Ithen Once-dominant Western companies have withdrawn from trading, shipping and insuring Russian oil since the war in Ukraine began. Instead, mysterious newcomers help sell the country’s crude. Their headquarters are not in Geneva, but in Hong Kong or Dubai. Many people have never dealt with this stuff before. The global energy system is becoming more fragmented, fragmented and dangerous.
Russia’s need for this alternative supply chain, which has existed since the start of the war, became more urgent after a package of Western sanctions came into effect on December 5. The measures bar European imports of seaborne crude and allow Russian ships to use Western logistics and insurance companies when cargoes are priced below $60 a barrel. More sanctions on diesel and other refined products will take effect on Feb. 5, making the new backchannel even more important.
economist spoke to a range of intermediaries in the oil market and looked at evidence across the supply chain to assess the impact of sanctions and understand what’s next. To the chagrin of the West and the comfort of Russia, we found the new “shadow” shipping and financing infrastructure robust and extensive. The gray market will not disappear, but is poised to expand when the next round of sanctions is imposed.
Russian exports, which accounted for more than 10 percent of global trade last year, took a hit after the European salvo in December. However, two months later, they have returned to June levels. When the market was congested, the volume of oil and water rose, but now it is back to normal. As expected, China and India are receiving most of the embargoed barrels. However, there was a surprise: the volume of cargo with unknown destinations soared. Russian oil, once easy to track, is now moving through more covert channels.
Some trade still uses the Greek shippers, British insurers and Dutch and Japanese banks that have long dominated the industry. The channel survived thanks to price caps imposed by the West in December. That month, as European companies paused to consider the paperwork involved, their share of western Russian crude handled plummeted from 60% to 13%. The legal trek is now complete, and the share has returned to 36%. But it seems likely to drop again. On Jan. 1, the world’s largest reinsurer, which insures insurers, decided not to cover shipping from Russian ports. Western insurers are now either out of the business or passing on the additional costs of increased risk.
At the other end of the spectrum is the “black” trade, tried and tested by oil producers such as Iran and Venezuela. The dilapidated, half-century-old tanker turned off its transponder and headed for a secret client. They were renamed and repainted, sometimes over several trips. They are often trans-shipped through busy terminals, where their crude is mixed with other crude, making it harder to detect. Recently, several giant tankers formerly anchored in the bay were spotted carrying cargo from smaller Russian vessels near Gibraltar. Oman and United Arab Emirates (United Arab Emirates), which imported more Russian oil in the first ten months of 2022 than in the previous three years combined, appears to have blended and resold some oil to Europe. Malaysia exports twice as much crude oil to China as it can produce. Most of it may have been Iranian, but ship watchers suspect some Russian barrels have also sneaked in.
Since Russian companies can still legally sell oil to much of the world, this channel seems unnecessarily tedious. The share of exports flowing through it, while rising, is small. Instead, much of Russia’s crude oil runs through gray networks that do not recognize price caps but are not illegal because they use non-Western logistics and ship to countries that are not part of the blockade. These opaque, fragmented operations rest on three main pillars: a new wave of traders, a large and growing fleet of tankers and new sources of funding.
unpredictable shades of gray
Russian crude has historically been sold overseas by Russian producers, Western oil majors and the trading arms of Swiss commodity merchants. Most of these institutions are based in Geneva. But many of the former seem to have moved to friendlier locations. Robin Mills of Qamar Energy, a consultancy, estimates that more than 30 Russian trade agencies have set up shop in Dubai since the war began – some under new names. As Western traders withdrew, newcomers emerged, selling to India, Sri Lanka, Turkey and other countries. Most have no history, or even record, of trading Russian oil; insiders suspect much of it is a front for Russian state-owned enterprises.
It is this curious group that orchestrates the vast gray fleet.since European Union Considering the sanctions on logistics first, the used tanker market has exploded. Nearly 200 crude carriers changed hands last year, about 55% more than in 2021, it said. sissy, shipbroker. Most are “Aframax” and “Suezmax” tankers: with a maximum capacity of 1 million barrels, these are the only small ships able to call at Russian ports.Demand for Aframaxes is so strong that several have recently sold for $35 million – the average price China paid for larger tankers last year super giants, can carry up to 2m barrels.
The fleet that Russia can use to circumvent price caps now stands at more than 360 vessels, equivalent to 16% of the global crude oil tanker stock. Reid l’Anson of data firm Kpler said that if all Western ships avoided Russian crude barrels, the shadow fleet would be enough to keep Russian crude exports at current levels. But many of the ships are more than two decades old, and they have long ranges. Crude oil takes less than a week to travel from the Black Sea to Europe and 45 days to reach China.
