Here Are the New Global Routes Followed by Russian Oil to Escape Western Sanctions.
The number of ship-to-ship transfers has exploded in recent months.
While you're living at home, strange things are happening on the world's seas. In the middle of the Atlantic, 1,500 km west of Portugal, in the Azores area, four boats disappeared from radar screens. At the same time and for at least forty-eight hours, from June 13 to 15, 2022. Their transponder - the AIS signal, Automatic Identification System, tracked by satellite - was disconnected. Three of them are flying the Panamanian flag, the last one is Liberian.
Three small tankers, the Emily S, the Merope, and the Skadi, and one large one, the Monica S, had a discreet rendezvous, reconstructed by the analysis company Kpler, in a note published on 7 September 2022. Based on its observations, it concludes that the three smaller vessels, coming from the Baltic, “transferred their oil cargoes from the Urals to the 'Monica S'.”
The Monica S then sailed east, unloading its cargo several weeks later in China. A few days later, in the same area, the Lauren II received 700,000 barrels of crude from each of the three vessels that came to meet it, the Zhen I, the Afrapearl, and the Amber 6. The latter, disconnected on June 19, 2022, reconnected on July 4, 2022, showing a 6-meter change in its draft, proof of its unloading in the meantime, Kpler explains. The Lauren II, with full tanks, arrived on August 17, 2022, in Xianren Dao, China.
“Meeting clubs” like these, tankers loaded with Russian oil have several since the beginning of the war in Ukraine and the outbreak of international sanctions. These are areas located in international waters, where anchoring is possible. In addition to the Azores, ship-to-ship (STS) transfers have been observed off Ceuta, the Spanish enclave on the North African coast, at the entrance to the Strait of Gibraltar, or towards Kalamata in Greece, where international waters are only 6 nautical miles from the coast.
STS transfers, the last step before using the Suez Canal to India and China, are carried out in full view of the public. According to an investigation by the Nikkei, in six months, 41 tankers have regularly met off Kalamata.
Ship-to-ship transfers are neither new nor illegal. But their number has exploded since February 24, 2022: the Nikkei has counted 175 operations off Kalamata, compared to only 9 in 2021. The phenomenon is the direct consequence of the gigantic reorganization of the Russian oil supply chain, which is adapting to the multiple constraints created by the sanctions. Russian oil is, in fact, subject to an embargo in the United States and Australia. It will be banned at the end of the year in the United Kingdom and the European Union (December 5, 2022, for crude oil delivered outside pipelines, February 5, 2023, for refined products).
Until then, since May 15, 2022, no service or financing can be provided to a Russian state-owned enterprise. The biggest Western players, majors, and trading companies have preferred to withdraw from a market that has become unattractive. Russian oil is still flowing. Production was close to 10 million barrels per day at the end of August 2022.
“Russian production and exports are proving resilient,” according to the International Energy Agency, which in early September 2022 revised the expected loss of Russian production from 3 million to 1.9 million barrels per day next year, once the European embargo is fully in place. “Russia is finding ways to reroute its oil supply,” said CREA (Center for Research on Energy and Clean Air) on August 24, 2022, six months after the start of hostilities.
China has become the first importer of Russian fossil fuels, ahead of Germany. India, which was not a customer or almost, buys according to CREA, 40 million dollars of Russian oil per day.
“The 1.5 million barrels per day of Russian oil that were subject to self-sanctions by European buyers have managed to find new destinations - initially mostly India, increasingly China, and other Asian countries in recent weeks,” wrote analysts at Goldman Sachs in early September 2022. “It's very inefficient, we're maximizing long hauls,” said an oil company executive.
Let's take the example of the barrels of oil from the Urals shipped from the Baltic ports, Primorsk or Ust-Luga. Their first destination (70%), before the war, was Northern and Western Europe, five days away by ship. Eighty percent of them are now going elsewhere, to Turkey, and, beyond the Suez Canal, to the Middle East, India and China.
