How Russia Dodges Oil Sanctions on an Industrial Scale

MeYear Since the war in Ukraine began, once-dominant Western corporations have pulled out of Russia’s oil trading, transportation, and insurance. started. They are based in Hong Kong or Dubai, not Geneva. Many have never traded before.of world energy system It has become increasingly dispersed, fragmented and dangerous.

Russia’s need for this alternative supply chain, which has existed since the war began, became more pressing after December 5th. Western sanctions has taken effect. The measure will ban the import of seaborne crude oil from Europe and allow Russian ships to use Western logistics and insurance companies only if the price of the cargo falls below $60 a barrel. . Further sanctions on diesel and other refined products will come into effect on his February 5th, making the new back channel even more important.

economist To assess the impact of sanctions and understand what happens next, we spoke with various intermediaries in the oil market and examined evidence from across the supply chain. We realized the chagrin of the West, Russian relief, the new “shadow” shipping and financing infrastructure is robust and extensive. The gray market is poised to expand when the next round of sanctions comes into force.

sly shades of gray

Russian exports took a hit after the first European salvo in December. However, two months later, it has recovered to levels last seen in June. Oil on water volumes, which tend to rise during market turmoil, have returned to normal. As expected, China and India have obtained most of the embargoed barrels. But there are surprises. The volume of undelivered cargo is skyrocketing. Once easier to trace, Russian oil now flows through less shadowy channels.

Some deals still use Greek shippers, British insurers, Dutch and Japanese banks that have long dominated the industry. This channel is price cap set by the west. In December, the share of Western Russian crude they picked collapsed from 60% to 13% as European companies paused to consider the paperwork involved. A legal deal was made and the share was restored to his 36%. But it looks like it’s going down again. On January 1st, the world’s largest reinsurer insuring insurance companies decided it would no longer cover shipments from Russian ports. Western insurers now have little choice but to exit the business or pass on the extra costs resulting from increased risk.

At the other end of the spectrum are the tried and tested ‘black’ trades by producers such as Iran and Venezuela. A battered half-century-old tanker sets sail for a secret client with its transponder off. They get renamed, redrawn, and sometimes it takes several trips. They are difficult to detect as they often pass through crowded terminals where their crude oil is blended with other crude oil. It was found carrying cargo from a Russian ship. Oman and the United Arab Emirates (United Arab Emirates) appears to have imported more Russian oil in the first 10 months of 2022 than in the previous three years combined, blending some and reselling it to Europe. Malaysia exports twice as much crude oil to China as it can produce. Many of them are probably Iranian, but ship watchers suspect that some Russian barrels may have also been caught.

This channel seems needlessly cumbersome, as Russian companies can still legally sell oil around the world. The share of exports flowing through it is rising, but small. Instead, most of Russia’s crude oil goes through “grey” networks that do not recognize price caps but are not illegal. This is because it uses non-Western logistics and delivers to countries that are not part of the lockdown. A new cast of traders, a vast and growing fleet of tankers, and new sources of funding.

Russian crude oil was sold abroad by Russian producers, Western oil majors and the trading arm of Swiss commodity merchants. These were mainly based in Geneva. But many of the former seem to have moved to friendlier places. Robin Mills of consultancy Qamar Energy believes more than 30 Russian trading companies have set up shop in Dubai since the war began. As Western traders retreated, new entrants emerged selling to India, Sri Lanka, Turkey and others. Most have no history of trading Russian oil, or indeed oil. Insiders suspect that the majority are contacts of Russian state-owned enterprises.

It is this curious gang that assembles a vast “gray” fleet. ever since EU After first considering sanctions against logistics, the used tanker market exploded. About 200 crude carriers changed owners last year, about 55% more than in 2021, according to the company. ssy, shipbuilders. Mostly “Aframax” and “Suezmax” tankers, with a maximum capacity of 1 million barrels, she was the only small vessel that could dock in Russian ports. Demand for Aframax was so strong that several companies recently sold for her $35 million. vlccIt can carry barrels up to 2m.

The fleet Russia can use to fend off price caps now counts 360 odd ships, equivalent to 16% of the world’s crude tanker inventory. Even if all Western ships avoided Russian crude barrels, the Shadow Fleet would still be enough to keep Russia’s crude oil exports at current levels, says Reid l’Anson of data firm Kpler. , many of the ships are over 20 years old and have made very long voyages. Crude oil travels from the Black Sea to Europe in less than a week, but it takes her 45 days to reach China.

