How Russia punched a $14b hole in the West’s oil sanctions

LONDON – The failure of Western sanctions on Russian oil exports can be seen a short boat ride from the Greek coastal town of Gytheio, where two oil tankers with rusty hulls and a combined age of 57 years sit just metres apart from one another.

The identity of the ships’ owners and insurer are elusive. They sail under the only flag in the world deemed by the authorities to be “very high risk”. And the final destination of the profits from trading their Russian fuel is a mystery.

Even their movements are suspicious. Digital tracking systems showed the 26-year-old Turba floating over 6.4km away, as the 274m Simba emptied its fuel cargo into the smaller vessel, in the full view of a Bloomberg documentary team.

On the same day as this ship-to-ship transfer took place in September, more than a dozen similar vessels – part of a vast shadow fleet – floated nearby, doing the same thing or getting ready to. 

Designed to reduce funding for

the Kremlin’s military assault on Ukraine,

the sanctions deal agreed a year ago this week included a US$60 per barrel price cap for seaborne Russian oil – US$24 below the average market price over the last 12 months.

Instead, it has fostered a lucrative business for scores of difficult-to-trace traders and shipping companies. As much as US$11 billion (S$14.7 billion) a year of petrodollars are evaporating between when the oil leaves Russia to when it reaches buyers, according to trade data compiled by Bloomberg. 

The price cap was structured to prevent companies in Group of Seven (G-7) nations from providing Russia with services like shipping and insurance when the oil was being sold for more than US$60.

At the same time, the European Union barred almost all oil imports from Russia, which up to that point had been the bloc’s main supplier, forcing Moscow into the arms of two dominant customers: China

and India.

The sanctions plan was conceived as a way to constrain Russia’s oil revenues without causing a spike in global energy prices.

A by-product has been the reshaping of the financial architecture of the oil and maritime trade in a way some experts say might be hard to reverse at the end of the conflict or after the eventual lifting of the existing sanctions regime.

It has increased fears of an environmental catastrophe and left the door open to these unseen oil funds flowing back into the Kremlin to finance the Ukraine conflict.

“The shadow fleet and alternatives to Western maritime insurance are not new. Iran has used them for years. Now that a massive producer like Russia is using them, they have become more mainstream,” said Mr Eddie Fishman, a senior research scholar at Columbia University’s Centre on Global Energy Policy, who has helped shape previous US sanctions on Iran and Russia and advocates the use of secondary sanctions to give the existing measures teeth.

“Absent concerted action to make it costlier to use these substandard alternatives to Western services, they will grow and become a structural feature of the world oil trade.”

Despite tentative signs that the West is reacting to try to frustrate Russia’s workarounds, the authorities in Greece argue they are powerless to prevent these clandestine shipping activities taking place just off the nation’s coast.

They happen in international waters that begin 9.7m from its shoreline in the Laconian Gulf, the stretch of water where the Turba and Simba came together. 

Spain, another EU member state, was able to stamp out similar activity earlier in 2023, leaving Greece – the world’s single largest oil tanker-owning nation – as a crucial outlier. 

Operating under the price cap, Greek-owned vessels handled more of Moscow’s oil in 2023 than rivals from any other individual country, except Russia itself. 

The Greek owners were able to stay in the trade – without breaking EU rules – after the country’s diplomats successfully lobbied other member states to water down measures that would have otherwise restricted the shippers’ ability to trade with Russia.

Greek vessels have carried 20 per cent of all Russia’s oil shipments so far in 2023 and almost a third of its exports of the flagship grade Urals crude, according to shipping data. 

How long that will continue is uncertain. 

The International Maritime Organisation (IMO), the watchdog that oversees shipping, on Dec 6 said the illegal activities of the shadow fleet of oil tankers present a “grave concern” for environmental safety, and called for a global clampdown.

It asked member states to promote actions to prevent illegal operations in the maritime sector by the shadow fleet. 

Without mentioning Russia by name, the IMO noted that the ships “pose a real and high risk of incident, particularly when engaging in ship-to-ship transfers”.

The importance of the shadow fleet to Moscow is evident – it moved about 45 per cent of Russia’s oil in 2023.

