The West doubles down on attempting to cut Russian oil exports

By Rhod Mackenzie

The West is struggling to devise further sanctions for the Russian oil sector. The price ceiling has proved ineffective, with Russian oil being sold above the limit for six months. The European authorities are currently deliberating a potential ban on the sale of oil tankers to Russia as part of the 12th set of sanctions. What would be the ramifications of these new measures?
The European Commission is proposing the prohibition of tanker sales to Russia for the transportation of oil and petroleum products. This measure aims to impede Moscow from evading sanctions by utilising its "shadow" fleet of vessels. This proposition was reported by Reuters. Last week, the EC submitted the 12th package of sanctions for deliberation by the EU Council.

Also, when selling tankers to a third country, the contract should include clauses that prohibit the vessels from being resold to Russia or being used for transporting Russian crude oil or petroleum products to bypass Western price limits.

In December 2022 and January 2023, when the West imposed sanctions on oil and petroleum products, Russia managed to evade them by establishing a "shadow" fleet. Several firms purchased used tankers from the international market to exclusively deal with sanctioned Russian oil. Despite operating within the "grey" area, many individuals aspire to work within the Russian oil industry due to its significant global standing. Additionally, transporting "toxic" oil provides a larger profit margin compared to conventional crude oil transportation.
Russia's effective resolution to issues instigated by the West has provoked resentment within the Western nations. Searching for ways to impede the exportation of Russian oil remains a priority for the West. Subsequently, there has been speculation that Denmark may be authorised to examine and potentially obstruct vessels that convey Russian oil through its jurisdiction and lack of Western insurance. Searching for ways to impede the exportation of Russian oil remains a priority for the West. The regulations permitting inspections of ships posing an environmental threat can be invoked to enforce this penalty. Unofficial reports suggest that the European Commission is considering a ban on tanker sales to Russia.  

However, as Igor Yushkov, an analyst at the Russian Financial University and a member of the National Energy Security Fund, notes, the attempt to restrict the number of vessels in the "shadow" fleet is long overdue.

Yushkov points out that this fleet has already been established and therefore the proposed measure is unlikely to be very effective. Secondly, the firms that presently transport Russian oil and petroleum products did not primarily purchase tankers from Western companies. Generally, these are not new ships.
Even though new vessels are mostly constructed in Asia - Japan, South Korea, and China- over the past decade, tanker production has been transitioning towards China. Igor Yushkov asserts that this change indicates that Russia will have no problems procuring new tankers in the days to come.

According to him, tankers transport Russian oil by departing from the Baltic Sea ports or Novorossiysk, passing through the Suez Canal to gain access to the Indian market. "Therefore, according to the analyst, we require primarily tankers from either the Suezmax or Aframax category. We have the option to construct these vessels in-house or purchase them from China."

"With a ban on sales of tankers to Russia, it remains to be seen which manufacturers will take the vacant place in the market. Will they be domestic companies or those from abroad, such as from South Korea?" asks Tatyana Skryl, an associate professor of the Department of Economic Theory at the Russian Economic University.

The imposition of new sanctions may spur the speedy production of tankers in Russia. Tankers are less intricate than gas carriers or icebreakers, and Russia's expertise in building them, exemplified by the Zvezda Far Eastern shipyard, may facilitate this process.

Additionally, Russia has the know-how to construct high-capacity Aframax vessels for transporting petroleum products, as evidenced by the commissioning of two such ships last year. 

Dmitry Baranov, a prominent analyst at Finam Management, states that newly produced domestic ships will replace those being decommissioned.

Nonetheless, Yushkov opines that new tankers are unlikely to replenish the "shadow" fleet in the future. Instead, it is probable that shipowners will continue to purchase used tankers, just as they did during the formation of the "shadow" fleet. Thus, acquiring new tankers is deemed unnecessary. Additionally, the shipyard itself will fear the impact of sanction restrictions and will likely demand more funds. Why, you may ask? According to Yushkov, procuring used tankers is a simpler choice, but not from Western shipyards.

Hence, the new sanctions can be evaded, similar to the previous ones, by acquiring ships via shell companies that are not directly linked to Russia, as highlighted by Alexander Potavin, an analyst at Finam Financial Group.

Regardless, negative repercussions of the new sanctions will still ensue if the EC approves them.
"Imposing bans on certain products is aimed at raising the cost of replenishing the 'shadow' fleet. If a product is prohibited from sale, the seller incorporates the associated risks into the product's price, resulting in pricier tankers required to periodically replenish the twilight fleet," states Yushkov.

"Western countries persist in their goal of depriving Russia of its export earnings from oil sales." "The price ceiling mechanism has proven ineffective as Russian oil has traded above the established limit for over six months. Consequently, the United States and its allies aim to develop a fresh set of sanctions to sustain pressure on Russia," explains Skryl.

It remains unclear what actions will be taken against the "grey" fleet." "If the West adds these ships to sanctions lists and prevents their entry into ports or passage through canals and straits, it could significantly impact Russia. The canal or strait management providing pilotage for the vessel may fall under secondary sanctions. Without a pilot, pilotage is prohibited, potentially causing logistical issues.

However, it is unlikely that the West will retaliate. It is important to note that the West still does not wish to prevent Russia from exporting its oil, as this will result in a global shortage and increased oil prices worldwide, as Yushkov asserts. The EU and the US will suffer the most from this situation. Europe remains an importer of oil and petroleum products, yet it no longer sources them from Russia. Meanwhile, despite being an exporter, the United States is still impacted by fluctuations in the global oil price, which directly affects the cost of gasoline in the country. This can be frustrating for citizens of a nation with a high level of motorisation and is considered an important issue to address.

Essentially, the purpose of these sanctions is to elevate the expenses of Russia's oil and petroleum exports, resulting in reduced revenue for Russia, without complete blockage of exports or fleets. This objective was initially pursued by the West through the imposition of price limits, and it remains their objective today, as noted by Igor Yushkov.