As the business boomed, new middlemen had to find financiers to fund and insure their operations. The ability to hold millions of barrels of oil without committing money through a nearly unlimited line of credit from the world’s largest banks has long been a key element of oil trading. In the case of Russian oil, which Western banks now shy away from, that is no longer possible. Instead, the shadow trade appears to be fueled by credit from the Russian government, with middlemen paying for goods only after they receive the proceeds. Banks in the Bay Area are also increasingly signing checks.When locals think they decide to step in Adnockthis United Arab EmiratesThe state-owned energy giant, which started receiving Russian crude in November.
Getting insurance has always been trickier. Oil shippers don’t just need to protect their cargo and ships. Port authorities controlling passages such as the Bosphorus also need protection and compensation (p&I) to insure against costs incurred by the ship against damage to persons, property or nature that may be caused by the ship.The damage from a single oil spill could be so great that 90% of the world’s p&I Coverage is provided by shipowners clubs, mainly in London, which collectively collect premiums. Ulrich Kadow of German insurer Allianz said that outside of the West, no private market was in a position to expand a similar safety net.
However, a solution was also found here. Since December, Russian companies, usually new to the shipping industry, appear to have stepped in to provide cargo and ship insurance.Some p&I Reports of equally questionable quality may have been provided by the Russian government. Insurance experts suspect that some ports serving countries that use heavy Russian crude oil, notably India, have reduced their level of insurance cover for incoming tankers.
Gray trade has room to grow. China and India could buy more Russian crude: Their storage tanks are still less than two-thirds full, according to data firm Kayrros, suggesting most of the crude they buy is refined and resold — some to to Europe—not to hide. Giovanni Serio of trading house Vitol noted that China on Jan. 3 raised its refined product export quota by almost 50% from a year ago, which could be a prelude to buying more crude from Russia and exporting refined products abroad.
The incentive to follow the price ceiling may also be weakening. In December, Vladimir Putin issued a decree banning sales to political parties that play by the rules. The statement was worded weakly, opening the door for exemptions; many believed it would not be strictly enforced. But the ruling, which took effect Feb. 1, could still cause some buyers to change their minds.
tanker, sailor, soldier, spy
A price increase would change the situation even more drastically. Today, Brent crude, the international crude benchmark, is trading at $83 a barrel, down from an average of $100 last year. Russia’s weak negotiating power and high freight rates mean its “Ural” grade crude is discounted even before the price cap. As a result, a barrel of Urals crude, which flows from western Russia and accounts for most of its exports, is selling for below the $60 price ceiling. This tepid market makes life easier for anyone who wishes to play by the rules. However, many analysts believe a rebound in Chinese demand, combined with weak investment in new oil supplies, could push Brent back to $100 in the second half of 2023. In this case, the price of Urals crude oil will also rise. Some buyers may turn to shadow trading instead of facing compliance issues.
The next round of sanctions targeting refined products will also give a big boost to the gray trade. Europe bought 1 million barrels a day of diesel and other clean distillates in December, equivalent to 55% of Russia’s exports. Now Russia will have to find new buyers. China and India have little demand for refined oil products, and the global market is fragmented. So Russia’s best bet may be smaller markets like Brazil and Mexico, which will see less supply as U.S. exports to Europe rise. However, the fleets carrying such products are small, and long-distance travel can exacerbate shortages. All of this suggests that Russia will not be able to sell most of its refined products and instead try to push as much crude as possible onto the gray market.
For Russia, the growth of gray trade has advantages. It puts more of the export machinery out of the control of Western intermediaries. And it makes pricing less transparent. Western estimates of Ural prices are based on few actual transactions, making it difficult to track costs. Sergey Vakulenko, a former Russian oil executive now at the Carnegie Institution think tank, pointed to India’s customs data for November – the latest available – showing that the country’s oil purchases were slow. The discount was much lower than what was reported at the time. Gray-market intermediaries, which charge costs such as shipping, provide a conduit for funneling funds into accounts at offshore companies that the Kremlin may influence.
At the same time, Russian sanctions evasion will have serious side effects for the rest of the world. One is to further fragment the oil trade along sharp geopolitical lines. In December, several Western giants including ExxonMobil and Shell said they would no longer charter tankers carrying Russian oil, forcing shipowners to take sides. The other is making oil trading a riskier business. More and more of the world’s oil is being shipped by companies with no reputation on aging ships on longer and harder voyages than ever before. If they cause an accident, insurance companies may not be willing or able to cover the damage. Ukraine’s allies have good reason to want to wash their hands on Russian oil. But that didn’t stop the remains of nearby wrecks from floating up to their shores. ■
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