Kremlin's 'shadow fleet' defies sanctions, sustains oil exports

The "shadow fleet" allows the Kremlin to bypass Western sanctions, comprising "a group of outdated ships illegally transporting oil," according to the Polish Institute of International Affairs.

Despite sanctions against Russia, the export of oil from the country has not been halted. BBC reports from early February indicate that the UK is still importing millions of barrels of fuel made from Russian crude oil, despite sanctions related to the war in Ukraine.

A loophole exists, allowing Russian crude to be refined in third countries, notably India, with the resulting products sold to the UK. The BBC underscored that this process does not violate the British ban on Russian oil imports, but it does undermine efforts to restrict Russian war funding.

**"Shadow fleet" and price cap**

The G7 countries and the European Union have set a price cap of 60 USD per barrel for Russian oil, aiming to impact the Kremlin’s budget significantly. "Before 2022, the sale of oil and oil-derived products constituted about 40 percent of Russia's total export value and accounted for approximately 30 percent of its budget revenues. The majority of these hydrocarbons were exported to the EU," says Szymon Pastucha from PISM.

In response, Moscow has turned to the "shadow fleet" to transport oil at prices exceeding those set by the sanctions. According to Pastucha, this maneuver has almost entirely circumvented the sanctions, with the shadow fleet handling 40 percent of oil transport in February 2023 and nearly 80 percent later on. The sanctions have led to increased freight rates, a reduction in the volume of commodities sold, and the necessity for discounts.

Pastucha notes that the fleet is composed of vessels with murky and frequently changing ownership, predominantly from Asia and the Middle East. Many of these companies lack experience in the oil market.

This includes logistics companies, often with obscured data, operating out of the UAE, China, Turkey, and EU countries such as Greece, Cyprus, and Malta. To further complicate tracking, these ships frequently change their names and flags - commonly opting for flags of convenience from Panama, Liberia, Gabon, and the Marshall Islands. They also conceal their location by disabling lights or AIS transponders, which are critical for shipping safety.

The ships employed by the Kremlin are aging, with the majority being over 15 years old and lacking regular maintenance, posing significant environmental risks in the event of an accident. Tankers generally have a lifespan of about 20 years.

Russia’s strategy mirrors those previously adopted by Iran and Venezuela to bypass primarily American sanctions.

Estimates suggest the "shadow fleet" might consist of up to 200 ships, accounting for nearly 80 percent of Russian oil reaching its buyers despite sanctions. This "black gold" is reportedly flowing to India, Turkey, and China.

Notably, India's imports from Russia have surged, with about 35 percent of its supplies now coming from Russia. These countries often process the imported oil and re-export it to the EU, with India becoming the second-largest supplier of oil products to the EU in 2023, up from sixth place.

How should Western countries respond? Pastucha recommends reducing the price cap on Russian oil to 25-30 USD per barrel, aligning with the estimated cost of Russian oil extraction.

This strategy could push the Kremlin to ramp up exports to counter the budget deficit, leading to increased demand for tankers that the shadow fleet cannot meet. Eventually, Moscow would need to comply with sanctioned entities for oil exports. "With rigorous insurance verification of ships, Russia's oil revenue could drop by another 50 percent," the expert concludes.