The shadow fleet “is becoming entrenched”, said Mr Lars Barstad, chief executive of the management arm of Frontline, owner of some of the world’s giant supertankers, “and this will continue as long as regulators are unable to act against it”. 

The shipowners and traders involved have helped Russia navigate its way round a sanctions package that was initially advertised as an aggressive move that for the first time was to impose a price cap on a major internationally traded commodity. 

Yet, Russia’s revenues from its main tax-generating sources of petrodollars almost doubled between April and October. 

Russia’s net oil revenues of US$11.3 billion in October accounted for 31 per cent of the nation’s overall net budget revenue for the month, according to Bloomberg calculations that are built around Russian Finance Ministry data, but smooth out profit-based tax revenue.

That was the highest since May 2022 and exceeded any single month in the year before the invasion of Ukraine, which initially caused huge volatility to the nation’s exports.

Domestic and shadow fleet owners collectively moved over 70 per cent of Russian oil cargoes in the first nine months of 2023, allowing Moscow to maintain control over its exports and progressively increase prices.

Official Indian customs data show the price paid for Russian oil averaged US$72 a barrel in 2023 by the time it reached the Asian country.

That is US$12 higher than prices declared at the point of export in Russia, according to data compiled by the KSE Institute, part of the Kyiv School of Economics and a supporter of tough sanctions on Moscow. Argus Media data, used to inform G-7 policy, show a similar gap since March. 

Given that Russia has exported close to 3.5 million barrels of oil a day in 2023, it means that about US$11 billion is going into what might be called a delivery spread. Some of that will represent legitimate shipping costs, but almost all of it goes through anonymous traders or unknown shipping companies.

Prior to the invasion of Ukraine in February 2022, the bulk of Russian oil was handled by a tiny clique of super-powerful merchants working out of locations like London and Geneva. 

Vitol Group, Glencore, and Trafigura Group were the dominant forces. Between them, they moved roughly 40 per cent of the nation’s Urals crude in 2021. 

This trio of companies publicly exited the trade in Russian crude oil not long after the invasion and as the prospect of sanctions became a reality. They have been replaced by an army of smaller and more difficult-to-trace organisations with unclear affiliations and headquarters from Hong Kong to Dubai.

Excluding Russia’s Lukoil, China National Petroleum and Indian Oil, the top five buyers of Russian oil today were all unknown entities when the assault on Ukraine began. One was incorporated only after the invasion, according to KSE Institute data and company filings. 

Some, including the seemingly Harry-Potter inspired Bellatrix Energy, and Nord Axis, are closely associated with individual Russian producers. 

In the first nine months of 2023, Bellatrix, for instance, handled about 20 per cent of shipments from Surgutneftegas, the nation’s third-largest exporter over that period, according to the KSE Institute data.

In 2021, the first year after its incorporation, it handled none. While Nord Axis, which was established in Hong Kong on Feb 15 2022 – just nine days before the Ukraine invasion – only buys crude oil from Rosneft. The state champion producer has used the start-up firm for almost a third of its sales in 2023. 

“The whole thing just goes underground,” said Mr Adi Imsirovic, a former head of oil at Gazprom Marketing and Trading – a British entity ultimately owned by the Russian energy giant – and now a director at Surrey Clean Energy.

“And we don’t know who’s doing what and how, and what’s going where.”

Tracking the Turba and the Simba – the two vessels involved in the clandestine cargo switching off the Greek coast in September – involved a global search stretching from Cameroon to Estonia, the Marshall Islands, Seychelles, Sri Lanka, Britain and Ukraine.

The IMO, part of the United Nations, hosts a database of ships including the companies that are registered as owning them and the flags under which they sail.

Both vessels sailed under the flag of Cameroon, the only flag state – the national jurisdiction under which ships are registered for international trading – deemed to be “very high risk” by the Paris Memorandum of Understanding on Port State Control, which monitors shipping safety standards. 

The Turba and Simba are among at least nine vessels listed as being insured against risks including oil spills and collisions by a firm called Continental P&I.

All but one of the ships sail under the flag of Cameroon, according to data compiled by Bloomberg from the IMO database, and have sailed to Russian ports at some point in the last year. The tankers in question have a combined transportation capacity of almost 10 million barrels of oil.

