Russia's Shadow Fleet: How it works and will new sanctions be able to deal with it?

Prior to the full-scale invasion of Ukraine, the Russian merchant fleet consisted of around 1,700 vessels with a total deadweight tonnage of approximately 24 million tonnes, accounting for roughly 1.1% of the global merchant fleet. Tankers and bulk carriers made up 70% of the Russian fleet, as a significant portion of Russia's external cargo turnover is commodity exports. Notably, Russia did not possess its own container ships, except for a few vessels, as international companies successfully delivered goods in containers to Russian ports. However, Russia's most modern and large-scale vessels operated under foreign flags (accounting for 61.5% of the overall Russian deadweight tonnage), and their owners are now compelled to maintain compliance with sanctions. Therefore, over the course of last year, as preparations were made for the expansion of sanctions against Russian raw material exports, Russian companies established their own shadow fleet.

Increased demand for LR1, MR, Aframax, and Suezmax tankers and bulk carriers, which are the most suitable for transporting Russian cargo, was observed worldwide in 2022, according to a report by S&P Global Market Intelligence. The number of Suezmax sales of all ages doubled compared to 2021 (reaching 103 vessels), Aframax sales increased by 30% (121 vessels), and MR sales grew by almost a third (reaching 350 vessels). Many transactions involved undisclosed buyers and investors who chose to remain anonymous, facilitated by the involvement of lesser-known brokers who guaranteed this anonymity. The number of tanker acquisitions with unknown end-buyers increased across all tanker classes in 2022 compared to the previous year: VLCCs went from 2 to 19, Suezmaxes from 4 to 14, Aframax from 6 to 10, and MR from 9 to 27. Sale and purchase contracts explicitly stipulate that, after acquisition, the vessel should not enter ports subject to sanctions (a safeguard employed by sellers). However, reality often proves otherwise.

The heightened demand has led to a widespread increase in tanker prices. The 2007-built Aframax vessel Aether was sold for $37 million following the Russian invasion of Ukraine, whereas just two weeks before February 24, 2022, a tanker of a similar size and age was purchased for a mere $17 million. The price of a 10-year-old LR2 doubled compared to pre-invasion prices, currently standing at approximately $56 million. The cost of a VLCC has risen by two-thirds over the past year, reaching $75 million. As such, this implies that Russia and Russian companies must have spent hundreds of millions or even billions of dollars on establishing this shadow fleet.

However, the acquisition or sale of vessels to bypass sanctions is not enough. The experts at S&P Global market Intelligence have calculated that, in 2022, 864 new international maritime companies with ties to Russia were created to manage the shadow fleet. Of these companies, 87 possess vessels that were previously owned by Russia or sailed under the Russian flag. Out of the ships owned by 777 companies from this list, 880 vessels entered Russian ports after December 5. The owners of these ships are mainly located in Turkey (160 companies), China (120 companies), Greece (110 companies), the United Arab Emirates (100 companies), Hong Kong (83 companies), and India (40 companies).

In the review of the Russian shadow fleet provided by Windward, a company specialising in risk assessment and maritime intelligence collection using artificial intelligence, the following classification of vessels is proposed. The 'clean' fleet refers to tankers that do not exhibit any suspicious activities such as flag switching or convoluted ownership structures. These vessels can be easily identified and operate within the bounds of the law. The 'grey' fleet, on the other hand, is a relatively new phenomenon that emerged after the Russian invasion of Ukraine. Special companies are created to conceal the origin and ownership of a vessel, while giving it a legal appearance to shield it from sanctions. Determining the legality of such companies' activities, including their compliance with sanctions, is often challenging. A significant number of these vessels change their flags. According to Windward's calculations, there are currently around 900 'grey' ships worldwide, accounting for approximately 8% of the global fleet. Finally, the 'dark' fleet comprises vessels used for the transportation of illegal or sanctioned goods. They disable automatic identification systems, employ location-hiding technologies, and engage in location falsification. Windward estimates that there are approximately 1,100 'dark' fleet vessels, representing around 10% of the global merchant fleet. The majority of 'grey' and 'dark' fleet vessels are over 16 years old — 63% and 83% respectively.

Last year, Russia ranked among the top five countries with the highest number of 'dark' fleet vessels. Panama accounts for 33% of all 'dark' fleet vessels by owner company location, followed by Liberia with 28%, the Marshall Islands with 15%, Russia with 14%, and Malta with 8%. Regarding the number of 'grey' fleet vessels, Moscow has become the absolute leader, with 42% of all 'grey' vessels worldwide owned by companies located in Russia. Liberia accounts for 21%, and the Marshall Islands for 15%.

Following the Russian invasion of Ukraine, the volume of oil transported by 'grey' and 'dark' fleet vessels has increased sharply. According to Windward, 2.6 million barrels of Russian oil per day, previously transported by 'clean' vessels, began to be transported by the 'grey' fleet after February 24. As a result, the volume of global oil transported by these 'grey' fleet vessels increased by approximately 68% compared to pre-war levels. The volume of transportation by the 'dark' fleet grew by 22%.

China and India are the main destinations for Russian 'grey' and 'dark' fleet vessels. However, according to Windward, Russian 'grey' ships have also called at ports in European Union countries such as the Netherlands, Italy, Greece, and Belgium, while 'dark' vessels have been docked in the Netherlands, Bulgaria, Italy, Germany, Greece, and Belgium. The largest volumes of oil transported by 'grey' and 'dark' fleet vessels originated from the Ust-Luga port, followed by Primorsk.

Russia's Top 10 'Grey' and 'Dark' Fleet Destinations

Source: Windward

Top 5 Russian ports of departure for grey and dark fleet vessels

Source: Windward

In any case, last year Russia managed to create a shadow fleet in order to circumvent international sanctions. And, moreover, secondary sanctions have not been much of a hindrance. For example, in April 2023, the India-based Gatik Ship Management lost its insurance because it was carrying oil from Russia at prices above the price ceiling ($60). The company's vessels lost the ability to enter ports and pass through straits, but Gatik Ship Management reorganised, registered new companies and transferred ships to other jurisdictions outside India, and were able to regain operations as a result. 

The fight against Russia's shadow fleet, as Re: Russia has already written, will be one of the primary targets of the 11th sanctions package. The exact parameters of the measures directed against this are not yet known, although a complete ban on such vessels from entering Western coalition ports is being discussed. However, this could result in the fragmentation of the maritime transport market and might highlight a segment in it that never enters the territorial waters of Western countries.