Russia quickly learned to circumvent oil sanctions — it uses a shadow fleet of old tankers and actively confuses the tracks — according to The Wall Street Journal and The Economist

Oleksandr Miasyshchev
Dmytro Rayevskyi
Russia quickly learned to circumvent oil sanctions — it uses a shadow fleet of old tankers and actively confuses the tracks — according to The Wall Street Journal and The Economist

The Marshall Islands-flagged Sunny Liger tanker transports Russian diesel through the North Sea.

Getty Images / «Babel'»

In early December 2022, the G7 countries and the European Union agreed to limit the cost of oil products that Russia sells by sea to Western countries. The maximum price for Russian oil was set at $60 per barrel. This was supposed to reduce Moscowʼs income from each barrel sold and at the same time, preserve the stability of the world market. At first, it really reduced Russian profits, but almost a year has passed since then, and Russia has learned to circumvent oil sanctions effectively. At the same time, its income from the sale of oil increased significantly. "Babel" explains exactly how Russia circumvents sanctions, based on the materials of The Wall Street Journal, The Economist, and studies of the Kyiv School of Economics.

In the beginning, the sanctions worked. Experts of the Kyiv School of Economics calculated that in the first quarter of 2023, the total export of Russian goods fell by 28%. Specifically, the export of oil products — it fell by 40%. But now these sanctions are "outdated". In October 2023, Russia received twice as many taxes from the sale of oil and gas than in September.

In 2024, the Russian Federation plans to increase military spending by almost 70%, reaching a record war budget of over $100 billion. Large profits from energy resources will allow Russia to spend money on war without additional financial burden.

Russiaʼs secret is a shadow fleet and large-scale manipulations with documents. Russia transports oil with a fleet of 180 outdated tankers, often nearly half a century old. They leave Russian ports with transponders turned off, changing their expensive name and color, sometimes several times. At the terminals, Russian oil is mixed with other oil to make it more difficult to detect. The cargo passes through several companies from different countries, so its path is more difficult to calculate. The main final buyers are China, India, and Turkey; they did not join the price cap on Russian oil. Also, Russian suppliers opened dozens of representative offices in the UAE and Sri Lanka, where the transshipment points of the tanker fleet are located.

Oil is sold at a higher price than the $60 set by the West. Despite the restriction, Russian oil has now almost reached the $74 mark. To circumvent the price ceiling and sell oil at a higher price, Russian traders provide shipping and insurance companies with trade documents that do not reflect the actual price of the cargo but instead, artificially inflate the cost of shipping and insurance.

One of the examples of such a scheme was studied at the Kyiv School of Economics: the Rosneft state company sold oil to the Hong Kong Nord Axis at $47 per barrel in the port of Primorsk. Nord Axis resold it to Petrokim Trading from UAE. In the end, Mangalore Refinery & Petrochemicals bought oil in India for $82 per barrel. That is, "on the way" between the port of origin and the port of destination, oil rose in price by $35 per barrel. At the same time, economically reasonable costs for freight, insurance and markup should not exceed $14 per barrel.

The US and the EU are trying to counter Russian schemes. In October 2023, the US Department of Finance, for the first time, fined two tankers for violating the sanctions regime. The United States is also preparing additional measures to force traders to trade according to the rules and to force Russia to pay more.

For example, the US has suggested that port authorities require ships to show that they are properly insured to sail in their waters. However, it is not yet clear whether foreign shippers will comply with these US recommendations.

Eric van Nostrand, Acting Assistant Secretary for Economic Policy of the US Treasury, says that sanctions affect Russiaʼs revenues even when it circumvents them. For example, the Russian Federation had to build a new shipping infrastructure and logistics system. Accordingly, instead of producing tanks, it has to buy tankers.

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