Slippery Moves

FORUM STAFF

A dearth of modern tanker ships willing to carry sanctioned Russian oil has given rise to a “shadow” fleet of more than 600 past-their-prime vessels that deliver crude and refined petroleum to receptive nations. The vessels elude detection by obscuring their ownership, turning off automatic identification system (AIS) devices, transferring cargo at sea and “spoofing,” or broadcasting a manipulated transmission signal that disguises a ship’s location.

Russia is the world’s second-largest oil exporter behind Saudi Arabia, and Moscow and Riyadh seek to keep oil prices high, Reuters reported in July 2023. 

Western and other nations banned or imposed price caps on Russian oil after the Kremlin’s invasion of Ukraine in February 2022. The goal was to cripple financing for the Kremlin’s unprovoked war while allowing Russian oil to flow to international ports. The price caps are “a novel tool of economic statecraft designed to achieve two seemingly contradictory goals,” according to the United States Treasury Department, and observers agree the measures have been effective.

Canada, the United Kingdom and the U.S. ban direct Russian oil imports, and the European Union prohibits seaborne importation of Russian crude and refined oil products. Australia, the EU and the Group of Seven major industrial nations have placed price caps on maritime delivery of Russian crude and other petroleum products worldwide. While it’s legal for tankers to transport Russian oil, the price caps prohibit insurance companies, most of which are Western, from covering vessels that deliver Russian oil selling above the ceiling, which is $60 per barrel for crude, $45 per barrel for “dirty” petroleum products such as fuel oil and diesel oil, and $100 per barrel for “clean” petroleum products (CPP) such as gasoline, jet fuel and naphtha, an oil used to make plastics. Without insurance, vessels are not allowed to enter most major ports, The New York Times newspaper reported in May 2023.

The international restrictions led Russia to embrace a fleet of aging ships to deliver oil or transfer their cargo at sea to waiting vessels bound for the People’s Republic of China (PRC) and other distant locations, duplicating attempts by Iran and Venezuela to evade international sanctions. The often-clandestine methods pose challenges to monitoring oil shipments. “The volume of cargo with unknown destinations has jumped. Russian oil, once easy to track, is now being moved through more shadowy channels,” The Economist newspaper reported in January 2023.

Shipping industry experts warn that such schemes greatly increase the potential for human and environmental disasters with aging, poorly maintained tankers navigating congested passages and ports. Those fears materialized in May 2023 when the tanker Pablo exploded and burned in the South China Sea off Malaysia’s coast. Three workers aboard the Gabon-registered ship were reported missing and presumed dead, and the outcome could have been worse. Twenty-five crew members were rescued and the Pablo, which tracking data showed had offloaded Iranian heavy crude in the PRC’s Shandong province, was largely empty when its deck blew off, avoiding a devastating oil spill, The Straits Times newspaper in Singapore reported.

The Pablo remained anchored at sea months after the explosion and fire, a listing hulk with no crew, traceable owner or insurer, Splash247.com, a maritime news provider, reported in June 2023. 

Maritime shipping officials said accidents are the inevitable result of efforts to circumvent oil sanctions. “You’ve got all these old vessels that are probably not being maintained to the standard they should be,” Richard Matthews, head of research at EA Gibson, an international shipbroker, told news broadcaster CNN in March 2023. “The likelihood of there being a major spill or accident is growing by the day as this fleet grows.”

Dark and Gray Fleets

The elimination of Europe as Russia’s primary oil market changed how the country conducted business. Russia had to find new customers willing to buy oil and an economical way to deliver it. There were no pipelines to faraway ports in China or other new client countries, and Russia’s tanker fleet could carry less than 20% of its seaborne crude oil exports, U.S.-based National Public Radio reported in January 2023. Russia needed more ships.

The aging fleet of tankers, which The New York Times described as “a hodgepodge array of ships that obscure their locations or identities to avoid oversight from governments and business partners,” moved in to help transport the Russian cargo. Many of these “dark fleet” ships already were ferrying oil from Iran and Venezuela. Meanwhile, mostly European-owned vessels that were now prohibited from moving Russian oil to European ports were sold to Middle Eastern and Asian firms and became known as the “gray fleet.” Russia used both shipping sources, which industry observers estimate to be about 10% of the globe’s large tankers, CNN reported. Collectively and generically called the shadow fleet, both types of vessels help Russia sidestep sanctions and move its oil without Western shippers.

Russia’s exports of crude to India and the PRC in the first quarter of 2023 set record highs as the two nations bought that oil at post-invasion discount prices, analytics firm Kpler told CNN. European markets that once made up nearly two-thirds of Russia’s crude exports fell to only 8%, Kpler reported. “Both China and India are taking advantage of discounted Russian crude, benefiting from the sanctions applied on Russian materials by other countries,” Kpler analyst Matt Smith told Insider, a U.S.-based media company, in April 2023.