Egypt is on the way. In August, it announced the expansion of the el-Hamra terminal, which will increase its storage capacity from 1.5 to 5.3 million barrels. The lengthening of oil routes and the application of sanctions are putting the world fleet under pressure. That's the first reason for the STS transfer epidemic: to unload cargoes from smaller tankers, Aframax or Suezmax class, onto larger ones, VLLCs (very large crude carriers).
“It's all about economies of scale. Freight rates have tripled,” Goldman Sachs wrote.
All vessels of Sovcomflot, the Russian state-owned shipowner, are persona non grata in Western ports. This is the second reason for STS. Russia uses its tankers to take its oil out of its ports, and then the loads are transferred to authorized supertankers that will deliver them to their final customer. Greek shipowners are said to carry about half of the Russian crude that goes to sea.
As a result of this great upheaval, the second-hand tanker market is booming. “25-year-old VLLCs are selling for $40 million each instead of being scrapped,” says one expert. According to EA Gibson Shipbrokers, quoted by Bloomberg, $1 billion was spent between May and August 2022 on 42 used icebreaking tankers. The buyers are mainly Chinese, as Beijing is preparing for the arrival of Russian crude oil via the northern route during the winter of 2022-2023.
Do these transactions mask more opaque operations? Experts suspect that Sovcomflot is reselling its vessels to false noses, registered in Dubai in particular, which will be able to continue transporting Russian crude without flying the flag of the pariah country. Requests for certification with the Indian maritime register are exploding. Professionals fear an unprecedented rise in the shadow fleet, which already carries a large part of the transport of long-sanctioned hydrocarbons.
“Russian producers and Chinese buyers are exploiting the same tactics used to transport Iranian or Venezuelan oil around the globe,” wrote Michelle Wiese Bockmann, an analyst at Lloyd's List, in the Financial Times.
The shipping services group BRS estimates that 268 tankers are suspected of regularly using subterfuge to evade U.S. sanctions on Iran and Venezuela. Iranian oil has its usual places of STS, towards Johor near Singapore, or off the United Arab Emirates, Oman or Malaysia. A market more grey than black.
Everyone in the business knows the tricks: boats that often change owners and flags; disconnected transponders; maritime identity numbers, in principle unique, recycled “like changing a SIM card in a cell phone,” describes Michelle Wiese Bockmann. On February 23, 2018, the U.S. Treasury Department's Anti-Corruption Services (Ofac) identified practices used by North Korea in an advisory, citing instances of “North Korean merchant vessels disguising their identities or trying to pass themselves off as other vessels, including repainting their names and IMO numbers,” which are supposed to be always visible on the superstructure. “If I ask for the signal to be disconnected, they disconnect the signal. I charter, I'm the boss,” a trader confided privately.
An old story. In the 1970s, the captain of the Dagli, chartered by Marc Rich's trading company, was asked to delete the name of the ship. The pasha's telexed response: “Under no circumstances will the name of the ship under my command be painted - stop - but I will cover it with a canvas if the weather permits. Greetings.” It was easier when satellites and their publicly available data were not around to constantly track ships.
“The mystery of the disappearing tankers,” was the headline in the 1970 Sunday Times. Ships full of Iranian oil that were supposed to sail to Gibraltar, bypassing Africa from the south during the years when the Suez Canal was closed, were returning too quickly to Iran, and empty. They actually unloaded their barrels at Eilat, t a secret 254-kilometer pipeline through Israel to Ashkelon on the Mediterranean.
For several years, Israel and Iran colluded to move oil, under Egypt's nose, with the help of Marc Rich, one of the most notorious founders of the modern trading world. International oil trading was partly born in Russia.
In the second half of the 19th century, two of the Nobel brothers (Robert and Ludwig, not Alfred) were pioneers in bringing the first barrels of black gold out of the Caucasus, in the region of Baku, where Stalin later made his first revolutionary moves. We owe them the invention of the first modern tanker, the Zoroaster, put into service in 1878.
