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.
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.”
