Oil Megasmuggling: How Russia Bypasses Sanctions
Experts are increasingly stating that anti-Russian oil sanctions are not effective enough. Even politicians who advocated for the introduction of a maximum price for Russian oil are admitting this, albeit reluctantly. The positive news is that there's a desire to bolster the efficacy of sanctions. It's gaining momentum.
Early in the morning on November 7th, in the Laconian Gulf (southern part of Greece), two tankers swayed side by side on the waves. The first, the ONRIM tanker (flying the flag of Gabon), had a deadweight of 318,000 tonnes and a length of about 333 meters. The second, arriving from the Russian port of Temryuk on the Black Sea, was the JUPITER I tanker (under the flag of Palau), with a deadweight of 7,100 tonnes and a length of 114 meters. The tanker from Temryuk did not arrive empty. Judging by what could be seen from a distance, Russian oil was being transferred from the second tanker to the first. And if there was at least a bit of non-Russian oil in the ONRIM's tanks, the Russian oil pumped into it from JUPITER I could no longer be called strictly genuine Russian. In the evening of the same day, another tanker joined the transfer to ONRIM - the SKY 1 (flying the flag of Panama) with a deadweight of 105,200 tonnes and a length of 243 meters. It delivered oil from the Russian port of Ust-Luga on the Baltic Sea. Where will ONRIM head after loading? Anywhere from Barcelona to Bari, from Rotterdam to Hamburg.
This is usually how sanctions are circumvented.
Price Cap
The maximum price, a price ceiling on Russian oil, was introduced to prevent the Russian Federation from receiving funds for conducting aggressive warfare against Ukraine. However, U.S. Treasury Secretary Janet Yellen has already stated that this measure has not been as effective as expected. Ben Harris, an advisor to the U.S. president and one of the "architects" of the price ceiling, also admitted that this mechanism needs refinement.
Kyiv is extremely concerned about the situation that has developed. Ukrainian President Volodymyr Zelensky has even appealed to the Council of Europe to lower the price ceiling and strengthen control over its observance.
After all, through oil revenues, the Russian Federation continues to finance its war against Ukraine. Therefore, it turns out that those EU countries that participate in circumventing sanctions are neutralizing the EU's efforts to support Ukraine in defending itself against Russian aggression.
Boost the Sanctions Now
Recall: since December 5, 2022, a ban on the sale and supply of Russian crude oil has been in effect if its price exceeds $60 per barrel. This ban applies to companies registered in countries that have joined these sanctions. We are talking about G7 member states, the European Union, and Australia.
Initially, this restriction did lead to a decrease in shipments. According to the International Energy Agency (IEA), in January 2023, Russia's revenues from the export of oil products decreased by 30% compared to January 2022.
But almost a year later, Russia learned to bypass the bans. As early as spring 2023, the analytical company Kpler published alarming data. According to its estimates, Russian oil enters Europe without any particular problems. To achieve this, Russia uses intermediaries in "friendly" countries such as India, China, Turkey, and Saudi Arabia. By September, Russia was able to lift almost 75% of its oil exports from restrictions. The situation on the exchanges also plays into Russia's hands. Urals oil has increased in price by almost 1.5 times to $75 per barrel from January to October.
Therefore, Russia may earn $15 billion more in profit in 2023 compared to what it could have earned under the price ceiling. And even if companies from countries that joined the sanctions do not directly buy Russian oil, they still provide accompanying services, including logistics (delivery) and contract insurance.
Asia Carves a Channel for Sanctions Evasion
The logistics of Russian oil have undergone a significant transformation, employing longer and more intricate routes involving third-party nations. Primarily, countries in the Middle East and Southwest Asia play a pivotal role. They not only purchase oil products from Russia but also provide ancillary services, including logistics and contract insurance.
Chief among them is India, which has exponentially increased its procurement of Russian oil compared to pre-invasion levels. Several major oil refineries on the western coast of the peninsula process Russian oil into gasoline and diesel, subsequently shipped to the European continent. For instance, Germany has augmented its imports of oil products from India more than twelvefold in the first seven months of 2023..
