Rusty Business: The fight against Russia's shadow fleet may only have a significant impact within conditions of a deficit-free oil market and relatively low prices

The shadow fleet, which enables Russia to supply oil to the world market at prices above the sanctions price cap, has reached colossal proportions and, according to some estimates, may consist of 1400 vessels. Meanwhile, the average displacement of shadow tankers has increased, along with their average age which has increased from 8 to 15 years. As a result, the shadow fleet poses a serious environmental threat to the world's oceans and, above all, to the Baltic Sea, through which Russian oil tankers make about a thousand voyages per month. However, the Baltic countries cannot control the level of the environmental threat and ensure reliable insurance, fearing retaliatory measures from Russia and serious escalation. The Yermak-McFaul Group, which is developing measures to improve the effectiveness of sanctions, believes that measures to put pressure on the shadow fleet could deprive Russia of up to $8 billion in export revenues. This would not be through physical inspections of vessels but rather due to the threat of secondary sanctions that would apply to both shipowners and participants in the oil trading scheme. Such pressure could increase Russia's costs and slightly reduce the actual profitability of exports. However, this effect will only be significant if the oil market remains deficit-free and oil prices do not start to rise again. Otherwise, the additional costs of using the shadow fleet will easily be offset by the rising oil prices.

The share of the shadow fleet in ensuring Russian crude oil exports increased from approximately one-third in the first half of 2022 to 65-70% in the second half of 2023, according to a report by Yermak-McFaul International Expert Group. According to the report's authors, increased pressure on the shadow fleet by the sanctions coalition could deprive Russia of $8 billion in export revenues, bringing it closer to the threshold at which it would be impossible or very difficult to wage war and maintain domestic stability (→ Re: Russia: Minus $50 billion).

Before the war, the shadow fleet's share of global shipping was small, and it was also used to circumvent sanctions (for example, by Venezuela and Iran), but on a modest scale. Russia, one of the largest suppliers of oil to the global market, began to deploy its shadow fleet immediately after the imposition of sanctions (→ Re: Russia: Russia's Shadow Fleet). By October 2023, its size, according to the analytical company Windward, reached 1400 vessels. In December 2023, analysts at the company Vortexa calculated that since January 2021, 1649 vessels, including 1089 tankers transporting Russian oil, operated on the global shadow market.

One of the main routes for delivering oil from Russia is the 'Baltic corridor'. According to the Norwegian Coastal Administration's estimates reviewed by the Atlantic Council, the number of 'Baltic' oil tanker voyages from Russia after the full-scale invasion of Ukraine has increased one and a half times (from an average of 662 voyages per month up to March 2022 to 955 voyages per month between April 2022 and September 2023). Moreover, the average size of tankers has increased (from 60.3 to 92 million tonnes) and their average age has risen from 8.3 years in 2020 to 14.6 years in 2023. The average age of tankers departing from Kaliningrad is 29.3 years.

According to experts from the Atlantic Council, the fleet consisting of outdated vessels without standard insurance not only helps Moscow bypass price restrictions on oil sales but also poses a significant environmental threat to the Baltic and Mediterranean Seas, where the majority of Russian shipments occur. Any incident at sea involving such a vessel poses a serious problem for coastal states, which, according to the UN Convention on the Law of the Sea, are obliged to send assistance to a ship in distress regardless of its legal status. 

However, identifying the owners of such vessels in the event of an accident can be problematic, preventing compensation for the damage caused. In order to enjoy most-favoured-nation treatment and reduced port dues, shadow fleet tankers mainly fly the flags of such countries as Liberia, the Marshall Islands, Panama, Vietnam, the Cook Islands, Gabon, Cameroon, Palau and Saint Kitts and Nevis. Coastal authorities have the right to restrict the movement of shadow tankers only if there are substantial grounds to believe that the vessel could cause an oil spill. In practice, this measure is rarely used by coastal states for fear of legal action from vessel owners. Consequently, coastal states often bear the consequences of incidents involving shadow tankers.

According to the Yermak-McFaul Group report, coastal states should exercise their right to deny passage to tankers lacking proper insurance, and violators of these prohibitions should be placed on the sanction list. Implementation of this measure could impact 50% of maritime shipments of Russian oil in the Baltic Sea and 80% in the Mediterranean. Thus, part of the shadow fleet would be taken out of the game, while the cost of transporting the remaining tankers would increase significantly, which would offset the Kremlin's benefits from their use.

In practice, coastal states have avoided tightening checks on shadow tankers for fear that doing so would lead to Russian retaliation, including military escalation in the Baltic Sea, according to an Atlantic Council study. The Yermak-McFaul group, however, argues that it will not be necessary to restrict vessel passage to verify insurance: once sanctions coalition partners announce that any vessel that refuses to provide accurate and adequate insurance information, as well as the commodity trader involved, may face sanctions, the risks of shipping will increase dramatically, serving as a strong deterrent to the use of the shadow fleet.

In late 2023, the US Treasury Department's Office of Foreign Assets Control (OFAC) imposed sanctions on several shadow maritime operators based in the UAE and Turkey. As revealed by an investigation by Bloomberg, a total of 50 tankers were affected by these sanctions, of which about half have had to stop carrying oil. Sanctions pressure has also led to a significant increase in the discount for Urals grade oil, with Russian oil of this grade now sold at around the $60 per barrel ‘cap’ price. However, as Re:Russia has previously discussed, both the OFAC directive and the change in the situation on the oil market, which is almost no longer in deficit have led to production growth in non-OPEC+ countries and compensated for the reduction in supplies from Russia and Saudi Arabia (→ Re: Russia: OPEC minus), which has contributed to the effectiveness of the sanctions. 

If this trend in the oil market persists, new measures against the shadow fleet will raise transport costs and further reduce export profitability. If oil prices go up again, their rise will easily compensate for the increase in these costs.