During the Cold War, the first to seek an opening on the Soviet market was a German, Theodor Weisser, who had only known the country as a prisoner of war. He succeeded in buying a cargo of oil from the head of the Soviet export agency during a dinner in Moscow in 1954, under close supervision of the KGB. Four years later, it was Enrico Mattei, the head of the Italian company ENI, who saw “an opportunity in Nikita Khrushchev's determination to rebuild an exporting oil industry.”
Mattei negotiated an agreement with Moscow for 60 cents a barrel less than the Middle East price of just under 2 dollars. With this deal, the precursor to the construction of the Druzhba pipeline that supplies Central Europe, ENI attacked the “cartel of the seven sisters,” the nickname Mattei had given to the American majors... and provoked a crisis within NATO as well as the creation of OPEC in 1960.
Russian oil worried America. “A senator was alarmed: the Soviets want to 'drown us in a sea of oil' for their 'conquest of the world,” recounts Daniel Yergin in “The New Map: Energy, Climate, and the Clash of Nations”. Who are the bad guys today, ready to trade in a Russian oil that has become sulfurous? The biggest traders are put away from the cars.
In the weeks following the start of the war in Ukraine, the most powerful players, Glencore, Trafigura, and Vitol, all made it known that they would comply with Western sanctions. Switzerland, where their teams and often their headquarters are based, is part of the coalition. But more than that, the big traders have promised to stop all activity on Russian oil beyond the execution of their current contracts. “We ensure the settlement of operations concluded before the war. But we don't do new ones,” explained one industry player in March 2022. All of them quickly stopped their purchases on the spot market.
Rosneft had created a close relationship with its traders. After 2014 and the sanctions package triggered after the annexation of Crimea (including a ban on financing beyond 30 days), the Russian state-owned oil group asked them to invest in some of its major projects to gain access to its resource. In 2022, Trafigura had to leave behind its $1.5 billion investment in its 10% stake in the giant Arctic Vostok project.
On July 6, 2022, Volodymyr Zelensky's economic advisor put pressure on Vitol, accusing it of still being “the largest trader of Russian oil transported by sea since the February 24 invasion.” Vitol responded in a statement that it had reduced its operations by 80% since January 2022, with the remainder to be extinguished by the end of 2022, in compliance with the sanctions. Before the war, according to Energy Intelligence, Vitol and Trafigura were handling 500,000 barrels per day.
Like the Western majors, the traders have decided to self-sanction. A painful renunciation?
In the first months after February 24, 2022, the price of all commodities and their volatility exploded. “There was so much money to be made elsewhere that it was not worth taking the risk,” smiles a good industry insider. The reputational risk is far too great. Handling Russian crude can indeed expose to serious public relations difficulties. In March 2022, Shell had to justify buying cargo at a discount. In the United Kingdom, dockworkers were refusing to unload liquefied natural gas from Eusses tankers on the Isle of Grain, while in early May 2022, the Sunny Liger, a Marshall Islands-registered tanker, was driven off the docks in Amsterdam.
But the nerve of the war is financial.
The major Western banks have indeed preferred to pull the plug. Since the United States fined BNP Paribas $9 billion in 2014, no international bank has taken the slightest risk. Yet credit lines are vital for the big trading houses. You can't make twice the turnover of Facebook's parent company, Meta, without the Western financial system.
With the lengthening of the roads, the capital has to be tied up for 30 days instead of 5. The Russians are doing part of the effort. “Rosneft accepts direct payments, without a credit line,” explains a banker specializing in trade finance. “Demand is so high on world markets that we have no problem selling,” Vladimir Putin bravely claimed at the economic forum in Vladivostok on 7 September 2022.
