Three-fifths of Russia’s seaborne crude exports are now being shipped by tankers not required to comply with the G7 oil price cap, according to S&P Global Commodity Insights data, making it increasingly difficult for the US and its allies to curb Moscow’s oil revenue by limiting access to key marine services.

In September, nearly 2 million b/d, or 60%, of Russian crude exports were shipped on tankers flagged, owned or operated by companies outside the G7, the EU, Australia, Switzerland, and Norway and those not insured by Western P&I Clubs, according to an analysis of tanker and insurance records from S&P Global Commodities at Sea and Maritime Intelligence Risk Suite.

Seaborne Russian oil shipments were generally covered by Western insurance before Russia invaded Ukraine in February 2022. However, Western marine services providers then began to voluntarily withdraw from the country, with an analysis showing the total share of non-Western tankers moving Russian crude already stood at 48% of total exports by November 2022, a month before the price cap came into effect.

The US-led price cap was designed both to limit revenue for Moscow and to keep Russian oil flowing to the global market. While those ships have apparently undermined its effectiveness, US government officials have argued that Russia had to divert financial resources from its war chest to build a so-called “gray” tanker fleet, designed to transport Russian oil without Western services.

“All along we had expected Russia to take countermeasures to try to circumvent the price gap,” said Ben Harris, vice president and director of the Economic Studies program at the Brookings Institution, adding that amassing gray tonnage would be one of the measures.

Based on risk consultancy Windward’s estimates, 2,452 tankers were confirmed to be or potentially involved in sanctioned trades and could operate outside the price cap as of early October, up from 855 tankers in January 2022.

The price cap does not directly target gray tankers but G7-based shipping insurance and marine service providers, alongside coalition members, have come under increasing political pressure in recent months as Russia’s main export crudes continue to trade above the $60/b threshold set by them last year.

‘Large-scale violation’
Russian Urals crude oil prices on an FOB Primorsk basis have been above $60/b since July 11, according to Platts assessments by S&P Global Commodity Insights, but nearly half of the grade’s exports were still facilitated by companies with Western links last month.

For Russia’s ESPO grade from the Pacific coast, which has generally traded above the threshold since last December, Western tankers’ share still reached 24% in September.
“There must be a large-scale violation of the oil price cap,” said Isaac Levi, an analyst at the think tank Centre for Research on Energy and Clean Air. “There is a low perceived risk of being found guilty of violating measures … The enforcement agencies perhaps do not have the capacity.”

Currently, tanker firms and insurers must obtain attestations from their clients that the barrels are sold within the threshold, but they do not need to verify them.

“Russian sellers … affiliated with Russian oil majors [and] traders likely provide attestations to shipping and insurance companies that do not reflect the actual price, which may be defined as attestations fraud,” Kyiv School of Economics said in a research note last month.

As the price cap’s effectiveness continued to be questioned, US Treasury Secretary Janet Yellen recently told the Wall Street Journal that the US would “very likely” start enforcement on Western companies failing to comply with the rules.

“My guess is that over the next three to six months, you’ll see tougher enforcement,” Harris told S&P Global. “You’ll start to see at least a handful of regulatory enforcement actions for outright fraud.”

Multiple fronts
Aside from preventing Western firms from violating the price cap, coalition members also need to constrain the gray fleet’s growth to limit Russian oil exports, according to some analysts.

“You need to do both,” said Harris, suggesting that the coalition could investigate ways to prevent ship sales to gray tanker owners.

However, doubts remain over whether the Biden administration is willing to risk higher inflation by driving out more Russian barrels from the market ahead of the presidential and congressional elections in 2024.

International crude prices have already been on an upward trajectory in recent months with OPEC+ production cuts. With the ongoing Israel-Hamas war in the Middle East, market watchers said the US could be under pressure to tighten sanctions on the major oil producer’s exports.

“The price cap has been unenforced to date,” said Jim Burkhard, head of research for oil markets at S&P Global. “We do not expect meaningful enforcement to take place if the war in Israel is seen as pushing oil prices higher.”

Source: Platts