The Western coalition has faced a relative setback in its efforts to curb Russia's oil revenue through the price cap mechanism. Specifically, it has failed to effectively limit Russia's use of the 'shadow' fleet to bypass sanctions. Over the past year, this fleet has increased its transport volumes of oil and oil products by 70%, according to a report by the Kyiv School of Economics.
Sanctions against individual ships and shipowners have had minimal impact on the ability of Russian exporters to deliver oil to buyers in Asia. In a year, only about 70 tankers have come under restrictions, whereas the total shadow fleet, according to various estimates, consists of between 700 and more than 1000 vessels. Moreover, blocked tankers gradually return to operation – changing their name and flag is often sufficient to circumvent restrictions.
The fight against the shadow fleet is rendered almost impossible by the fact that, as it turns out, most of the ships associated with it only serve Russian clients occasionally. In reality, the shadow fleet has become an inseparable part of the global tanker fleet. More precisely, it is divided into two parts: the actual shadow fleet, created by Russian oil companies, and the ‘phantom’ fleet, where the same tankers are involved in both legal and shadow transportation.
At the same time, sanctions have impacted the global tanker shipping market. Ship prices have risen significantly, and law-abiding operators are experiencing a shortage of vessels and suffering losses.
However, it would be incorrect to say that the sanctions have been completely ineffective. The greater or lesser discount on Russian oil has become a constant pricing factor, and without it, Russia's oil revenue would be at least 10% higher. The sanctions coalition should consider lowering the price cap further and increasing pressure on the shadow fleet to maintain the discount, which, as oil prices decrease, will become increasingly impactful on Russia's budget and economy as a whole.
The Western coalition has suffered a significant setback in its efforts to limit Russia's oil trade revenues through a price cap, as well as in its fight against the ‘shadow’ fleet that Russia uses to circumvent sanctions. Over the past year, the volume of oil and oil product shipments using this fleet has increased by 70%, from 2.4 million to 4.1 million barrels per day, according to a new report by the Kyiv School of Economics (KSE). In June 2024, the shadow fleet accounted for 89% of all Russian crude oil shipments and 38% of oil product shipments, the report’s authors estimate. Almost all of this oil was sold at prices exceeding the $60 per barrel cap for Brent crude set by the sanctions coalition.
The report's authors urge G7 countries to more actively impose sanctions on individual ships and shipowners caught collaborating with Russian exporters. They also suggest applying diplomatic pressure on the countries where Russia registers its shadow fleet tankers, pushing for stricter checks to ensure these vessels comply with international safety standards and have insurance that meets the requirements of the International Maritime Organisation (IMO). Recently, KSE experts noted that these shadow fleet tankers are increasingly flying under the flag of Gabon, a country that has not signed the Paris Memorandum of Understanding (Paris MoU), a document regulating ship inspections for IMO compliance.
The report’s authors urge G7 countries to impose more sanctions on individual vessels and shipowners found collaborating with Russian exporters. They also propose applying diplomatic pressure on the countries where Russia registers its shadow fleet tankers, encouraging them to conduct stricter checks for compliance with international safety standards and insurance requirements set by the International Maritime Organisation (IMO). Recently, KSE experts noted that shadow fleet tankers are increasingly flying under the flag of Gabon, which has not signed the Paris Memorandum of Understanding (Paris MoU) – a document that regulates ship inspections for IMO compliance.
The majority of the shadow fleet's tankers are insured by four Russian companies, according to the report: Ingosstrakh, AlfaStrakhovanie, VSK, and Sogaz. Their reinsurer is the Russian National Reinsurance Company (RNRC), which is owned by the Central Bank of Russia. The report's authors express doubts about the reliability of these insurance policies. KSE experts discovered that Ingosstrakh's policies likely contain an exclusion clause that voids the insurance contract if the tanker is used in violation of international sanctions. Furthermore, it is unclear how insurance claims might be processed, given that both Ingosstrakh and RNRC are under international sanctions.
Efforts to impose sanctions on the shadow fleet have also been largely ineffective. The US began imposing such sanctions in October 2023, followed later by the EU and the UK. Over the course of a year, sanctions have affected 74 vessels, costing Russia approximately $2.5 billion, according to the KSE report. However, the total size of the shadow fleet is estimated to range from several hundred to more than a thousand tankers (→ Re:Russia: Rusty Business). Thus, the proportion of blocked vessels remains small. Moreover, nearly a third of those vessels have resumed transporting Russian oil, the KSE experts acknowledge. The downtime after being added to sanctions lists has been shrinking, as Bloomberg's investigation reveals. Seven tankers resumed operations in just the first ten days of October, with six doing so in both September and August, while only five ships resumed work during the entire preceding period since the fall of last year.
