"Shadow fleet" shields Russia from sanctions

The topic? Oil. And more specifically, the so-called "shadow fleet," which has become a floodgate of financial resources for the Russian government and its military.

More than a year after the West imposed a $60 price cap on Russian oil, the key condition for enforcing it has all but evaporated (!).

Now, almost all oil is shipped by "shadow fleet" tankers, many of which still rely on Western insurance.

A study by NRC in March identified roughly 1,600 tankers in the shadow fleet, most of them old, poorly maintained, and underinsured.

These ships deliver crude to nations that haven't imposed sanctions on Russia and frequently refuel at North Sea ports on their way back—partly to take advantage of cheaper fuel.

This shadow fleet has allowed Russia to create a parallel shipping system, able to navigate the shifting strategies and pressure of Western sanctions, with hundreds of tankers under murky ownership using convoluted routes.

Windward, a maritime AI firm, estimates the shadow fleet grew to 1,800 vessels last year (!).

For context, the global fleet of oil tankers today stands at about 12,300. Russia, therefore, controls nearly 15% of the world’s oil tanker capacity.

Some key figures:

1. Russia’s federal revenue hit a record $320 billion in 2023, with further growth expected. Oil exports accounted for 234.3 million tons, and a staggering 82% of those exports went to the Asia-Pacific region.
2. Analysts estimate that around one-third of that income was spent on the war in Ukraine last year, with most of it likely earmarked to finance the conflict in 2024.
3. Oil and gas revenues made up 32% of Russia’s 2023 budget, with the oil sector contributing around 80% of that.
4. KSE projects Russia’s oil revenue at $183 billion for 2023, but expects a dip to $145 billion in 2024 and $139 billion in 2025. (However, Russia is working hard to prevent this drop.)
5. Russian oil and gas revenues fell to $102.8 billion in 2023, down from $169.5 billion in 2022.
6. According to Rosstat and the Russian Central Bank, the oil and gas sector made up 27-28% of Russia's GDP in 2023.
7. The Russian Academy of Sciences estimates that oil alone (production, refining, and exports) represents about 15-20% of the country’s GDP in recent years.
8. Remarkably, in eight regions of Russia, oil and gas production accounts for nearly half the local economy. This highlights how crucial oil exports are to Russia’s budget (!).

In fact, it’s the largest sector of the Russian economy.

Only VAT surpasses oil in terms of its contribution to the budget, making up about 30-35%, compared to the oil and gas sector's 32% or the oil sector's 24%.

Today, Russia has mastered the art of dodging sanctions, has built a shadow fleet, and is managing it quite effectively.

The news in 2024 already sounds like this:

• "Russia’s revenues from oil and gas sales in February surged by over 80% year-on-year, exceeding $10 billion."
• "The Kremlin has never been richer – thanks to a U.S. strategic partner" Analysis from the Centre for Research on Energy and Clean Air (CREA) shows that the U.S. became the biggest buyer of Indian petroleum products refined from Russian oil, spending over $1.3 billion (!) on them last year.
• "About 1/8 of Russia’s defense budget comes from taxes on oil and gas sold to European Union countries. So, Europe is essentially funding the war in Ukraine."
• "In 2023, Britain bought oil products made from Russian crude worth £2.2 billion, despite its own sanctions." This was revealed at the start of March 2024.

Sanctions lag behind Russia’s schemes and innovations. A major role in this is played by know-how copied from Iran — the infamous "shadow fleet."

Matt Wright, Senior Freight Analyst at Kpler, categorizes ships carrying Russian oil into two groups: "grey vessels" and "dark vessels."

• The "grey vessels" were sold post-invasion, mostly by European owners to firms in the Middle East and Asia that had previously been active in the tanker market.
• The "dark vessels," however, are veterans of Iran and Venezuela's sanction-busting campaigns, now repurposed for transporting Russian oil.

Each month, an additional 25 to 35 ships are added to the shadow fleet.

This raises two pressing questions:

1. Who’s behind the shadow fleet?
2. How can it be stopped?

So, who’s pulling the strings?

According to Bloomberg, six relatively obscure companies—including some formed less than a year ago—are exporting roughly 1.5 million barrels of oil per day from Russia. That’s enough to meet the total demand of a country like Britain or Italy, turning these firms into some of the largest resource traders globally.

Here are the companies:

• Nord Axis Ltd: In December, it bought over half a million barrels of Russian oil per day from Rosneft. Registered in Hong Kong in February of last year, it acquired a stake in Rosneft’s Vostok Oil project from global trader Trafigura by summer.
• Concept Oil Services (Hong Kong)
• Coral Energy (Dubai)
• QR Trading (Dubai)
• Bellatrix Energy (Hong Kong)

Documents show that Azerbaijani national Adalat Kazimli became the owner of all ordinary shares in Nord Axis in May last year. In June, he transferred them to a holding company based in Dubai.

Kazimli served as Nord Axis’s director for a month, from May to June 2022.

After Kazimli’s resignation, Istanbul-based lawyer Murat Sayın was appointed director of the company.

Further documents, dated March and August 2022, show Kazimli had power of attorney to act on behalf of Coral in Turkey, signing documents as their representative.

Sayın was a lawyer working for Coral in Turkish business.

But the formal architect of this oil trading empire is Etibar Eyyub, an Azerbaijani citizen.

Is Eyyub the real boss? No. The top figure here is Igor Sechin, a heavyweight in Russian business, president of Rosneft, and widely regarded as the second most powerful man in Russia after Putin, according to American diplomats in Moscow.

Eyyub, it seems, is the manager and public face of the project, often seen with Sechin.

But here’s what’s intriguing: Eyyub and Garaev are still not on any sanctions lists.

And the big question is, what do we do about the shadow fleet?

As you can see, the shadow fleet is growing. Russia’s revenue from oil exports is rising. The aggression against Ukraine continues. Meanwhile, private companies in the U.S., EU, and UK are still purchasing petroleum products made from Russian oil.

Ukraine must lead by example and impose sanctions (!) on both known shadow fleet vessels and the companies that own, manage, and use these services.

But more importantly, sanctions need to target the nominal managers behind these companies.

Yes, Ukrainian sanctions may not have a huge immediate impact.

But how can we ask our allies to stop sending petrodollars to the aggressor when we turn a blind eye to what's blatantly obvious?

Some countries have already started applying sanctions.

• Specifically, 53 ships (out of around 1,800) linked to Russian trade are now sanctioned. Many of them sit near the shores of Russia, China, and Turkey.
• On June 13, the UK introduced extensive sanctions against the Russian Federation. For the first time, ships from Russia’s so-called shadow fleet and "Ingosstrakh" — a major insurer of tankers illegally transporting Russian oil — were hit with restrictive measures from London.
• Scholz has also announced plans for sanctions on the shadow fleet.

Yet, for some reason, Ukraine remains silent...

The next move is to create an "Oil Ramstein" – a coalition of partners to restrict Russia's ability to bypass sanctions.

Sanctions should target:

• The beneficiaries and managers of companies that own and operate the shadow fleet.
• Ports receiving shadow fleet vessels. This will be more complex, but it’s crucial.
• Buyers of Russian oil.

The world fears high oil prices from a Russian oil embargo.

But no one is calling for an embargo (!)

Russia can sell oil, but only within the limits agreed by the coalition — no more than $60 per barrel.

And that decision has to be made today.

I really hope no one is deliberately slowing things down.

Source

About the author. Anatoliy Amelin, co-founder and director of economic programs of the Ukrainian Institute for the Future

The editors do not always share the opinions expressed by the blog authors.