Ghost Ships: Vladimir Milov explains why Putin's “shadow fleet” defies sanctions and what can be done about it

Reuters reports that Russia's oil and gas revenues surged by 41% in the first half of 2024. Putin is successfully circumventing the democratic world’s price cap on Russian oil using a “shadow fleet” of tankers to work around international sanctions. Economist Vladimir Milov explains why the “price ceiling” failed and how the West should develop better controls over transactions and supply chains. He suggests threatening sanctions against oil refiners — who, unlike carriers, cannot operate entirely in the shadows. Without action to end the activities of the “shadow fleet,” not only will the Kremlin's coffers continue to swell, but the risk of oil spill disasters due to poorly maintained tankers and cost-cutting measures on crews and upkeep will also increase.

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What exactly is this “shadow fleet”? It's not as mysterious as it sounds: Russia has established a global network of obscure shell companies that have reportedly acquired hundreds of oil tankers. These vessels transport Russian oil to markets, primarily in Asia.

The crux of the matter is this: traditional shipping and insurance companies operate transparently and face pressure from Western governments, risking sanctions if they violate the “price ceiling.”They must declare contracts for Russian oil transportation and could face severe consequences if found to be transporting oil sold above the designated price cap.

This pressure on carriers and insurers was the cornerstone of the “price ceiling” strategy. When faced with the problem of regulating transactions between Russian oil sellers and buyers in countries like China or India, the G7 group of economically advanced democracies — Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — proposed leveraging the transport and insurance sector, which is dominated by companies heavily dependent on Western regulatory systems. The assumption was that these companies, fearful of facing legal consequences in the Western markets where they earn much of their revenue, would refuse to handle Russian oil sold above the “ceiling.”

Russia's response was straightforward: they simply transferred tankers bought from “legitimate” carriers to “gray” and “black” companies registered in opaque jurisdictions. These shell companies operate outside the realm of Western regulatory pressure, as they do not participate in the open market. Their sole purpose is to transport Russian oil while evading sanctions. Insurance for these shipments isn't provided by reputable global firms, but by dubious entities.

The sole purpose of the shell companies is to transport Russian oil while evading sanctions

What are the consequences of this development? Firstly, despite offering substantial discounts when compared to global market prices, Russia is often able to export oil at well above the $60 per barrel “price ceiling.” The price assessment analytics firm Argus reports that in May-June of this year, the average price for Russian Urals crude was between $65-68 per barrel (over the same period, the price of Brent Crude mostly remained above $80 per barrel). This translates to an additional $20-30 million daily, or $7-11 billion annually in oil revenue. That's no small sum.

Secondly, the extensive use of this “shadow fleet” not only poses a significant environmental threat, but makes a major disaster — or, more likely, several such disasters — almost inevitable in the near future. These tankers are in poor condition and are poorly maintained. The extended transport routes from Baltic or Black Sea ports to Asia force oil companies to cut corners wherever possible. When asked about tanker crews, my sources in the Russian oil industry cryptically reply, “You don't want to know!” – implying they're hiring just about anyone they can from the unregulated labor market.

An environmental catastrophe is looming on the horizon

Under these circumstances, disasters are practically unavoidable. The combination of decrepit tankers, underqualified crews, and a lack of incentives to follow international shipping standards — as these shell companies operate outside any regulatory framework — creates a perfect storm. Moreover, insurance coverage from these questionable providers likely won't cover potential damages from such catastrophes.

How can we address this issue? Russia’s “shadow fleet” has exposed a glaring weakness in international maritime law, which fails to adequately regulate shipowners' responsibility for avoiding environmental risks. The recent oil product tanker disaster off the coast of Trinidad and Tobago demonstrated that when something inevitably goes wrong with a ship of dubious ownership, no one is held accountable.

An oil spill from a capsized vessel occurred near Trinidad and Tobago on February 27, 2024, reaching as far as Venezuela's Bonaire in the Caribbean Sea

However, there are potential solutions. For instance, when exporting oil through the Baltic Sea — Russia's primary export route — ships must pass through the Danish straits, inevitably entering Danish territorial waters. Denmark could potentially block their passage, an option currently under active discussion.

An oil spill in the Baltic Sea would be particularly catastrophic due to the area's low oxygen content, which would hinder marine fauna regeneration. As a result, all nations bordering the Baltic are deeply concerned about potential Russian oil spills.

All nations bordering the Baltic are deeply concerned about potential Russian oil spills

Will Denmark take concrete steps to block “shadow fleet” ships from its straits? Russian officials view this as a real possibility and are openly threatening Denmark with “consequences” in the event that Copenhagen takes action. Pro-Kremlin “experts” are even discussing such a move as a potential casus belli — a pretext for war.

Whether Putin would actually start a war with NATO over tanker access is debatable. However, NATO countries are reportedly developing plans to protect Denmark and the region from potential Russian asymmetric attacks should the situation escalate due to restrictions placed on the movements of these dangerous “shadow fleet” tankers. There seems to be a growing determination to address this fleet issue, especially given the high risk of catastrophe and the fact that European taxpayers would have to foot the bill for any damages. We can expect concrete actions on this front in the coming months.

NATO countries are reportedly developing plans to protect Denmark and the region from potential Russian asymmetric attacks

Turkey, which controls the Bosphorus — the choke point for all Black Sea Russian oil exports – could implement similar measures. However, Recep Tayyip Erdogan has been reluctant to impose restrictions on Putin. That said, a major tanker disaster on the southern export route could quickly change this stance.

How effective are Western efforts to sanction ships and companies linked to the “shadow fleet”? Honestly, it's somewhat like a dog chasing its tail. Taking action is necessary, but this does not change the fact that Russian exporters are often able to swiftly rebrand both tankers and shell companies, allowing oil transportation to continue relatively unimpeded.

A more effective approach might be to target legitimate players in the supply chain. Every deal ends with a buyer — a trader or oil refiner — who cannot operate entirely in the shadows and is therefore more exposed to the potential consequences of Western regulation. These companies should be identified and directly threatened with secondary sanctions.

Unlike carriers, oil refiners are visible market players who can be effectively pressured with the threat of secondary sanctions

We've seen the effectiveness of this approach in the mass freezing of financial transactions and business ties with companies and banks in China, Turkey, India, and the Middle East. It works for public entities integrated into the global trade and financial system. The “gray” players, however, remain indifferent — they're created solely for one-off deals and have no stake in the broader market, making them impervious to threats. Discussions on these matters with Western counterparts continue, and ideally, the strategy of pursuing “gray” players will either soon evolve, or it will be complemented by efforts to identify and pressure the “white” players who inevitably bookend each supply chain.

Overall, the West should be prepared to adjust its “price ceiling” implementation on the fly. When the scheme was introduced, the role of incentive mechanisms was overestimated — it was assumed that buyers, carriers, and insurers would voluntarily avoid Russian oil priced above the “ceiling.” That hasn’t happened, meaning a more robust system for monitoring business transactions and supply chains is needed.

Stopping Russia’s “shadow fleet” may require additional personnel, even if Western taxpayers might be resistant to hiring more bureaucrats. However, the goal of cutting off funding for Putin's aggression against Ukraine and preventing global-scale oil spill disasters more than justifies the potential costs.

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