Putin's shadow fleet: How Russia making money from oil trade and how the West reacts

Contents

• How much Russia gets from maritime exports
• How Russian exports by sea work
• How Russia's exports to third countries being fought

From the first days of the full-scale Russian invasion of Ukraine, one of the key tasks of Ukraine and its allies has been to limit Russia's revenues. In particular, from the export of hydrocarbons, because it is thanks to these revenues that the Kremlin can finance the war. Some results have already been achieved, but the entire task is still quite far from being accomplished.

On July 18, German Chancellor Olaf Scholz announced at a press conference after the European Political Community summit that the fight against Russian oil exports by sea would be intensified.

Scholz says that the European Union already responded to this with sanctions, and now they wanted to unite their efforts in a global coalition to put this fleet on a chain.

This is both a diagnosis that there is a problem and a declaration of intent to do something about it.

How much Russia gets from maritime exports

After Russia's full-scale invasion, Ukraine's allies imposed restrictions on Russian oil exports. Perhaps the most painful for the Kremlin was the EU embargo on oil and oil products.

The problem is that Russia is trying to circumvent these restrictions in every way possible. To do this, it uses a powerful navy.

German Chancellor Olaf Scholz at the summit of the European Political Community (photo: Getty Images)

“There are hundreds of tankers that are legal, absolutely following international law, registered, insured, having a country of registration, having a ship-owning company. These companies, in the maritime registers, have addresses down to the street, and house, and office numbers,” Andrii Klymenko, head of the Black Sea Institute for Strategic Studies monitoring group, tells RBC-Ukraine.

According to the monitoring group, Russia exports about 15 million tons of crude oil and 6-7 million tons of oil products from the Baltic and Black Seas every month.

Experts and officials interviewed by the publication differ in their estimates of the number of tankers at Russia's disposal, ranging from 300 to 500 vessels. But not all of them work simultaneously. The duration of voyages for each tanker is different, and they also need time to return to ports.

Ukraine's partners call such tankers shadow tankers.

“These are tankers that are not owned, managed or insured, meaning they do not have adequate insurance coverage from the G7 countries and the European Union,” Yulia Pavytska, head of the sanctions division at the Kyiv School of Economics think tank, tells RBC-Ukraine.

The International Group of P&I Clubs provides the vast majority of insurance in maritime transportation in the world. It has enormous resources at its disposal to cover almost any insured event in maritime transportation. The group does not insure shadow tankers.

“Now all research efforts are being devoted to identifying who insures such tankers and who assumes the risk in the event of an oil spill,” the expert notes.

In addition, such tankers are old, which increases the risk of their breakdown and subsequent oil spill.

At the same time, according to Andrii Klymenko, the definition of shadow fleet is manipulative and aims to hide the inability of the international community to limit Russian oil exports.

How Russian exports by sea work

The European Union has almost solved the problem of Russian oil supplies bypassing the embargo.

In the 11th package of sanctions (June 2023), the EU banned access to EU ports for ships transporting Russian oil and transshipping from ship to ship. The 12th package (December 2023) introduced a requirement to notify all third countries of tanker sales.

And in the latest, 14th package of June 2024, the EU approved measures aimed at specific vessels involved in Russia's war against Ukraine and subject to a ban on access to ports and a ban on the provision of services.

“These ships can be identified for many reasons, such as their support of Russian aggression against Ukraine through the transportation of military equipment for Russia, transportation of stolen Ukrainian grain, and support for the development of Russia's energy sector, for example, through the transportation of LNG components or LNG transshipment. The measure also targets tankers that are part of Putin's shadow fleet that circumvent EU and Price Cap Coalition restrictions (on the price cap for Russian oil - ed.), using deceptive shipping practices, completely ignoring international standards,” the European Commission tells RBC-Ukraine.

According to Andrii Klymenko, in recent months, only about 5% of Russian oil has been entering the EU. Previously, twice as much was supplied to the EU countries.

Russian oil is still being exported clandestinely, in small quantities, through the ports of Italy, especially Sicily, Greece, and Spain.

Until recently, ship-to-ship transshipment took place in the Laconian Gulf off the coast of Greece. However, this country has been pushed and since May of this year, military exercises with firing have been conducted indefinitely in the Gulf, so transshipment is now impossible there. However, Russian tankers have moved to the shores of the island of Chios, south of the Laconian Gulf, or are transshipping in the open sea.

Russia also jams the GPS signals of some ships with electronic warfare when they approach Russian ports. On the one hand, this is to conceal the vessel's involvement in Russian transactions. On the other hand, it is used to underestimate the real amount of income. For example, the relevant equipment is located near Putin's residence in Gelendzhik, Klymenko says. Among other things, it jams the signals of AIC (Automatic Identification System) transmitters on ships loading in Novorossiysk.

But the lion's share of Russian oil goes to third countries that have not joined the sanctions. In December 2022, the European Union, the G7, and Australia introduced a price ceiling mechanism for them. It stipulates that companies can participate in the trade in Russian oil from December 2022 if oil is sold below $60 per barrel. Even though, according to Russian official data, the cost of oil production in Russia is about $50 per barrel.

It was planned that the price ceiling would be regularly reviewed, but in practice, this does not happen.

“The ceiling level was set and not reviewed from the very beginning. We believe this is wrong, because, in principle, if we are talking about crude oil, it was initially set at a much higher level than the costs that Russia incurs in oil production,” says Yulia Pavytska.

According to her, the Group of Seven countries are afraid of the turbulence that may arise if the price ceiling is further reduced.