The discounts on Russian crude oil are attracting new players. “When there is a 30 dollar difference per barrel compared to the price of Brent, and you can put 1 million barrels on a boat, it creates vocations. It allows to pay a lot of lawyers,” laughed, a little yellow, a trader subjected to the auto sanctions at the beginning of the conflict. Vocations are being created. Harold LeClair Ickes, Franklin D. Roosevelt's Secretary of the Interior in charge of oil during World War II, said “an honest and scrupulous man in the oil business is so rare that he should be made a museum piece.”
A very exaggerated statement, but, indeed, the unscrupulous are out there. Previously marginal players like Coral Energy, founded in 2010 in Dubai by an Azeri Oxford graduate, have seen their business explode, while dozens of new middlemen have appeared on the market. “We don't know where they're coming from,” smiles an industry expert.
The Petro-Logistics company keeps an up-to-date list of new intermediaries, the “middlemen,” as they say in the trade, who are now taking Russian oil on the market. It counts 28 of them. Most have innocuous names: Alvari, Avis Trading, Euronova Energy, Tejarinaft, United Maritime Logistics ... Others have had their moment of fame, like Bellatrix, based in Geneva, spotted with its name borrowed from a witch character (wicked) in Harry Potter. Nord Axis had its 15 minutes of fame when it bought its 10% stake in Vostok Oil from Trafigura. This is just one example of the many suspicions that Russian companies, especially Rosneft, have created out of thin air.
What most of these companies have in common is that they are very discreet about their shareholding and are registered in accommodating places such as Hong Kong or Dubai. Today, “you can hear Russian on the street in Dubai,” says one expert. Litasco, the trading arm of the Russian company Lukoil, has moved its desk of 35 Russian oil traders, previously based in Switzerland, to Dubai. The Russian system is reorganizing. Including supplying its facilities.
In May 2022, Italy imported four times more Russian crude than in February 2022. Important flows arrive in Sicily, to the refinery of Isab, owned by Lukoil since 2008 in Augusta or in Trieste, an entry point to the European refineries in which Rosneft is a shareholder (Germany has just decided to seize those on its territory). Refined products can be mixed in any way. When a product is “substantially transformed, it loses its origin,” explained Shell boss Ben van Beurden in spring 2022.
“Approximately half of the oil products that leave the major Indian refineries receiving Russian oil are re-exported to other countries, including the United States and Australia where an embargo is already in place,” CREA said in its August 24, 2022 memo.
“Take the example of Iranian oil under sanctions. It's still flowing and everyone knows it. It is going to the Chinese 'tea-pots', the unofficial refiners,” recalls a sector player. “Russian oil is following the same path, but on a larger scale.”
China has always been a big importer of Russian oil, especially from Siberia. For India, it is newer and openly opportunistic. A true Indian bridge has formed between Russia and the countries that sanction it, Petro-Logistics argues in a note. From April to June 2022, there was an average of 583,000 barrels per day of Russian oil imports compared to 36,000 a year earlier.
“If India is financing the conflict by buying Russian oil, then tell me: is it only Indian money and Russian oil exported to India that is financing the conflict? And not the Russian gas sent to Europe,” retorted Foreign Minister Subrahmanyam Jaishankar on June 3, 2022. Russian crude is flowing to the refineries of Reliance Industries, or to the port of Vadina, where it feeds the Nayara refinery, in which Rosneft holds a 49% stake.
Other more surprising destinations have appeared, such as Saudi Arabia. At the same time, the kingdom does not seem ready to leave its market share in the Indian and Chinese markets to the Russians. Neither is Iran, which, having failed to reach an agreement to lift sanctions, has little choice of outlets. “The Russians are destroying the market,” lamented Hamid Hosseini, an exporter representative, recently quoted by the Wall Street Journal. Does this augur well for a price war to avoid filling Vladimir Putin's coffers? We are not there yet. “Better to stay buddies with the Middle Easterners,” concludes an industry executive, referring, in particular, to Mohammed Ben Salman's visit to Paris or his meeting with Joe Biden.
The entry into force of the total embargo in the European Union is approaching.
