In the year since the war in Ukraine began, once-dominant Western firms have pulled back from trading, shipping and insuring Russian oil. In their place, mysterious newcomers have helped sell the country’s crude. They are based not in Geneva, but in Hong Kong or Dubai. Many have never dealt in the stuff before. The global energy system is becoming more dispersed, divided—and dangerous.
Russia’s need for this alternative supply chain, present since the war started, became more pressing after December 5th, 2022 when a package of Western sanctions came into effect. The measures ban European imports of seaborne crude, and allow Russian ships to make use of the West’s logistics and insurance firms only if their cargo is priced below $60 a barrel. More sanctions on diesel and other refined products will come into force on February 5th, 2023 making the new back channels more vital still.
The Economist has spoken to a range of intermediaries in the oil market, and studied evidence from across the supply chain, to assess the effect of the sanctions and get a sense of what will happen next. We find, to the West’s chagrin and Russia’s relief, that the new “shadow” shipping and financing infrastructure is robust and extensive. Rather than fade away, the grey market stands ready to expand when the next set of sanctions is enforced.
As expected, China and India are picking up most of Russian embargoed oil barrels. Yet there is a surprise: the volume of cargo with unknown destinations has jumped. Russian oil, once easy to track, is now being moved through more shadowy channels….Battered tankers as much as half a century old sail to clandestine customers with their transponders off. They are renamed and repainted, sometimes several times a journey. They often transit via busy terminals where their crude is blended with others, making it harder to detect. Recently, several huge tankers formerly anchored in the Gulf were spotted taking cargo from smaller Russian ships off Gibraltar. Oman and the United Arab Emirates (UAE), which imported more Russian oil in the first ten months of 2022 than in the previous three years combined, seem to have blended and re-sold some to Europe. Malaysia is exporting twice as much crude to China as it can produce. Much of it is probably Iranian, but ship-watchers suspect a few Russian barrels have snuck in, too.
Most of Russia’s crude runs through grey networks which do not recognize the price cap but are not illegal, because they use non-Western logistics and deliver to countries that are not part of the blockade. friendlier locations…More than 30 Russian trading outfits have set up shop in Dubai—some under new names—since the war started. As Western traders have withdrawn, newcomers have emerged to sell to India, Sri Lanka, Turkey and others. Most have no history of trading Russian oil, or indeed any oil; insiders suspect the majority to be fronts for Russian state firms….
For Russia, growth in the grey trade has advantages. It puts more of its export machine outside the control of Western intermediaries. And it makes pricing less transparent. Meanwhile, Russia’s sanctions-dodging will have nasty side-effects for the rest of the world. A growing portion of the world’s petroleum is being ferried by firms with no reputation, on ageing ships that make longer and dicer journeys than they have ever done before. Were they to cause an accident, the insurers may be unwilling or unable to cover the damage. Ukraine’s allies have good reasons for wanting to wash their hands of Russian oil. But that will not prevent debris from nearby wreckages floating to their shores.
Excerpts from the The Economic War: Ships in the Night, Economist, Feb. 4, 2023