Photo: Russia has sharply changed the directions of oil exports to bypass sanctions. Source: The Gaze, Bloomberg
Following India is China, acquiring up to 20% of Urals-grade oil. Additionally, Russia leverages the services of companies registered in the United Arab Emirates (UAE), acting as a sort of transshipment point. According to the Financial Times, UAE-based companies buy about a third of Russian oil, after which it disperses to other nations in Asia, Africa, and South America. Dubai, in jest, is already being referred to as the "new Geneva," as Switzerland has long been a hub for oil traders dealing in Russian oil.
Turkey is also involved in aiding Russia, becoming one of the primary purchasers of Russian diesel after the February 2023 embargo on exporting refined oil products from Russia to the European Union. According to Kpler, Turkey receives 30-40% of Russian diesel monthly.
Photo: Crazy changes in Asian exports of Russian oil. Source: The Gaze, Bloomberg
Greek Ghost Ships
Russia has assembled a veritable "shadow" fleet of vessels engaged in transportation. By spring 2023, the number of these phantom tankers exceeded 600, typically comprising rather aged ships, 18 to 20 years old or more. Nevertheless, they effectively serve their purpose: smuggling oil products. Greece stands out, with Greek shipowners eagerly parting with assets, contributing to the formation of this formidable fleet. In the twelve months leading up to February 2023, they sold around 125 oil tankers and an additional nearly 100 tankers during the first half of 2023.
The exact number of these ships transporting Russian fuel is unknown, but companies registered in the UAE, Turkey, India, and China bought the majority of them. Interestingly, these are the very countries showing the greatest interest in Russian fuel.
Moreover, Robin Brooks, the Chief Economist of the Institute of International Finance (IIF), estimated that 50% of tankers entering Russian ports and exporting oil products do so with a Greek "trace." Could this be more than mere coincidence?
According to Kpler, about 75% of Russian oil exports transported by sea lack insurance coverage. If the cargo is uninsured, it technically falls outside the scope of sanctions and price limits.
In addition, the "shadow" fleet follows routes that are challenging to trace, muddying the waters. For instance, in a bay off the southern coast of Greece, tankers were observed transferring oil products between each other, resembling "money laundering." This happens in neutral waters, and Greek authorities seem powerless to intervene.
Some shipowners' tactics even resemble Hollywood blockbuster scripts. Tankers change names and even their paint jobs during their routes. But more frequently, they simply transfer oil from one ship to another. It's awkward to mention such details as turning off ship trackers during movement; nevertheless, it occurs quite frequently.
Photo: This is how oil from Temryuk and Ust-Luga (both - Russia) can enter EU countries bypassing price control. Source: The Gaze. marinetraffic. com
Need Tough Measures, and Quickly
Countries that have joined the sanctions are trying to resist abuses. In October, the U.S. Department of the Treasury's Office of Foreign Assets Control imposed sanctions on two companies from the UAE and Turkey, which were transporting Russian oil at a price almost a third above the price ceiling.
But this seems more like putting out a fire with a thimble. After all, there are hundreds of such companies. In 2022 alone, 864 maritime companies indirectly or directly connected to Russia were created.
How to ensure compliance with the price ceiling? One option is not to let any tanker pass through territorial waters or straits bordering EU or U.S. countries without adequate insurance coverage and compliance with the price ceiling.
Another approach is the physical arrest of tankers flying the flag of a third country, up to criminal liability. Such harsh measures will act on shipowners like a cold shower and discourage any desire to engage in smuggling.
The third way is a complete refusal of insurance and financing of oil supplies by insurance companies and banks if there are grounds to believe that the fuel is of Russian origin, sold above the price ceiling, and in violation of sanctions.
Whatever, Janet Yellen promised that the G7 with other partners would think about how to make restrictions on the trade of Russian oil more effective. And Joanna Penn, Deputy Head of the UK Treasury, reported that Britain is discussing a review of the price ceiling for Russian oil.
By the way, the EC and G7 have already started working on the 12th package of sanctions. One of its points should be a mechanism for punishing companies from third countries that help Russia circumvent these sanctions.