The Aakhya Weekly #59 | How Russian Oil Exports Work
In Focus: From Russia with Love Shadow Fleets
It has been one year, five months and four days since Russian troops marched into Ukraine. Countless lives have been lost on a brutal, futile campaign, fought along the heaps of rubble that dot the carcasses of once lively cities.
Far from the killing fields of Eastern Europe, however, is another furious battle, fought in political capitals and corporate boardrooms across the world. This is the economic war that the Western world wages against Russia, seeking to starve it of foreign trade as punishment for its militarism. There are now over 13,000 different sanctions against Russia – making it the most heavily sanctioned country in the history of the world.
At least in the short term, the sanctions seem to have left the Russian economy relatively unscathed. The Russian economy shrank by a mere 2.1% last year, and may actually grow, slightly, in 2023. Middlemen in neutral countries have carved channels through which Western goods reach Russia. And Russia remains a behemoth in global energy markets, selling as much oil as it did before the war.
Oil is Russia’s biggest source of revenue. Today, to many, it is Russian oil sales alone that have helped it evade Western sanctions. India and China are routinely painted as its financiers, as though callously undermining Western measures for a quick buck.
Curiously, however, the sanctions on Russian oil are working exactly as intended.
Understanding the price cap
What most people miss is that Western sanctions never intended to ban Russian oil from world markets. Russia is the third largest supplier of oil in the world, accounting for around 8% of the world’s oil supply. Pulling Russia out would have dealt global oil markets a deep blow. Oil trade is controlled, to a great degree, by an international cartel that coordinates to fix prices. A sudden fall in supply could have sent prices soaring – causing severe inflation across most of the world. The world, simply, needs Russian oil to run.
The West’s challenge, instead, was to ensure that Russia kept selling oil, while finding a way to still hurt it. It did so through a unique new instrument – a price cap.
A price cap is an almost comically odd foreign policy tool. It is a decree that another country cannot sell something above a certain price, even if it finds a willing buyer. This should be impossible to enforce.
In essence, a coalition of the G7 and its allies decided that Russia could not sell crude oil at a price higher than $60 a barrel. In subsequent periods, Brent Crude, the global benchmark price for crude oil, has hovered at between $20 and $40 above this cap. It could do so because of the bloc’s dominance over two industries – shipping and insurance. Greek ships alone carry about 70% of the world’s crude oil, for instance, while companies from the coalition account for more than 90% of maritime insurance services. Russia needs ships to sell its oil, and these ships need insurance to access most ports and canals. It is coalition shipping and insurance companies that would suffer if they permitted Russia to break out of this price cap. These companies, therefore, became the enforcers of the West.
The price cap was designed for those outside the coalition to use as leverage against Russia, buying its oil for cheap and hurting its revenues, while refining and selling the oil to the rest of the world. This would ensure that the global oil supply remains stable, while profits that once went to Russia would be lapped up by other intermediaries.
The battle for tankers
Coalition ships can still service the Russian market, as long as the price cap is not breached. American and North European companies have pulled back regardless, fearing reputational harm. Greek fleets and Swiss traders cashed in on the vacuum they left behind, however, raking in millions.
The importance of Western fleets is slowly declining, however. Serving the Russian market is a massive commercial opportunity, however, and it has unleashed a frenzy for aging oil tankers, that would otherwise have been scrapped, amongst countries outside the coalition. These ships are being bought up covertly, by entities hidden in jurisdictions like Dubai, Hong Kong and Cyprus behind many opaque layers of shell companies. More than one hundred ships, for instance, were sold to undisclosed buyers in the year 2022. Russia is also spending on creating insurance systems to act as an alternative to Western maritime insurance. Oil exports from the country are slowly shifting to the ‘shadow fleet’ of around 600 ships that is emerging, which is immune to the price cap. Russia’s own tanker companies, meanwhile, are moving base to jurisdictions like Dubai, in order to escape Western sanctions.