As business boomed, new intermediaries had to find a financier to raise money and insure their business. The ability to hold millions of barrels of oil without investing capital, with access to nearly unlimited lines of credit from the world’s largest banks, has long been a key component of oil trading. This is no longer possible for Russian oil, which has Instead, shadow trade appears to be fueled by credit from the Russian government, with middlemen paying for freight only after they have collected the proceeds. Increasingly, Gulf banks are also signing checks.Locals think they decided to intervene Adnok, United Arab EmiratesThe state-owned energy giant began receiving Russian crude in November.

Securing insurance just got trickier. Oil shippers don’t just need to protect their cargo and vessels. Port authorities that control shipping lanes such as the Bosphorus also need protection and compensation (p&Me) Insurance against the cost of damage that a ship may cause to persons, property or nature. Oil spill debt is very high, 90% of the world p&Me Coverage is provided by shipowners’ clubs, mainly in London, pooling premiums. Ulrich Kadow of German insurer Allianz says no private market outside the West has the power to extend a similar safety net.

But I found a solution here too. Since December, new Russian companies appear to have entered the shipping business to provide cargo and vessel insurance.Several p&Me Coverage of equally questionable quality is likely provided by the Russian government. Insurance experts suspect that some ports serving Russia’s oil-devouring countries, especially India, are lowering the level of coverage required for incoming tankers. .

tanker, sailor, soldier, spy

The gray trade has plenty of room to grow. china and india You can buy more Russian crude oil. Their storage tanks remain less than two-thirds full, according to data firm Kayrros, suggesting most of what they buy is being refined and resold to Europe. On Jan. 3, China raised its refined oil export quotas by nearly 50% compared to his year earlier, notes his Giovanni Serio of Vitol.

Incentives to comply with price caps may also weaken. In December, President Vladimir Putin issued a decree banning sales to political parties that adhere to the cap. The statement’s language is weak and opens the door to arbitrary immunity. But the ruling, which goes into effect on February 1st, may change the minds of some buyers.

A price increase would change the situation more dramatically. Today, the international crude benchmark, Brent, is trading at $86 a barrel, up from an average of $100 last year. Russia’s weak bargaining power and high transport costs meant that Russia’s ‘Ural’ grade crude had been slashed even before the price cap was set. As a result, Ural barrels, which flow in from western Russia and account for the majority of Russian exports, are sold below the $60 price cap. This lukewarm market makes life easier for those who like to follow the rules. However, many analysts believe that a recovery in Chinese demand coupled with weak investment in new oil supplies could push Brent crude back to his $100 level in the second half of 2023. In such a scenario, Ural prices would also jump. Some buyers will probably look to shadow deals rather than face compliance issues.

The upcoming sanctions on refined products will also boost the Great Trade significantly. In December, Europe bought 1 million barrels per day of diesel and other clean distillates, equivalent to 55% of Russia’s exports. Now Russia has to find new buyers. China and India have little demand for refined products, and the global market is fragmented. So Russia’s best bet may be the smaller markets in Brazil and Mexico, supplies of which will dwindle as America increases its exports to Europe. However, the fleet to carry such products is scarce, and long journeys exacerbate the shortage. All of this suggests that Russia will be unable to sell much of its refined oil and will instead try to push as much crude oil into the gray market as it can.

For Russia, the expansion of the gray trade has advantages. It has more and more export machines outside the control of Western intermediaries. It also reduces pricing transparency. Western Ural price estimates based on a small number of actual trades struggle to keep track of costs. The latest November Indian customs data available show India bought oil at discounts far lower than those reported at the time, says a former Russian oil official. . Gray market intermediaries that keep track of costs such as freight provide a conduit for money to flow into the accounts of offshore companies that the Kremlin could possibly influence.

On the other hand, Russia’s sanctions evasion will have nasty side effects for the rest of the world. One is to further divide the oil trade along geopolitical lines. In December, several Western giants, including ExxonMobil and Shell, announced they would no longer hire tankers to carry Russian oil, forcing owners to take sides. Another is to make oil trading a riskier business. A growing mass of the world’s oil is carried on dilapidated ships on ever longer and more dangerous journeys by companies with no reputation. Ukrainian allies have good reason to want to wash their hands off Russian oil. However, it cannot prevent debris from nearby wreckage from floating on the shore.

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