KSE: Russian oil revenues rising, tougher sanctions needed on shadow fleet

KSE: Russian oil revenues rising, tougher sanctions needed on shadow fleet
Russian revenues from oil exports are going up. Tougher sanctions are needed to reverse the trend. / bne IntelliNews
By Kyiv School of Economics May 3, 2024

Russian oil export revenues surged to $17.2bn in March 2024, driven by higher global oil prices and increased crude export volumes, according to the April ‘Russian Oil Tracker’ by KSE Institute.

Despite robust US Treasury sanctions targeting the shadow fleet, Russia continues to expand it by incorporating new tankers, allowing for stable exports and further evasion of oil price cap.

Russian seaborne oil exports rose by 4% in March, driven by a 12% increase in crude oil shipments (+400 kb/d), while exports of oil products declined by 6%. Notably, India saw a 3% increase in Russian crude imports (to 1,445 kb/d), maintaining its position as the top importer of Russian crude oil. Meanwhile, Turkey has been meeting around two-thirds of its oil demand through Russian oil products imports, with total imports exceeding 800 kb/d since November 2023.

However, only 36% of Russian oil exports were shipped by IG-insured tankers. For other shipments, Russia utilized its shadow fleet. It was responsible for exports of ~2.8 mb/d of crude and 1.1 mb/d of oil products in March.

Specifically, 223 loaded non-IG-insured tankers left Russian ports, with 2 engaged in STS transfers in March 2024. With 85% of these tankers aged over 15 years, the risk of oil spills at sea is heightened—a potential catastrophe for which Russia would likely refuse to pay.

The US Treasury’s strategy of designating individual vessels effectively removes shadow tankers from regular commercial service. As of April 12, 2024, out of 41 sanctioned vessels, 37 were unloaded and not scheduled for further voyages, while 3 were completing their current voyages in line with the OFAC authorization. One vessel provides coastal shuttle services violating OFAC’s sanctions but only within the Black Sea. On April 4, OFAC also sanctioned Oceanlink Maritime Dmcc and its 13 tankers for its ties with Iran but 7 of these 13 tankers also shipped Russian crude without IG P&I insurance.

Russia managed to expand its shadow tanker fleet, adding 35 new tankers to replace 41 tankers added to OFAC’s SDN list since December 2023. These tankers, all over 15 years old, are managed outside the EU/G7. Nine of them were directly involved in loading Iranian oil in Iran or through STS operations in 2021-2023, as per Kpler.

Russia also continues to evade shadow fleet sanctions by transferring sanctioned tankers to new entities. For instance, when four UAE-registered shipping companies, sanctioned by the UK, passed tankers to other Emirati firms, they continued commercial operations under new management. Similarly, Stream Ship Management Fzco became the top shipper of Russian crude oil after acquiring tankers previously managed by Oil Tankers Scf Mgmt Fzc, sanctioned by the OFAC.

Maintenance and expansion of the shadow fleet enables Russia to bypass the oil price cap. In March 2024, the average Urals FOB Primorsk and Novorossiysk, as well as ESPO FOB Kozmino, increased by ~$2 per barrel, to levels well above  price cap threshold. The discount of Urals FOB Primorsk and ESPO FOB Kozmino to Dated Brent decreased by ~$0.4 per barrel over the previous month.

UAE, Chinese and Greek ship managers have played a leading role in transporting Russian crude. In March 2024, 8 of the top 10 shippers of Russian crude were registered in the UAE or China. As for Russian oil products exports, Greek companies dominated the top shippers, although Modern Gemi Isletmeciligi As (Turkey) and Oil Tankers Scf Mgmt Fzco (UAE) led the list in March.

KSE Institute projects Russian oil revenues to reach $175bn and $152bn in 2024 and 2025 under the base case with current oil price caps and stronger sanctions enforcement. However, if sanctions enforcement is weak, Russian oil revenues could increase, reaching $206bn in 2024 and $195bn in 2025.

The Q4 2023 data suggest that problems with price cap implementation and enforcement are much bigger than previously expected. To ensure that sanctions continue to constrain Russia’s ability to wage its war of aggression on Ukraine—and that their credibility is maintained—additional steps urgently need to be taken. Below, we outline three critical measures that can quickly and effectively address Russian effort to evade sanctions on its oil exports.

1. G7/EU countries should ensure that their authorities have sufficient proof of compliance with the price cap, including by: a) leveraging the involvement of G7/EU financial institutions in the Russian oil trade and their knowledge of key transaction details such as prices; b) requiring attestations to be provided by reputable entities defined via transparent criteria and subject to sanctions in the case of violations or their facilitation; and/or c) stepping-up of documentary evidence requirements for G7/EU service providers under the current system (including original sales contracts, etc.).

2. EU coastal states should leverage geographical “choke points” to limit Russia’s use of a “shadow fleet” of tankers by requiring proper spill insurance for vessels’ passage through their territorial waters, including in the Baltic Sea and Mediterranean. This would force Russia to rely once again on G7/EU services for a substantial share of its exports and also help address environmental risks that have emerged due to the increasing use of old and under-insured tankers. For this purpose, a system to allow for timely and efficient verification of insurance information should be established.

3. Price cap coalition countries should step up penalties on entities that violate the price cap. For G7/EU companies, this should include tougher monetary penalties and expanded lockout periods. For third-country actors, price cap coalition countries should impose “direct” sanctions (e.g., SDN listing in the United States or use of the European Union’s anti-circumvention tool established in the 11th package) and consider the application of extraterritorial (“secondary”) sanctions, leveraging the continued critical importance of its financial system for internationally operating businesses.



Russian seaborne crude oil & product exports

Russian crude oil exports from Pacific Ocean ports

Russian crude oil exports from Arctic Ocean ports

Russian crude oil exports by shadow fleet by flag

The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website. Read the full report via the link below.