Continental has a phone number in Estonia and an address in the Marshall Islands, but there is no record of any named individuals involved in the company or financial information about it. A person answering the phone in Estonia requested that inquiries be sent by e-mail. The subsequent e-mails requesting comment were ignored. Its website claims it has reinsurance from Lloyd’s of London. 

A spokesman for Lloyd’s said it would not comment on individual policies or policyholders placed with insurers in the market, but pointed out that Lloyd’s itself is not a reinsurer. 

Several officials working in the shipping-insurance industry said they had never heard of Continental P&I and that they were unable to find information about the firm. While two senior insurance executives highlighted a lack of published rules on Continental’s website as a concern.

The Turba receives ship-classification services – documentation proving adherence to international maritime rules – from a company called Mediterranean Shipping Register. It provides an address in Baker Street, London – the home of fictitious detective Sherlock Holmes – which is shared with more than 400 other firms. 

The database on the website of the International Maritime Organisation shows MSR as being based in Odesa, Ukraine. Bloomberg called the listed contact, who initially said he did not think MSR was involved in providing classification services for the Turba, but then did not answer further calls and messages. 

To provide classification services, a company needs the international recognition of a flag state. MSR has that from Cameroon and the United Republic of Tanzania. Limited financial reports, lodged with the Britain’s companies register, show that MSR had assets of £100,528 (S$135,000) in July 2022.

Officials in Cameroon’s Ministry of Transport did not respond to requests for comment.

It was not possible to contact the registered owners of either ship. Half a dozen international databases provided conflicting information about the ultimate owners.

Scoot Chartering and Lorni Marine are listed as the registered owners of the Turba and the Simba respectively. The pair share a business address in the Seychelles.

A person answering the phone at AC Management, a corporate service provider at the Seychelles address, asked for inquiries to be e-mailed. But an e-mail to its online address bounced back, and follow-up calls were not answered.

A Tokyo-based organisation that oversees port inspections and keeps a database of its findings, lists the Turba as being operated by a company called Arnavy Shipping based at an address – 923, EW Perera Mawatha – in Colombo, Sri Lanka, that does not exist. The building numbers on that street do not go up that high. 

“Sanctions are well-intentioned,” said Mr Ben Cahill, senior fellow at the Centre for Strategic and International Studies (CSIS).

“But the fact is they have ultimately led to a large fleet of ageing tankers operating outside the reach of Western regulators, presumably with subpar insurance.”

This has not gone unnoticed.

Since Oct 12 the US Treasury has sanctioned eight oil tankers for breaching the price cap, six were owned by Russia’s Sovcomflot, the state-backed oil tanker company.

The US authorities have also written to operators of about 100 ships asking for information about potential price-cap violations.

The EU is exploring the introduction of a notification system that would require its authorisation to sell or export tankers and second-hand carriers. That could make it harder for member states such as Greece to sell tankers into the shadow fleet. Britain has also sanctioned a Dubai-based oil trader over its opaque ownership structure.

The US Treasury has said that it now wants to push up the costs Russia faces to deliver its oil.

“We’re going to look more carefully at the price cap,” President Joe Biden’s energy security adviser Amos Hochstein told Bloomberg on Dec 5.

He added that the “US Treasury and others” were taking measures to ensure that Moscow’s profits from the oil trade fall, following an increase in the price of Russian crude. 

“We’re going to take action whenever we see the need to bring the price down to the cap level or below it,” he said on the sidelines of COP28 in Dubai.

The ultimate question is whether the US and its allies really want to curtail Russian oil flows, something that would potentially drive up global fuel prices – in an election year for Mr Biden. 

If they do not, and that is the belief among many oil traders and analysts, then Moscow has workarounds it can employ: from its shadow fleet to encouraging Western service providers to turn a blind eye to potentially false attestations from traders about the price at which they are buying oil. 

“Policymakers always had dual goals: keep the market well supplied, but drive down Russia’s revenue per barrel,” said Mr Cahill at CSIS.

“It seems clear that the first priority is taking precedence. Targeted enforcement actions have increased in the past six weeks, but in the big picture, Russia has moved most of its crude and product exports out of easy reach of G-7 sanctions.” BLOOMBERG