By Kontur | 2024-02-21

Russia is attempting to skirt a Western oil price cap by using "shadow tankers" and mixing Russian crude with oil from other places to obscure its origins, according to industry insiders and a watchdog committee of British lawmakers.

But as authorities become aware of Russia's shadow tankers and sanctions evasions, they are taking effective measures to stop them.

Arguing that the United Kingdom, European Union (EU) and other allies must maintain sanctions and support for Ukraine, a panel from the UK parliament's House of Lords urged "decisive action" over Russia's shadow tankers.

"We are concerned at the growing evidence that Russia has been able to circumvent sanctions, including through third states and uninsured shadow tanker fleets," the European Affairs Committee said in a January 31 report.

The panel found that "cooperation between the UK, the EU and other allies on imposition and implementation of sanctions following Russia's invasion of Ukraine have been broadly effective."

But it warned that "divergence between sanctions regimes results in gaps and loopholes, weakening their effectiveness; it should be as limited as possible."

Just over a year ago, the G7 -- Canada, France, Germany, Italy, Japan, United Kingdom and United States -- imposed an unprecedented price cap on Russian oil, along with the EU and Australia.

The $60 per barrel price ceiling aimed to starve President Vladimir Putin of revenue to fund his war in Ukraine while ensuring Russia still supplied the global market.

The price cap on Russian oil prohibits companies based in G7 member states, the EU and Australia from providing services enabling maritime transport, such as insurance, of oil above that price.

Skirting sanctions

Initially successful, the price cap lost its impact once Russia found new buyers and new tankers to deliver its exports.

Recent assessments show Moscow has reduced its dependence on Western shipping services and skirted the curb by building so-called "shadow fleets" of tankers and buying old ships, while offering its own insurance services.

"The amount of shadow vessels leaving Russia rose from 13% in February 2022 to 42% by mid-2023," Newsweek reported February 6.

In order to sell its oil, Moscow has reorganized ship ownership, often through shell companies in the Middle East, to obscure their connections to Russia.

The Kyiv School of Economics (KSE) also has highlighted the extent to which Russia has been able to get around the price cap.

In its December "Russian oil tracker" report released last month, it estimated "179 loaded Russian shadow fleet tankers left Russian ports in November 2023."

In October, the shadow fleet was responsible for exports of about 2.3 million barrels per day (BPD) of crude oil and 800,000 million of petroleum products, according to the KSE.

Another loophole has enabled Russian crude processed in third countries and then sold on to enter the United Kingdom, the BBC reported, citing findings by Global Witness and the Centre for Research on Energy and Clean Air (CREA).

Russia also is mixing Russian crude with oil from other places to obscure its origins, said Marcus Fishburn, head of disputes and investigations at S-RM, a global intelligence and cyber security consultancy.

"This is happening in Singapore and Turkey [Türkiye], as well as at sea via ship-to-ship transfers, which are very difficult to police," Fishburn said.

"As long as Russia continues to find middlemen and buyers to facilitate its shadow trades, the true value of its oil revenue will remain difficult to capture."

Authorities crack down

As Russia's sanctions evasions come to light, regulators have been taking concrete steps to stop them.

For example, ships flying under the flags of Liberia and St. Kitts and Nevis have been heavily targeted by regulators, Bloomberg reported, citing data from Windward AI, a predictive intelligence company.

The same data showed a fivefold increase in ships sailing under the flag of Gabon -- from just 20 in February 2023 to 100 in January 2024.

"The move to Gabon by operators shipping sanctioned oil was precipitated partly by the US authorities putting pressure on the St. Kitts and Nevis registry earlier last year," said Septimus Knox, director of disputes and investigations at S-RM.

"Gabon has not flown on under the radar and it is likely the US will take similar steps to encourage Gabon to deflag any vessels suspected of carrying sanctioned Russian crude," he told Newsweek.

A mechanism coming into force February 19 will make it even more difficult for Russia to circumvent the oil price cap by increasing ancillary costs at Russian ports, Knox said.

Under the imposed sanctions regulations, an itemized list of each ancillary cost must be supplied to the US Treasury's Office of Foreign Assets Control, meaning that any inflation of costs to offset the price cap would be detectable.

"The US has the power to sanction specific vessels carrying sanctioned oil, which could theoretically prevent a cat and mouse game, whereby ship owners engaging in sanctions busting keep one step ahead of the US authorities by flagging vessels in less-scrutinized jurisdictions," Knox said.

In November, the US Treasury sanctioned three maritime companies based in the United Arab Emirates and three vessels owned by the companies for shipping Russian oil sold above the cap.

The Treasury sent notices to companies in a dozen countries and followed up with sanctions against those that continued to trade in Russian oil, Bloomberg reported.