a shadow fleet of oil tankers to ship oil to buyers willing to disregard the price cap. This isn’t a new idea: Iran and Venezuela have long used shadow fleets to circumvent international sanctions.

While the West was discussing the terms of the price cap, Russia began buying up used tankers worldwide. According to the commodities trader Trafigura, by February 2023, about 600 tankers were transporting Russian oil and oil products under the radar. By December, that number had grown to 1,089, according to the analytics firm Vortexa. At that time, 75 percent of the world’s shadow fleet was exporting Russian oil, with 66 percent solely dedicated to deliveries from Russia. Analysts from the maritime AI company Windward estimate that shadow vessels account for 18 percent of all shipments worldwide.

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Russia spent about $8.5 billion on purchasing its own shadow tankers, with most of this money coming from state funds, writes Craig Kennedy, an expert on the Russian oil industry who runs the Navigating Russia newsletter on Substack. Hundreds of companies were created worldwide to manage the tankers. Bloomberg estimates that by December of last year, shadow vessels were transporting about 45 percent of Russia’s oil.

Winward analysts divide the shadow fleet into “dark” and “gray” vessels. Ships in the dark fleet often disable their identification system while transporting illegal cargo, and hide or falsify their location. They frequently change names, flags, and nominal owners and have insurance from non-Western companies or sail without insurance at all. By the end of last year, the dark fleet numbered about 1,100 vessels worldwide. The gray fleet is a new phenomenon, emerging shortly after Russia’s full-scale war with Ukraine began. The approximately 900 ships in this fleet are registered to shell companies created to conceal the true owners and to appear law-abiding. Many tankers in the gray fleet also “flag hop.”

More than 80 percent of tankers in the dark fleet and 60 percent in the gray fleet are over 16 years old, according to Winward. The age and condition of the shadow fleet worry environmentalists. By May of this year, there had been at least 50 incidents involving such ships, including fires, technical malfunctions, collisions, and oil spills at sea, according to a report by the insurance company Allianz. Often the countries in whose waters the incidents occurred ended up footing the bill for the damage, or, in the case of collisions, the other vessels involved bore the expenses. Shadow fleet tankers are de facto uninsured, writes the Center for European Policy Analysis (CEPA).

Going the long way

Tankers load Russian oil at three locations: Russian ports in the Baltic Sea, Black Sea, and the Far East. According to Winward, by the end of last year, the primary buyers were China, India, and (in much smaller quantities) Turkey. During transportation, the oil is sometimes transferred from ship to ship to conceal its origin and make it difficult to track the companies involved — a maneuver that increases the risk of oil spills.

Some of the Russian oil purchased this way may be sold on the buyers’ domestic markets, but it’s mainly either resold or refined and then sold as petroleum products to other countries, including those in Europe. For instance, in 2023, the volume of Russian oil imports to India increased by 140 percent, while the export of petroleum products from India to E.U. countries rose by 115 percent. Companies that track oil supplies say it’s impossible to determine the origin of the oil used to make gasoline, diesel, or kerosene.

It’s likely that Turkey is operating in a similar fashion. From February 2023 to February 2024, the country increased its purchases of Russian oil by 105 percent compared to the previous year. During the same period, Turkish fuel exports to the E.U. grew by 107 percent.

Exporting via the shadow fleet allows Russia to sell oil above the $60 price cap. According to the Russian Finance Ministry, in 2023, the average price for Urals oil, the blend used as the price benchmark for Russian oil exports, was $62.99 per barrel. This year, it’s risen significantly — from $64.14 in January to $74.98 in April.

The problem for Russia is that it’s more expensive to transport oil this way. Carriers have raised prices due to sanction-related risks, and the route to India from Russia’s Baltic and Black Sea ports is significantly longer than to Europe, making it more expensive. (Russia exports oil to China from its Far East ports, which is a much more economically viable route.) Moreover, buyers drive down the price as the cap gives them leverage to demand higher discounts on Russian oil.

Craig Kennedy believes that economically speaking, it would make more sense for Russia to transport its oil on standard tankers, even if it had to sell at a price below $60 per barrel. Doing so would eliminate the expenses associated with purchasing and maintaining shadow fleet vessels. However, from a political perspective, selling oil under conditions dictated by the West is most likely out of the question.

Chasing a shadow

Naturally, there’s no official registry of shadow fleet vessels, and formally, if a tanker doesn’t belong to or use the services of companies from countries that have imposed a price cap, it’s not violating any rules.

In reality, however, Russian oil is being transported by companies whose ships are serviced in the West and who own assets there. In October, the U.S. started imposing sanctions against them, targeting both the companies and the tankers themselves so that the vessels can’t just be reregistered to evade restrictions. By February, about 50 tankers were under U.S. sanctions, half of which stopped working with Russian oil, Bloomberg reported.

It’s likely that the U.S. will continue to identify individual companies and ships that are violating the price cap and impose sanctions on them. However, more extreme measures, such as seizing tankers in the territorial waters of Western countries, are unlikely as this could lead to serious escalation. Banning the sale of used tankers to Russia would also be ineffective, as Russia could easily circumvent this using shell companies.

The growth rate of the Russian shadow fleet slowed even before the U.S. started imposing sanctions, notes Kennedy. Purchases peaked in the first quarter of 2023, when Russia bought about 60 tankers. Since then, Russia has been buying fewer and fewer ships. In the last quarter of 2023, after sanctions were imposed, Russia bought only 20. Currently, the fate of the shadow fleet largely depends on whether the U.S. will continue to impose sanctions, and if so, to what extent. Kennedy believes that the U.S. can significantly reduce the number of shadow vessels this way without risking the global market. The Russian shadow fleet will also be one of the targets of the new 14th package of E.U. sanctions, Reuters reported in April. According to Bloomberg, these sanctions will impose restriction on 11 Russian vessels.