EU enters unknown waters as a result of the fight against "shadow fleet" shipping Russian oil

The EU intends to take action against a fleet of ageing tankers, the most of which are Greek-owned and transporting Russian oil around the world while contributing to the Kremlin's coffers.

But fighting the so-called shadow fleet is more difficult than anticipated, and the EU is becoming divided in the process.

According to a draft of the 11th round of sanctions the EU wants to impose on Russia for its involvement in the conflict in Ukraine, the Commission is recommending a ban on ships from entering European ports if they are thought to be carrying Russian oil illegally.

Brussels was optimistic it would receive support from every nation when it announced the most recent set of sanctions, but that hasn't happened. According to European diplomats, the attempt has enraged nations with sizable merchant marine fleets like Cyprus, Greece, and Malta. A request for comment received no response from any of the nations.

According to Byron McKinney, a director with S&P Global Market Intelligence, "Greek and Cypriot shipping is well-represented within Russian oil shipments today, with some Maltese involvement as well. Most of their fleets are operating in the normal way, but some of those vessels are involved in suspicious activity as well."

He calculated that there are roughly 443 tankers, the majority of them Greek-owned, operating as part of the hazy fleet delivering Russian crude.

At a press conference on Thursday in Berlin, Cypriot President Nikos Christodoulides responded to a query by saying that if Brussels wants his country's cooperation, it would have to shoulder the burden of any financial losses brought on by additional sanctions.

He added that sanctions enforcement is also a huge worry "because some countries choose not to implement them," adding that where we have expenditures on European business, "the EU has to intervene so that we can support these areas."

A price ceiling imposed by the G7 in December governs the legality of moving Russian petroleum; importers must demonstrate that they are adhering to the $60 per barrel cap in order to employ Western shipping and insurance. All imports of Russian crude oil transported by sea are prohibited by separate restrictions imposed by the EU.

The price cap must be adhered to, according to Craig Kennedy, a researcher at Harvard University's Davis Center for Russian and Eurasian Studies. "If you're a tanker relying on any major European or G7 insurer, you've got to comply with the price cap," he added. "For example, there are many Greek ships lifting every day from Russia, and well over half of all the ships loading in Russia are insured and likely financed by Western banks and insurance groups. But all of them are getting that piece of paper that says this cargo is under $60. In most cases today, but not all, that is probably accurate."

The price cap's objective is to financially sanction Russia without upsetting the oil markets around the world. This month saw a record high for the nation's seaborne oil exports, which increased 10% from early April to an average of 3.7 million barrels per day. According to the Russian Finance Ministry, oil and gas income were 45% lower in the first quarter of this year compared to the same period in 2022.

However, there is mounting proof that supplies are being sold over the cap.

According to the Kyiv School of Economics, in the first three months of the year, prices at the Russian port of Kozmino on the Pacific Ocean averaged roughly $73 per barrel.

These costs "point to sanctions violations and underscore the urgent need for more rigorous enforcement," the report concluded.

"We’re seeing some countries actively profiting off the opportunity to purchase cut-price Russian oil," a senior Commission official said.

This is how it goes.

The Russian oil price cap is being disregarded by some investors, who are taking advantage of the emerging market niche to buy cheap tankers that are over 15 years old. These shippers turn to dubious new companies that might not have the capital to pay out in the event of a catastrophe because they are excluded from major insurance markets.

"Let’s say one of these guys hits ice and leaks oil along the coast of Sweden, and you call up their insurance company and it’s some low-transparency, no-name group operating out of a shell company somewhere," Kennedy said. "Can you trust they’ll be able to pay for the clean-up?"

Western nations worry that ships may turn off their automatic identification systems (AIS) in an effort to conceal the genuine origins of their cargo. They can sail without being seen, but it increases the possibility of crashes.

In order to make it harder to trace the oil's origins, there are reports of ships moving crude to other ships in the middle of the ocean.

The EU desires stricter laws.

"Given the sharp increase in deceptive practices, and related environmental risks, by vessels transporting Russian crude oil and petroleum products in an effort to circumvent Union restrictive measures," the draft sanctions package recommends that the EU should block "access to the ports and locks of the Union to vessels that are suspected or found in breach of the ban on importing seaborne Russian crude oil and petroleum products into the Union and of the G7 agreed price cap by engaging in ship-to-ship transfers." 

Similar rules apply to ships that turn off their AIS transponders. Nevertheless, the most recent version of the sanctions package, dated May 24, makes it clear that the "prohibition does not apply in circumstances where the navigation system can be legitimately turned off."

However, it is difficult to stop the Russian crude trade that is shattering price caps.

Other EU nations, including France, Germany, and the Netherlands, in addition to those with sizable fleets, have voiced concerns during the sanctions negotiations, a European official from a third country said on the condition of anonymity.

Speaking under the condition of anonymity to discuss the delicate negotiations, another diplomat from a European country with a significant maritime industry said, "We’re not opposed to these measures, but we need to understand how they would work."

"Identifying which vessels are involved is very difficult," they claimed. "There are instances where ships can legitimately switch off their AIS, so you can’t automatically say if they do that, they’re transporting Russian crude. So there is no agreement at the moment and there will have to be a new draft," they said.

The proposed reforms have the industry on edge as well.

"Regulators need to be aware of the risk that by prohibiting certain activity, the demand to purchase, sell and transport that cargo isn’t going to go away," said Daniel Martin, a partner at international law firm HFW, which has a significant maritime practice. "There will always be those who look to circumvent restrictions in other ways, which will carry its own risks."

Greek and Maltese shipowner organisations as well as the European Community Shipowners' organisations declined to comment on the record.

Taking on ship-to-ship transfers and vessels that go offline can be dealt with, but only if there is adequate political will, claims S&P's McKinney.

That presents a challenge. He said that oil transfers in the Black Sea are "hugely involved" with Greek-owned ships.

"If you start to clamp down on that, then obviously it would affect Greek shipping the most out of any other flag state within the EU. So I can imagine there would be some pushback there," he remarked.

By fLEXI tEAM