However, it is not an easy task to force compliance with even the current level. Formally, there is no direct enforcement tool for this. Transportation companies only have to send a notice that they are carrying Russian oil.

Moreover, three weeks after the price ceiling was introduced, Putin issued a decree prohibiting Russia from selling oil and oil products to foreign companies that comply with the price ceiling. So de facto, all carriers carrying Russian oil ignore the restrictions.

Russian exports are serviced by vessels of several categories. A significant part of them are Russian, owned by companies registered in the United Arab Emirates or so-called flag of convenience countries: Liberia, Panama, the Marshall Islands, etc. Sometimes quite complex schemes are used for this purpose.

“It is not necessarily a transfer of ownership of the vessel. It can be a change of ownership of the company. That is, they simply took a Dubai company that owns tankers and bought it. And you don't see or understand this. Sometime later, when you monitor the movement of many tankers, you notice that this tanker suddenly started carrying other oil on a different route,” says Vladyslav Vlasiuk, the Presidential Commissioner for Sanctions Policy.

Ships owned by Turkish and Chinese companies are a separate category. However, tankers from the European Union - Greece, Malta, and Cyprus - still make up the largest share.

Much of the oil is transported quite openly, so many online services allow you to track at least the physical entry of tankers into Russian ports.

How Russian exports to third countries being combated

Currently, one of the working ways to limit Russian maritime exports is through sanctions against specific companies that own tankers. In 2024, the United States, the United Kingdom, and the European Union imposed such restrictions on a total of 49 vessels. At the same time, Russia has attracted 74 new tankers during the same period.

The price ceiling alone is rarely a basis for sanctions, so in each case, new grounds for imposing restrictions need to be sought.

“Strictly speaking, a price ceiling is not a sanction. It is just another mechanism. But compliance with the price list is inextricably linked to compliance with other sanctions restrictions. In particular, about war financing, transactions, and entry and exit to ports. That is why it is a bit more difficult to justify,” Vlasiuk says.

According to him, imposing sanctions usually does not require a very detailed argumentation, because, in addition to legal arguments, there are also political ones. Western countries have put a lot of effort into introducing the price ceiling and they don't like the fact that Russia is relatively easy to circumvent the restrictions.

“Suffice it to say in most jurisdictions we believe this poses a national security threat to us. Because they make money there, for example, to wage war against Ukraine,” Vlasiuk adds.

Olaf Scholz's recent statement about his intention to nail the Russian fleet with joint efforts is related to this direction.

Russian oil tanker (Photo: Getty Images)

According to RBC-Ukraine's sources, several coordination meetings have already taken place on the restrictions of the Russian fleet based on the European Political Community and with the participation of the United States.

“So far, I would say that they are agreeing on how they will work within this platform, we are talking about the exchange of information and data, setting common goals that they will try to achieve within the framework of this platform,” Vladyslav Vlasiuk says.

According to him, Ukraine is also involved in the process, and by the end of the year it should show the first results.

In this context, it is especially important to work with countries that have an impact on the passage of goods through the Baltic Sea and the Denmark Strait, from Estonia and Denmark to Sweden and the United Kingdom. After all, at least 60% of Russia's oil exports go through the Baltic route.

“Now they are looking for other legal structures to limit Russia's ability to transport oil and oil products above the price list. And to do this, they are pulling out other wording, and other legal arguments. In particular, these are those related to the risks of pollution to the environment,” Vlasiuk notes.

This is legally complicated because international law has a principle of freedom of navigation. It provides for the free movement of any ships flying the flags of sovereign states on the high seas.

“This is pure luck for the whole planet. There have already been several incidents that could have led to an oil spill, but this miraculously did not happen. Not only with Russian shadow tankers but mostly with tankers belonging to the Iranian and Venezuelan shadow fleets,” says Pavytska.

Russian tankers, oddly enough, are regularly shelled by the Houthis in the Red Sea. But there have been incidents in other locations as well. On March 2, the shadow tanker Andromeda star collided with another vessel in the Gulf of Denmark, but it was heading empty to a Russian port, so an oil spill was avoided. In October last year, the Turba drifted without control for two days on a busy route in the Indian Ocean. And these are not all such cases.

We should also mention EU companies that transport oil to third countries, primarily Greek, Cypriot, and Maltese companies.

In the 12th package of sanctions, the EU banned the sale of tankers to Russia directly and obliged them to report on sales to third countries. However, according to RBC-Ukraine, the EU has not yet analyzed this data.

The EU itself has some difficulties with sanctions against specific companies from Greece, Cyprus, and Malta. As the European Commission responded to RBC-Ukraine's request, the EU can only impose sanctions unanimously.

“The implementation and enforcement of EU sanctions is the responsibility of the Member States. The Commission, as the guardian of the Treaties (on the constitutional foundations of the EU - ed.), monitors this process,” the European Commission tells RBC-Ukraine.

At the same time, the European Commission, with the assistance of the European Maritime Safety Agency (EMSA), is ready to join sanctions against third countries and supports the efforts of competent authorities to monitor any vessels of interest and implements and enforces EU sanctions, as well as facilitates the exchange of information.

In general, the cat-and-mouse game with Russia continues. For each new restriction, the Kremlin is looking for ways to get around it. However, the experts interviewed by RBC-Ukraine are rather optimistic about the restriction of Russia's oil revenues in the future.

Sources: Vladyslav Vlasiuk, the Presidential Commissioner for Sanctions Policy, Yulia Pavytska, Head of Sanctions at the Kyiv School of Economics, Andrii Klymenko, Head of the Monitoring Group at the Black Sea Institute for Strategic Studies, and the European Commission.