In December, the European Union banned imports of Russian crude oil by sea, and the EU and other major economies imposed a price cap – designed to keep essential exports flowing from one of the world’s biggest oil producers while still penalizing it.
Another embargo and a cap on refined oil products followed, nearly a year into an onslaught believed to have so far resulted in hundreds of thousands of military casualties and some 30,000 civilian deaths.
The sanctions mean that even if a delivery of Russian crude is headed somewhere without an embargo, insurers can’t cover its transport if it’s being sold above a price cap. But there’s another option.
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A non-Western-aligned shadow fleet (or “dark fleet”) is largely made up of ageing ships that maintain a low profile by sailing without insurance, turning off transmitters, falsifying documents, or simply painting over a name. Decades-old vessels are now being sold at record prices, and furtively joining its ranks.
Ben Luckock, an executive at commodities trading firm Trafigura, said recently that this parallel armada has swelled to about 600 ships. Some 400 crude oil vessels, or a fifth of the world’s fleet, has exited mainstream operation “ostensibly to do Russian business,” he said. And 200 smaller product tankers, or 7% of that market, have followed suit.
The freight they’re tasked with sustaining is enormous. In the year prior to its invasion of Ukraine, Russia accounted for about 14% of global crude oil supply – and revenue from both oil and natural gas made up nearly half of its federal budget.
Shadow fleet: a fleet that’s a shadow of its former self
Shadow fleets have emerged in the past, to help Iran sidestep US sanctions or to ferry Venezuelan oil for the same purpose.
But experts say the surreptitious supply chain required to continue transporting Russia’s oil must operate at a far bigger scale. And the stakes may be more readily apparent to anyone who sees the images regularly streaming out of Ukraine.
An increasingly fractured global economy could become even more accommodating to shadow fleets, or similar means to fund military aggression. Countering that will require building greater consensus on sanctions and other matters – and not just in Western capitals, but in places like the Strait of Malacca, the Black Sea, or the waters off southwestern Africa.
In truth, Russia doesn’t have a perfect replacement on hand. A shadow fleet is exactly that: a murkier option. Its economics may favour middlemen assuming greater risk while diminishing Russia’s own income. And abruptly making shipments in an ad hoc manner can be less efficient in other ways.
Trafigura’s Ben Luckock, for example, said many ships entering the shadow fleet are designed for short-haul business, and will require longer and more costly voyages to reach their final destination. “It is a vast volume that needs to find a new home,” he said.
The oil trade played a major role in fueling modern globalization. It’s a big reason why a single iPhone can be made from components originating in 43 different countries, or one soft drink company can penetrate every market on Earth but two.
Countries with fast-growing economies may now have more room to operate on the margins of this globalized economy – and even create an entire oil market of their own that extends beyond shipping while still existing in a grey area.
Plenty of Russian oil will still likely find its way into Europe and the US, even without the services of a shadow fleet.
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Still, experts say that more actively targeting Russian oil could stop the killing in Ukraine. As allies seek to limit market opportunities and lessen value, though, Russia has propped up prices by announcing it will cut output. More unified pressure might help break the impasse.
In 1935, another frustrated global power invaded a smaller country. The international community was horrified, and tried to hit back by targeting its oil trade.
Fascist Italy was the aggressor then, and its victim was Ethiopia. Major exporters were on board with the idea of suppressing Italy’s oil supply. But an absence of US support made an embargo untenable. The disunity provided an opening for a strongman to have his way, and helped spin an isolated conflict into a world war.
Fast forward nearly nine decades. Western countries have generally held together on their measures meant to blunt Russia’s invasion of Ukraine by throttling its oil revenue.
Better than in 1935, anyway, when the lack of US commitment to an oil embargo and other sanctions being attempted by the ill-fated League of Nations, which the country never joined, undermined the collaboration needed to contain fascism.
A decade later, the US was hosting a seminal meeting that helped launch the United Nations.
More reading on sanctions and Russia’s war on Ukraine
For more context, here are links to further reading from the World Economic Forum’s Strategic Intelligence platform:
• “Sanctions are well known to have criminalizing effects.” Now that Russia has become the most sanctioned country in the world, according to this piece, other nations with similar experiences are ideally suited to come to its aid. (Global Initiative Against Transnational Organized Crime)
• A big factor impacting the effectiveness of sanctions, according to a recently-published book by a former advisor to the French Treasury: “to what extent they are imposed multilaterally.” (The Diplomat)
• Are sanctions a tool to prevent war, or war by other means? One scholar delved into the history of sanctions, like the planned oil embargo targeting fascist Italy, to draw lessons for the present day. (Project Syndicate)
• Another corner of the grey market – according to this analysis, an estimated 7 million liters of Iraq’s relatively cheap oil is being smuggled across its border daily, a figure that’s risen in tandem with oil prices following Russia’s invasion of Ukraine. (Global Initiative Against Transnational Organized Crime)
• “The costs of sanctions for Russia could become substantially higher with more countries joining in.” According to this analysis, though, it will ultimately take more than sanctions to limit Russia’s ability to continue its war. (VoxEU)
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• Many countries may be shunning Russian oil, but according to this piece Pakistan is on the verge of sealing an agreement to have Russia supply more than a third of the country’s total crude oil requirement. (The Diplomat)
• The shadow fleet is expanding at a time of increased oil demand and higher prices, but don’t expect that to last; this piece projects that the war will hasten a shift away from fossil fuels, and global oil demand will plateau and decline before the end of this decade. (Pembina Institute)
On the Strategic Intelligence platform, you can find feeds of expert analysis related to Geopolitics, Supply Chains and hundreds of additional topics.
Source: World Economic Forum