The shadow fleet fueled the transition. Russian oil restrictions increased the value and life span of older tankers with dubious owners and registries that operate outside Western insurance, financial and shipping service networks, FreightWaves, which monitors the global freight market, reported in February 2023. The shadow fleet appears willing to transport oil without insurance from major providers, The Washington Post newspaper reported that month. The tankers are registered or “flagged” in various countries, most commonly Panama, Liberia and the Marshall Islands, according to Vortexa, which analyzes and tracks global seaborne oil.

Oil tankers are considered old after about 15 years, FreightWaves reported. Previously, many were sold for scrap. But the emergence of the sanctions-skirting fleet, in which ships average 20 years old, is changing that. The Pablo, for instance, was built in 1997. This fleet of revived vessels “could be viewed as the new scrapping,” Svein Moxnes Harfjeld, CEO of crude tanker owner DHT Holdings, told FreightWaves.

Changing Patterns

“The global energy system is becoming more dispersed, divided — and dangerous,” The Economist reported. The sanctions and price caps have dramatically changed shipping patterns. Long, costly voyages are now common, not only for Russia but also other major energy suppliers, Reuters reported in April 2023. Along with its crude exports, Russia is delivering CPP to Brazil, Morocco, Nigeria and Turkey, while Asia, the Middle East and the U.S. ship more fuels such as diesel to Europe. Displaced from Africa and the Mediterranean by abundant Russian supplies, Asian exporters are sending fuels to Singapore for storage, Reuters reported. “Mysterious newcomers” in Dubai and Hong Kong are trading and insuring Russian oil that was handled by companies in Geneva, Switzerland, before the sanctions, The Economist reported.

Meanwhile, global oil prices had not changed dramatically in the year after Russia’s invasion of Ukraine, Ben Cahill, a senior fellow and energy security expert at the U.S.-based Center for Strategic and International Studies, told EsadeGeo, a global economic research center, in March 2023. “The transition has been smooth,” Cahill said. “The EU embargo and the oil price cap ultimately had two goals: to keep the market well-supplied and to deprive Russia of revenue. In those terms, it worked.”

With longer supply chains, there was twice as much oil at sea in February 2023 as there was at the start of the Russia-Ukraine war, David Wech, Vortexa’s chief economist, said in a webinar that month. Ships that formerly delivered Russian crude to Europe in a week or less now spend up to 45 days at sea delivering to distant ports, The Economist reported. It can take 18 days for U.S. companies to deliver CPP to Europe, Reuters reported. Meanwhile, carbon emissions that contribute to climate change rise as tankers embark on extended routes.

Finding owners of the shadow fleet tankers is difficult. Authorities and shipping analysts increasingly ask about ships moving Russian oil, reported the Center for Advanced Defense Studies (C4ADS), a Washington D.C.-based nonprofit research group. “Generally, they are looking for patterns of suspicious behavior, new leads on unknown sanctions evaders or more complete beneficial owner buildouts for known ships [and] fleets of concern,” Margaux Garcia, an analyst with C4ADS’s State Sponsored Threats team, told FORUM.

Companies shipping Russian oil differ from those moving oil for other sanctioned regimes, Garcia noted, because Russian oil can be shipped legally if companies comply with cap regulations. So there is more room for plausible deniability if authorities board a ship transporting Russian oil.

Responsible shippers worry about the industry’s reputation with so many aging vessels plying the seas. “Is there any will to stop this creeping anarchy, or is it all to be lost in tedious legal arguments about sovereignty and freedom of the seas?” the Seatrade Maritime News, an international shipping website, opined days after the Pablo exploded. “Where is the robust, international and immediate response that will stop this [from] becoming a far worse international scandal that will leach out into the rest of world shipping?”

Despite the challenges governments and the shipping industry face in policing sanction-breaking practices, there are encouraging signs. “The Russian price cap is working and working extremely well,” Deputy U.S. Treasury Secretary Wally Adeyemo told The New York Times in May 2023. “The money that they’re spending on building up this ecosystem to support their energy trade is money they can’t spend on building missiles or buying tanks.”  

High-Seas Deception

Shadow fleet vessels use various deceptions to obscure their ownership, the origin and price of their oil cargo, and their location.

Flags of convenience denote the nation to which a merchant ship is registered. A ship might register with a state that has few labor, environmental or inspection regulations. Some shipowners change registries repeatedly, making it difficult to track a vessel’s history.

Unregulated transfers at sea can obscure the cargo’s origin, Armen Azizian, an analyst with Vortexa, which tracks global seaborne oil, told FORUM. “You put another step between buyer and seller,” Azizian said. “You have a middleman involved.”

Deceptive accounting practices related to shipping costs, customs fees, insurance and cargo make it difficult to calculate how much a buyer paid for an oil shipment and whether price caps were skirted.

Turning off a ship’s automatic identification system (AIS) and spoofing conceal or electronically manipulate a ship’s whereabouts. AIS transponders use ground- and satellite-based equipment to locate ships for other vessels and regulators. Spoofing involves emitting a fake signal about a vessel’s location. In one instance, satellite imagery helped reveal a tanker carrying Russian crude that appeared to be in the Sea of Japan actually was more than 400 kilometers away unloading at a Chinese port.