Russia's Covert Fleet: A Geopolitical Timebomb

Despite the imposition of Western sanctions and oil price caps, Russia has managed to maintain steady oil exports through the use of an aging "shadow fleet" of tankers. This fleet has allowed Russia to bypass restrictions and continue to trade primarily with 'friendly markets' such as China, India, and Turkey.

Shadow Fleet Bypasses Sanctions

In response to Russia's invasion of Ukraine in February 2022, the European Union and several other Western countries imposed stringent sanctions on Russia, aiming to halt the trade of Russian oil. In December 2022, the G7 countries implemented an oil price cap. However, Russia has managed to evade these sanctions, mainly through the establishment of a "shadow fleet" of oil tankers. Despite the US Treasury's strong sanctions targeting the shadow fleet, Russia continues to expand it by adding new tankers. This expansion allows for stable exports and further evasion of oil price caps. Only 36% of Russian oil exports were shipped by IG-insured tankers. For other shipments, Russia relied on its shadow fleet, which was responsible for exports of approximately 2.8 mb/d of crude and 1.1 mb/d of oil products in March 2024. Data from Kpler shows that in April 2024, 83% of crude oil and 46% of petroleum products were shipped on shadow tankers. The diminishing role of the mainstream fleet fundamentally undermines the effectiveness of the price cap.

Environmental and Safety Concerns

The shadow fleet comprises aging and often poorly maintained vessels with unclear ownership structures and a lack of insurance. The number of old, outdated ships departing from Russia has significantly increased. The EU has recently introduced legislation aimed at cracking down on the sale of mainstream tankers into the Russian shadow trade, but the problem persists. Russia has managed to expand its shadow tanker fleet, adding 35 new tankers to replace 41 tankers added to OFAC’s SDN list since December 2023. These tankers, all over 15 years old, are managed outside the EU/G7. With 85% of the tankers aged over 15 years, the risk of oil spills at sea is heightened. The shadow fleet poses a significant and rising threat to the environment. The aging and underinsured vessels increase the risk of oil spills, a potential catastrophe for which Russia would likely refuse to pay. The vessels can cause collisions, leak oil, malfunction, or even sink, posing a threat to other ships, water, and marine life. With estimates suggesting over 1,400 ships have defected to serve Russia, the potential for environmental damage is substantial.

Geopolitical Implications

Adding to the environmental issue, seaborne Russian oil is almost entirely heading to the Asian markets, with India, China, and Turkey being the biggest buyers. In 2023, 86% of oil exports went to friendly countries compared to 40% in 2021, and 84% of petroleum product exports compared to 30% in 2021. This shift in export destinations highlights the changing geopolitical landscape of the oil market due to the sanctions and the rise of the shadow fleet. Several measures have been proposed to address the challenges posed by the shadow fleet. These include stricter sanctions on individual vessels, increased scrutiny of financial institutions involved in Russian oil deals, and fines that would limit sales or decommission tankers. The G7 countries are taking measures to tighten control over the price cap and further pressure Russia. However, concerns remain that these measures could lead to higher energy prices and escalate tensions with Russia.

International Solutions Needed

The Danish foreign ministry has stated that "The Russian shadow fleet is an international problem that requires international solutions." The shadow fleet has allowed Russia to circumvent Western sanctions and continue profiting from its oil exports, but it has come at a significant cost. The environmental risks posed by these aging and poorly maintained vessels are alarming, and the shift in oil trade patterns is reshaping the geopolitical landscape.

Bottom Line

Addressing the issue of Russia's shadow fleet is a complex task that will require concerted international efforts and a delicate balance between maintaining sanctions and ensuring stable energy markets. The situation is unsustainable, and the need for action is becoming increasingly urgent. The environmental risks and geopolitical implications of this covert fleet are a ticking timebomb. What are your thoughts on this issue? Do you think the international community is doing enough to address it? Share this article with your friends and let us know your thoughts. Remember, you can sign up for the Daily Briefing, which is available every day at 6 pm.