The authors of the investigation explain the ineffectiveness of sanctions by noting that Russia and its partners have realised in practice that blocked ships do not face re-blocking. To unblock a tanker, it is enough to change its name and the flag it sails under. However, Bloomberg journalists point out that almost all tankers sanctioned by the US continue to remain idle, while most of the ships that resumed operations were sanctioned by the UK. Interestingly, most of the tankers that returned to service are now flying the flag of Barbados, whose ship registry is managed by none other than the UK.
Initially, the UK was assigned a key role in enforcing sanctions against Russian oil. The expectation was that the price cap would be upheld by cutting off violators from British service companies (particularly insurers and brokers), which have historically dominated the global market. However, as revealed in a recent Financial Times investigation, British citizens and UK-registered companies ended up playing a role in creating the shadow fleet – while doing so entirely legally.
The Financial Times report describes how Lukoil built its fleet in 2022-2023. The process was led by a 74-year-old veteran of the British market with experience at top companies in the country. Ships were acquired through the brokerage firm Braemar, the second-largest British broker, whose shares are traded on the London Stock Exchange. The formal owners were Lukoil subsidiaries in the Middle East, which at the time were not under sanctions. The tankers were managed by Dubai-based companies owned by another British businessman.
Financial Times journalists examined transactions related to the purchase of 25 tankers. In total, the Russian company spent about $700 million. The final cost of each vessel was two to three times higher than the usual market price, but these investments appear to have paid off. Since their acquisition, the tankers have transported about 119 million barrels of Russian oil, which, even at $60 per barrel, amounts to nearly $7.2 billion. Sanctions have so far been imposed on only seven of these tankers and two Dubai-based companies managing them.
The tankers mentioned by the Financial Times have avoided sanctions, despite transporting almost exclusively Russian oil. At the same time, most ships considered part of the shadow fleet only occasionally serve Russia, according to analyst Sergey Vakulenko, who studied the routes of 2,849 tankers, 735 of which had taken at least one cargo from Russian ports (→ Carnegie Politica: Oil from the Shadows). Thus, most of the shadow fleet's ships are an inseparable part of the global tanker fleet, concludes Vakulenko. Essentially, the shadow fleet consists of two 'divisions' – the 'dark' and the 'ghost' fleets, as explained by the industry publication AXSMarine. The 'dark' fleet refers to tankers linked to Russian companies and primarily transporting Russian oil. AXSMarine estimates their share of total Russian oil and petroleum product exports at around 20%. The ‘phantom’ fleet, on the other hand, comprises ships not controlled by Russian citizens or companies but involved in transporting Russian oil on an opportunistic basis.
As a result, the fight against the shadow fleet has had little effect on Russia's ability to supply oil to buyers in Asia at prices above the price cap. However, it has impacted the global market. According to AXSMarine, due to the expansion of the shadow fleet in 2022, the prices of second-hand Aframax, Suezmax, and VLCC ships aged five years and older increased by an average of 45% compared to the previous year, by another 40% in 2023, and by an additional 10% in 2024 (overall, prices have more than doubled, increasing by 2.2 times). Despite the fact that ship retirements nearly halted after the introduction of the price cap (tankers that would have been scrapped are now joining the shadow fleet), law-abiding operators face a shortage of ships. Fearing sanctions, they refuse to use tankers that, after due diligence, raise even minimal suspicions. For example, in 2023, V.Group, one of the largest British operators, was forced to reduce its fleet from 569 to 537 vessels, according to TradeWinds.
However, it would be incorrect to say that sanctions caused no harm to Russian oil exports. In the first months after the price cap was introduced, the discount of Urals crude to Brent reached around $30 (→ Re:Russia: The Discount Has Shifted). By the end of 2023, it had shrunk to $12, increased to $18 in early 2024, and then dropped again to $10. In addition, according to KSE estimates, Russia was forced to invest around $10 billion to create its shadow fleet. In the near future, oil prices are expected to remain at lower levels: Brent could stabilise around $70 per barrel or even fall to $60, and if Saudi Arabia initiates a price war to regain its market share, the price could drop to $50 (→ Re:Russia: Chinese Correction). As prices decline, the discount will become increasingly significant for the Russian budget: previously, when prices were high, the discount only deprived Russia of part of its windfall profits; now, it will press down around the price levels needed by the Kremlin to fund current expenditures. Therefore, it makes sense for the Western coalition to lower the price cap and continue to exert pressure on the shadow shipping market to maintain the discount on Russian oil.