FILE – An oil tanker is moored at the Sheskharis complex, part of Chernomortransneft JSC, a subsidiary of Transneft PJSC, the largest facilities for oil and petroleum products in southern Russia, in Novorossiysk, Tuesday, Oct. 11, 2022. Russia’s still making plenty of money from oil sales despite a price cap imposed by the Group of Seven major democracies. Researchers at Helsinki’s Centre for Research on Energy and Clean Air said in report Wednesday Jan. 11, 2023 that the cap is too lenient at $60 per barrel. (AP Photo, File)

 

Putin’s Russia may indeed be incompetent at managing a large modern military. But when it comes to evading international rules around things like laundering the proceeds of crime and large scale corruption, Russians are world leaders.

That’s why news reports in January claiming a new set of EU sanctions on Russian oil exports was actually working seemed hard to believe.

Usually reliable media sources like The Economist reported last month that according to official Russian sources that country’s revenues from oil and gas declined by 46 per cent in January 2023, year on year. The drop in reported revenues followed the EU’s imposition of new trade sanctions on Russian oil exports on December 5, 2022. No wonder that in early January some EU leaders felt justified in thinking the new sanctions regime was going to be a big success.

The EU claims the new sanctions have two principal objectives. One is to reduce European dependence on Russian energy. The other is to damage the Russian economy by reducing its oil export revenues and by extension its capacity to wage war in the Ukraine.

The sanctions impose a $60 US per barrel cap on what Russian oil can be sold for in international markets. The enforcement mechanism is a ban on insuring vessels carrying Russian oil priced over the $60 ceiling. When the insurance ban was conceived, the shipping insurance industry was dominated by well-established companies in the UK, the EU and other G7 countries. Since those countries support the sanctions, they could be expected to hold their insurance and financial institutions to account. It was assumed that owners of vessels which could not obtain insurance would also find it difficult to find financing. This was because uninsured or poorly insured vessels pose high liability risks. A ship that runs aground in a major harbor or canal or has a big oil spill can rack up damages in the hundreds of millions.

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As of mid-February 2023, it was apparent last month’s optimism on the part of EU leaders was misplaced. While the sanctions will probably succeed in further reducing imports of Russian oil into the EU, they have failed to significantly reduce Russia’s oil exports. According to the Feb. 4 edition of The Economist, regardless of what Russian officials claimed in January, Russia’s oil exports have recovered to levels not seen since June 2022. That was the month prior to the date when the EU first formally announced its intention to impose new sanctions in December. Apparently, in January 2023, Russian policy was to lie about the success they were having beating the sanctions. Shocking!

During the second half of 2022, while some EU officials were taking a premature victory lap, the Russians were busy working on plans to evade the sanctions. The signs were obvious for those who chose to look for them.

The sanctions plan itself has loopholes large enough to sail a giant oil tanker through. For example, Western and non-Western shippers can still legally transport Russian oil priced above the $60 cap provided they can obtain insurance coverage. And for some importing nations it doesn’t seem to matter how reputable or solvent companies insuring tankers carrying Russian oil might actually be. All that is required to sell oil to some of the sketchy countries still buying from Russia is to show them that a ship carries insurance from somewhere. India, one of the largest buyers of Russian oil, has simply reduced the amount of insurance coverage shippers are required to carry.

And why set the ceiling at $60 per barrel? The CBC reported that when the sanctions plan was first announced, Ukrainian President Volodymyr Zelenskyy argued the cap was too high. The Ukrainians claimed it would be necessary to lower it to “$30 US in order to destroy the Russian economy faster.”  The $60 cap has in fact been high enough for some Greek shippers and UK insurers to get Russian oil to market legally and profitably without contravening the sanctions.

The evasion of trade sanctions is an integral part of the industrial strategy for countries such as Venezuela and North Korea. Russia has been able to rely on help from its friend Iran — a country with decades worth of sanctions-busting expertise.

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In the fall of 2022, the online news site, Politico, reported Iran had offered to share its sanctions dodging knowledge with Russia. The two countries were already enjoying amicable trade relations. This was exemplified by Russian purchases of Iranian-made weapons including kamikaze drones. One Western diplomat warned Politico that if the oil sanctions were going to work it was essential for the NATO allies to dismantle the underground international banking system that has allowed the Islamic Republic to evade sanctions. Politico’s sources claimed the US bank, Citigroup, along with Deutsche Bank and Commerzbank in Germany had played a role in helping Iran in making the international transactions required to sustain its sanctioned oil exports.

