FRANKFURT, Germany — The Group of Seven (G7) nations have been working to reduce Russia’s oil export revenues, which are funding its ongoing conflict in Ukraine. However, experts have noted that Russia has activated a “shadow fleet” consisting of hundreds of older tankers with ambiguous ownership and questionable safety standards, allowing it to circumvent sanctions and maintain oil revenues.
The term “shadow fleet” refers to these aging tankers that are often purchased pre-owned and operated by obscure entities based in non-sanctioning nations such as the United Arab Emirates or the Marshall Islands, frequently flying flags from countries like Gabon and the Cook Islands. Some vessels are owned by the Russian state shipping company, Sovcomflot, and their function is to assist Russian oil exporters in bypassing the $60 per barrel price cap established by Ukraine’s allies. Estimates from S&P Global and the Kyiv School of Economics Institute suggest this fleet consists of more than 400 ships capable of transporting oil and its derivatives, including diesel and gasoline.
Interestingly, the shadow fleet is not entirely elusive; these ships openly visit Russian oil ports, and some are directly linked to Russian interests, especially those owned by Sovcomflot. The real concern lies in the obscured ownership details of many vessels and the lack of transparency regarding their safety protocols and insurance coverage. Their operations fall outside the jurisdiction of G7 sanctions, which adds to the complexity.
So what exactly is this price cap? It was established to restrict Russia’s financial gains from oil sales while ensuring that oil remains accessible in global markets, thus preventing potential energy shortages that could spike fuel prices and inflation. Enforced since December 5, 2022, the cap restricts service providers—such as insurers and shipping managers—from engaging with oil traded above the price limit. Most of these service providers are located in Western nations, making them susceptible to sanctions enforcement.
The cap is bolstered by the strict requirements set forth by the U.N.’s International Maritime Organization. Vessels must have robust insurance coverage and be subject to credible audits to operate, traditionally supplied by a consortium of Western insurers known as the International Group (IG). Initially, around 70% of Russian oil was transported on IG-covered vessels, but that number has now dropped to just 10% as more ships enter the shadow fleet.
The shadow fleet avoids the price cap through various means. Many vessels are acquired second-hand and belong to obscure owners in countries that are not enforcing sanctions. These new owners often secure insurance from non-Western providers, which complicates efforts to monitor and restrict their activities.
The significance of the shadow fleet in the context of the Ukraine war is notable. According to sanctions experts, evading the price cap has allowed Russia to sell its oil at more favorable prices internationally. The discount for Russian oil compared to the global benchmark, Brent crude, has decreased from around $35 per barrel to less than $10. Russian oil revenue has remained robust, averaging $16.4 billion monthly for the first 11 months of 2024, a 5% increase from the previous year, due to this circumvention of the price cap. This extra revenue provides the Kremlin with resources to fund military production and maintain economic stability, helping to manage the budget deficit and bolster the Russian ruble’s value, resulting in a favorable trade balance.
Concerns are also rising regarding environmental risks associated with these older vessels. With an average age of around 18 years, many tankers are nearing the end of their operational lifespan, raising fears about potential accidents due to poor maintenance. The reliability of non-IG insurance becomes questionable in the event of significant oil spills, which could have catastrophic impacts on sensitive coastlines, particularly in regions like the Baltic Sea and the English Channel, commonly traversed by these tankers.
Recent incidents underscore these worries. In May 2023, an 18-year-old tanker lost engine power while transporting oil, nearly running aground in the Danish Straits. In response to the heightened risk, several countries have begun demands for insurance documentation from suspected shadow fleet vessels. Although such vessels aren’t stopped immediately, those that lack proof of adequate insurance could face sanctions.
In summary, while efforts to curb Russia’s oil revenues through sanctions have led to the targeting of over 100 vessels engaged in breaking the price cap, the shadow fleet complicates enforcement. Approximately two-thirds of these identified vessels have gone inactive, reflecting one of the sanctions’ core objectives: to increase the costs associated with illicit trade, even if complete prevention isn’t feasible.