Will the reorganization of the flow of Russian black gold, which has been taking shape for six months, allow the complete redirection of the 3 million barrels per day that, before the war, took the road to the West? “The world cannot live without these 3 million barrels,” says one expert abruptly. And the West, led by the United States, is not prepared to put up with a further surge in oil prices to $150 or $200 or more, which would create an additional inflationary spike.
In this context, the arsenal of sanctions is evolving, not without ambiguity. On July 22, 2022, the European Union amended its system: “To avoid potential negative consequences for global food and energy security, the EU has decided to extend the exemption from the prohibition to engage in certain transactions with certain state-owned companies (regarding) the transport of oil to third countries,” the statement said.
Translation from a major trader: “This latest draft allows European companies to resume purchases of oil and refined products to the world. In other words, export contracts that became illegal in May 2022 are possible again!”
The United Kingdom also lifted its foot: “An earthquake was expected at the end of July 2022. London was supposed to ban the insurance of all cargo ships, but in the end, the measure is limited to oil destined for the UK alone,” explains an expert. The future of Russian oil tribulations will depend on the finalization of the price cap that the US wants to impose on the G7. The idea is that Russian crude can only be marketed at a certain price, probably set between the cost of production and the pre-war price, i.e. between 40 and 60 dollars.
“Our approach is guided by the principle that Russian oil should continue to reach the world market, provided that buyers and service providers comply with the ceiling in good faith,” said Wally Adeyemo, the U.S. Assistant Secretary of the Treasury. But who would ensure compliance with this new rule?
European insurers, mainly British and Norwegian, most of them affiliated with Lloyds of London, could play this role, providing coverage only for tankers and cargoes sold at the cap price. Insurance is essential, for example, to sail through the Suez Canal or to enter most of the world's major ports. “But we only declare to the insurers once a month,” says a trader, “I don't see how this could work, and the banks are no better equipped.”
An alternative would be for licenses to be granted to oil companies, traders, and shipowners to continue moving Russian oil shipments. This would be a way for Western companies to get back into a game that is out of their hands. Rosneft, for example, recently signed a contract with refiner Indian Oil Corp. that runs until 2028 and in which the Russian oil company takes over delivery and insurance.
“They think they have found the martingale with the price cap. But you can build the most beautiful cathedral of sanctions, it may not work. Russia is sovereign, it chooses its buyers,” comments an expert in the sector. The idea of a price cap has already provoked a strong reaction in Moscow.
Gas deliveries through Nord Stream 1 were stopped the day the proposal was approved at the G7. And in Vladivostok, at an economic forum, Vladimir Putin did not mince his words: “We will no longer sell gas, oil, coal, fuel oil. We will no longer supply anything.”
However, the objective is not that. It is that Russian oil continues to flow. A desire that makes a trader say that “in the event of a price ceiling, the European embargo no longer makes sense.” A logic that a European negotiator is not ready to hear: “Other countries must be able to access the resource. But we will not give money to Russia.”
Some reading
India Is Beginning to Lose Patience and Is Urging Vladimir Putin to End the War in Ukraine. The worst thing for New Delhi would be a Russia so weakened and isolated that it would become subservient to China, India’s rival.
Putin Has Passed the Point Of Not Return — The Security and Stability of the World Mean Moving On to the Post-Putin Era. There is nothing to negotiate with Putin. Russia gambled on force and lost.
The Dollar King Crushes Everything — Are We Heading for the Same Situation As in 1985 With the Plaza Accord? The hypothesis remains remote, but some already remember this major historical episode of the 80s.
How a Wall Street Trader Manipulation Made the World’s Most Expensive Deli at $113M Market Cap. For the Deli gang, the cafeteria of a federal prison is on the horizon.
Two Years After Trump’s Threats, Silicon Valley Tries to Drive China’s TikTok Out of America. Worried about the success of TikTok, Meta leads an anti-TikTok campaign full of bad faith and hypocrisy.