In less than a year Russia and its customers established a whole new international system for insuring and financing oil exports. Dutch and Japanese financial institutions and UK insurers have been replaced by new companies based in Dubai and Hong Kong. One analyst told The Economist that some 30 new Russian trading firms have set up shop in Dubai since the start of the war in Ukraine.

FILE – An oil tanker is moored at the Sheskharis complex, part of Chernomortransneft JSC, a subsidiary of Transneft PJSC, in Novorossiysk, Russia, on Oct. 11, 2022. A price cap and European Union embargo on most Russian oil have cut into Moscow’s revenue from fossil fuels, but the Kremlin is still earning substantial cash to fund its war in Ukraine because the $60-per-barrel cap was “too lenient,” researchers said Wednesday, Jan. 11, 2023. (AP Photo,

With financing and pseudo-insurance coverage in place the next step in the sanctions avoidance game was to create new shipping companies prepared to flout the notion that they needed to carry meaningful risk protection.

An analyst writing in The Washington Post in December noted that Iran and Venezuela have been using “dark tanker” fleets to evade oil sanctions for years. According to The Economist, dark tankers sail the high seas with their transponders turned off and have been known to change and repaint the names on a ship several times during a single voyage.

Almost anyone watching the global trade in used oil tankers in 2022 had to figure something unusual was afoot. In July, Bloomberg reported that over the previous several months there had been a surge in used oil tanker sales with at least 184 small mostly older tankers selling for a total of $3.79 billion US. Shipping analysts now estimate Russia has a dark fleet of 360 ships available to haul its oil to market.

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The new dark fleet consists primarily of small used tankers with a maximum capacity of one million barrels. While these are half the size of ships that make up the world’s conventional tanker fleet, they are well suited to Russia’s smaller tidewater ports. New full-size tankers can take up to three years to build. Old and battered tankers can be had today provided buyers are willing to pay the inflated prices brought on by the surging demand for second-hand vessels. Bloomberg’s sources claim the selling price for 15-year-old long-range tankers increased nearly 60 per cent in 2022. Prices for medium-range vessels over 10 years old rose more than 40 per cent.

No surprise, India and China are importing much of Russia’s purportedly sanctioned oil. What’s new is that a lot of oil is moving through other more opaque channels. New trading firms in countries like Sri Lanka, that have no oil, are now selling the stuff. The Economist reports that Oman and The United Arab Emirates imported more Russian oil between January and October 2022 than they had over the preceding three years. Malaysia is now exporting twice as much oil as it can produce. Much of that oil is assumed to be Russian product laundered through Iran and other shadowy intermediaries. Laundered Russian oil is now supposedly making its way to places like Turkey, an actual NATO member.

Additional signs that it’s been full speed ahead for the dark fleet and the shadow market include sightings off Gibraltar and the eastern Mediterranean of large tankers being filled by several smaller tankers. After all, once blended via the tanker shell game, dark market oil and legal oil look the same.

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While the Russian sanctions evasion system has prevented the collapse of Russian oil exports it has nevertheless been a costly nuisance. Whereas a tanker shipment from a Russian Black Sea port to a European customer could take less than a week, voyages to alternative customers can take a month or more. The dark fleet requires more ships sailing greater distances and old ships can cost more to keep afloat than new ones.

Of course, not everyone has the same interpretation of the extent of the flaws in the sanctions program.

Some observers take the ostrich approach. According to a Bloomberg report, Ben Harris, the US Treasury Assistant Secretary for Economic Policy, stated on Feb. 16 that, “To my knowledge, there is no hard or conclusive evidence that supports speculation about Russia evading the sanctions using coalition service providers and receiving above the cap payments.” That is a rather narrow view of the problems with the sanctions. Do officials like Harris really believe that just because it isn’t raining under one umbrella means that it’s dry everywhere?

A commentary appearing in The Washington Post on December 8 was more concerned with the risks to the environment presented by derelict, under-insured shadow tankers than it was with how sanctions evasion might affect the war in Ukraine. No surprise there, that view conforms to what we’ve come to expect from strident environmentalists.

One thing we can safely conclude is that it’s easier to avoid international oil sanctions designed to help win a war against a blood-soaked autocrat than it is to get approval for a new pipeline to transport Canadian crude to tidewater.

 

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Alberta wind generation falls to 0.3% capacity at supper on Thursday, battery output 0.09% over 30 days