Russia’s ‘shadow fleet’ is sailing through sanctions to pay for war

Oil revenue boosting the Kremlin’s invasion of Ukraine comes from a fleet of ships and intermediaries designed to evade sanctions and price caps. All signs are that it is working.

Nathalie Lees

Russia’s ‘shadow fleet’ is sailing through sanctions to pay for war

Nine months after Russia invaded Ukraine, the West imposed sanctions on Russian oil, later targeting diesel and other refined products too. From 5 December 2022, European imports of seaborne crude have been banned, and Russian ships are only allowed to make use of the West’s logistics and insurance firms if their cargo is priced below $60 a barrel. The effect is a price cap.

As soon as the restrictions were imposed, Russia set about trying to evade them. Old ships were key to the plan, as were a host of new actors. When the big Western firms that had been trading, shipping, and insuring Russian oil for years suddenly pulled out, they were replaced by new oil market intermediaries based in Asia and the Middle East. This gave birth to a “shadow” shipping and financing infrastructure that is still going strong today.

Intention and effect

The sanctions and price cap were introduced by the West to curb the profits from carbons that Russian President Vladimir Putin was using to fund the war. Its effect was to divert Russian oil from Europe onto global markets. By the time the measures were introduced, Russian oil had already become difficult to purchase because other Western sanctions had closed the international payment system off to buyers of Russian crude, while Western insurers were no longer interested in tankers transporting it.

At first, the West felt it had the right formula. “So far, the price cap is working well to address our two concerns: keeping products on the market and restricting revenues,” said Amos Hochstein, US Special Coordinator on Energy Security, in January 2023.

“There’s a long way to go, and we have to see how things develop, but so far, we are quite satisfied with where things are going and how they have been implemented.”

Now, 18 months later, there are no signs that the Russian economy has taken the hit Washington expected, partly because Russian oil is arriving at its destination via Moscow’s “shadow fleet” of tankers, which has kept supplies moving.

The crude oil tanker RN Polaris and a bulk carrier sail in Nakhodka Bay near the port city of Nakhodka, Russia, December 4, 2022.

Sailing in the shadows

Countries that know a thing or two about Western sanctions (like North Korea, Iran, and Venezuela) know that international maritime law is notoriously hard to enforce.

They also know about shadow fleets, which consist of ships that are mostly past their prime, sailing without industry-standard Western insurance, under the flag of a country that is not their true country of origin, with ownership arrangements that are opaque. The combined effect is to keep them beyond the reach of maritime law and its enforcement mechanisms.

Russian economist Yan Melkumov says the Kremlin made “titanic efforts to buy as many old tankers as possible” after the sanctions and price cap were brought in.

“Most experts believe that this was done through Greek shipowners, who were happy to sell the tankers that they were supposed to write off sooner or later anyway, sending them to be dismantled. Instead, they sold them to Russian companies or even probably to newly created front companies registered in countries all over the world,” he said.

Beyond the reach of sanctions, these vessels then took Russian oil to places like Turkey, India, and China. They even used “ship-to-ship transfers”, according to Helia Ebrahimi, the economics correspondent from Channel 4 News in the UK.

“Two ships sidle up to each other, and Russian barrels get transferred from a legitimate ship to a dark ship, which then turns off its transponders, essentially disappearing.”

Countries that know a thing or two about Western sanctions know that international maritime law is notoriously hard to enforce.

Navigating sanctions

Maritime Artificial Intelligence (AI) company Windward estimated in late 2023 that the Russian shadow fleet consisted of around 1,400 ships accounting for about a fifth of global oil trade, carrying more than $1bn of under-the-radar oil. By keeping its oil flowing, Russia has kept its revenue stream flowing, too. Those investigating it think that any effect the Western price cap may have had was temporary.

"In the first four months of the year, Russia's budget deficit was bigger than it was supposed to be for all of 2023," said Stephanie Baker from Bloomberg, who has been reporting on the subject in-depth.

"So, at least for the first six months of the year, the price cap was working as intended. Then, as the summer wore on, you saw the price cap being breached."

Moscow is still dodging the sanctions bullet. In the first quarter of 2024, oil revenues were up 79% year-on-year, with increased exports. According to Reuters, oil and gas revenue in April 2024 had doubled to $14bn, thanks to rising prices.

There are signs that the price cap is no longer working. Urals Oil (used as the price benchmark for Russian oil exports) was $46 per barrel when the price cap was introduced in December 2022. Ever since then, the price has been higher, twice approaching the $85 mark (in September 2023 and April 2024).

Between the far lower cost of Russian oil when it is exported and the far higher cost of Russian oil when it is delivered at destination, hundreds of millions of dollars are being made in the middle. By whom remains unclear. The lack of transparency needed to operate a shadow fleet means that mysterious middlemen are growing rich. It is likely, though unproven, that a thick slice of the revenue is being funnelled back to the Kremlin.

"Say China and India buy the cargo on a delivered basis, you can kind of give different valuations as to how much the freight would have cost," explains Bloomberg investigator Serene Cheong.

"There are many miscellaneous expenses in between that can be inflated or deflated, whichever way you want. You can then get under the price cap because we all know that there are many ways you can slice and dice a price."

Moscow is still dodging the sanctions bullet. In the first quarter of 2024, oil revenues were up 79% year-on-year, with increased exports.

The West's response

Western capitals and maritime authorities are mulling their response to Russia's shadow fleet. Sweden's Foreign Minister Tobias Billström said in April that it would be targeted as part of the European Union's next package of sanctions. To do this, Europe's lawmakers need to "sit down and make a thorough run through of all the elements of the 'shadow fleet' and what can be done," he added.

The EU knows that Russia's shadow fleet is funding its war in Ukraine, but the next steps carry risk, not least because Moscow will see it as an escalation. Others warn that efforts to rein in the ships are impractical.

"As long as you're in the high seas, a country's exclusive economic zone, or the outer edge of its territorial waters, you have the right to 'innocent passage'," said Nils Wang, a retired rear admiral from the Danish Navy, in an interview with the Atlantic Council.

"That means that if you're not doing anything harmful to the environment or the seabed, the coastal country can't impose any sanctions on you."

Russia's shadow fleet, then, could continue to find routes to their destination without being lawfully impeded.

Shun Tai crude oil tanker is seen anchored at the terminal Kozmino in Nakhodka Bay near the port city of Nakhodka, Russia, December 4, 2022.

Activists take action

Environmental factors are important because much of the shadow fleet will be old. Groups like Greenpeace fear a major accident is inevitable and have started to take direct action. In April 2024, Greenpeace Nordic activists in inflatables daubed "Oil is War" across one of the vessels thought to be used for transporting Russian crude.

Rolf Lindahl, of the group, said: "Not only does the shadow fleet constitute an immediate environmental threat, it is also fuelling Russia's war on Ukraine. The sanctions are vague, allowing for this shadow fleet because of global society's dependence on oil."

Elisabeth Braw, a senior fellow at the Atlantic Council, thinks such actions by groups like Greenpeace could provide vital information for more targeted efforts by institutional players like NATO and the International Maritime Organisation (IMO).

"Armed with such data, the IMO could create a list of vessels that bear the shadow fleet's trademarks of poor insurance, obscure ownership, regular signals gaps, and frequently changing flag registration," she argued in Foreign Policy.

However it is tackled (if at all), it is clear that the shadow fleet is seriously undermining the West's efforts to reduce Russian oil revenues, with Moscow's work-around now posing new risks to the environment.

Everybody knows that something must be done. Alas, few know what.

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