Since the early days of Russia’s war in Ukraine, Western nations have imposed extensive economic penalties designed to cut off Moscow’s oil profits. Yet, as Europe prepares for its 19th round of sanctions, a challenging reality has emerged.
Russia quickly developed cunning strategies to continue profiting from oil sales, effectively circumventing price caps and import restrictions. By assembling a vast, clandestine fleet of aging ships with opaque ownership, Russia has managed to secretly transport its fuel to distant markets, successfully evading sanctions and maintaining its revenue streams.
It’s now increasingly apparent that the dramatic expansion of this ‘shadow fleet’ carries profound and potentially enduring consequences. These decrepit vessels present grave environmental hazards, and this trend has fostered a massive illicit shipping industry. Experts are concerned this underground economy could persist long after the conflict ends, establishing a precedent for nations like Russia and Iran as shippers, and China and India as customers, to bypass established international regulations.
Ian Ralby, a prominent expert in maritime security and founder of the research firm I.R. Consilium, noted, “Many desire the easy part—imposing sanctions—but we’ve inadvertently created a larger problem. Sanctions aren’t putting them out of business; they’re merely pushing them out of legitimate business.”
This shadow fleet now comprises approximately 17 percent of all active oil tankers globally, according to S&P Global Market Intelligence. Earlier this year, the fleet numbered 940 ships, marking a 45 percent increase from the previous year, based on the firm’s data.
While some vessels with dubious ownership and shipping practices existed prior to Russia’s full-scale invasion of Ukraine in February 2022, their prevalence surged dramatically after the conflict began.
By late 2022, Europe had imposed a ban on Russian seaborne oil imports, compelling Russia to seek new buyers in India and China. With its ships undertaking longer voyages to these more distant ports, Russia urgently needed to expand its shipping capacity.
Russia was also determined to circumvent a price cap. The Group of 7, the European Union, and Australia had restricted companies from providing insurance and other services for Russian crude oil sold above $60 per barrel, a threshold the EU and Britain have since lowered even further.
Consequently, ships associated with Russia began operating with unreliable or no insurance. They adopted third-country flags and transmitted false location data to obscure their cargo’s origin.
By making it difficult to ascertain if oil originated from Russia, these practices provided an element of plausible deniability for oil purchasers.
As these vessels have become crucial to Russia’s oil economy, they have also elevated the risk of oil spills and other maritime catastrophes. Data from S&P shows that the average age of these shadow fleet ships is about 20 years, significantly older than the broader oil tanker fleet’s average of 13 years.
“The absence of proper insurance combined with these exceptionally old vessels critically heightens the danger of an environmental disaster,” warned Natalia Gozak, office director of Greenpeace Ukraine.
Environmental hazards aren’t the sole concern. There are suspicions that clandestine ships may be involved in underwater sabotage, targeting pipelines or cables and attempting to make such incidents appear accidental.
The shadow fleet presents another glaring problem: it has “limited the cap’s effectiveness,” as concluded in a report this month by America’s Government Accountability Office. This enables continued funding for Moscow’s war efforts in Ukraine.
However, proponents argue that these sanctions, despite their imperfections, are not a mistake and impose real costs on Russia.
Ben Harris, a former Biden administration Treasury official and a key architect of the price cap, emphasized that sanctions, though imperfect, inflict costs on Russia. Shipping oil to India or China and maintaining this shadow fleet is an expensive undertaking.
“The true challenge lies in effective enforcement,” he stated.
Currently, nations are escalating their sanctions against the shadow fleet.
The European Union has blacklisted over 500 shadow-fleet ships in its latest announcement, making ports more hesitant to engage with them. The United States, Britain, Canada, and Australia are also targeting these vessels. The collective aim is to brand these ships as maritime outcasts.
Yet, Russia continuously replaces these blacklisted vessels with new additions.
“It’s like that dreadful American game, Whac-A-Mole,” said David O’Sullivan, the E.U. sanctions envoy. “Circumvention feels very similar.”
Still, Russia must bear the cost of acquiring these new ships.
“Everything we’ve done ultimately costs them significantly more,” Mr. O’Sullivan commented.
However, this remains an imperfect solution. Shadow fleet ships have devised methods to evade blacklisting. They offload cargo at sea or engage in “flag hopping,” repeatedly changing their registrations to obscure their true identities.
Meanwhile, as Mr. Ralby cautioned, the West is inadvertently encouraging Russia to foster a vast illicit economy.
Nevertheless, government officials contend that inaction is simply not an option.