Similar shadow fleets had formed around Iran and Venezuela when they were hit by sanctions over the last decade. They ply old, janky ships purchased second-hand, employing a variety of clever tricks to get around sanctions – from changing their name and nationality mid-voyage, to broadcasting fake locations through their transponders, to making ship-to-ship transfers of oil in the international waters. Many ships from these older shadow fleets, in fact, have switched to the Russian market.
Even though 80% of the world’s shadow fleet now services Russia, it is still not nearly large enough to take up all of Russia’s oil, however. Moreover, Russian ships have to now travel much longer – to distant ports in India and China, rather than nearby locations like Finland that they serviced before the war. The country’s shipping requirements have quadrupled as a result. The ships are old; they move slowly and are prone to being held up by authorities. Owing to these difficulties, without Western ships, Russia would be unable to ship around 1.5 million barrels of oil per day. Russia also continues to be hit by the Western stranglehold on insurance, with more than half of its exports still insured by Western companies.
The impact on Russia
Where does this all leave Russia?
The truth is that we don’t quite know – not really. Global markets are the only authoritative source we have for oil prices. And ever since the sanctions have come into play, Russian oil has gone underground.
Our best estimates come from conversations that entities like S&P have with market participants. Because of the complexities of how oil is priced, these require a heavy degree of guess-work. The prices we finally see are distorted, notional and hazy.
With all these caveats, however, it does appear that the sanctions have found their mark. Russian ‘Ural’ crude oil appears to consistently have traded at a discount of up to $40 against the Brent Crude. Its earnings from fossil fuels have been declining by around 17% every month. Between January and March 2023, the Russian Federal Government’s oil revenues had declined by as much as 40%, despite an increase in the number of barrels it exported. The sanctions are costing the country as much as $180 million a day, by some estimates. The evidence indicates that while Russia’s oil revenues were buoyed for a year after the sanctions, this year, the sanctions have begun to pinch.
Having one’s cake and eating it too
The price cap on Russian oil is an example of that remarkable rarity in the policy world: the ability to have one’s cake and eat it too. It presents a solution to a seemingly impossible problem – how can one hurt Russian oil revenues without disturbing its exports. This, it has achieved in spades.
The benefits that countries like India derived from purchasing Russian oil were baked into the system by design. Indeed, they were foundational to the plan. Indian refiners purchase Russian oil, and sell refined fuel in global markets. Much of this refined fuel – no longer considered Russian in origin - makes its way to the West itself. Russia has an incentive to sell more oil to make money despite the lower prices, keeping the market well supplied with cheap oil.
Meanwhile, concerns about the discount grow in Kremlin. In a year where Russia has ramped up military expenditure to pursue its war, it has found its coffers shrinking. Even the Russian Prime Minister, Alexander Novak, described them as “the main risk”.
Top Stories of the Week
MeitY introduces the Digital Personal Data Protection Bill, 2023
Minister for Electronics and Information Technology Ashwini Vaishnaw table the Digital Personal Data Protection Bill, 2023 (DPDP Bill) in the Lok Sabha on Thursday. While there were questions raised at the beginning about the bill being introduced as a financial bill under Article 117 of the Constitution, the Minister eventually clarified that the bill is not a money bill and that all issues raised by the Opposition will be addressed during the debate in the House.
The DPDP Bill is based on six principles governing the data economy: (a) lawful collection and usage of personal data of Indian citizens; (b) collection of data for legal purposes and safe storage of data until that purpose is served; (c) minimisation of data collection based on relevance and pre-defined purpose; (d) accountability for the digital personal data of citizens; (e) accuracy of data; and (f) fairness, transparency and equity in the rules for reporting data breaches.
While the latest draft of the DPDP Bill (and indeed, there have been many drafts of this Bill in recent years) is an expansion from its predecessor which was released in November 2022, the DPDP Bill continues to ensure broad exemptions for the Central Government and its agencies based on considerations like security of the State, maintenance of public order, and friendly relations with other countries. The Government also has the power to issue a 'negative list' of countries where processing of Indians' personal data shall be prohibited - a big reversal from the 2022 draft which prohibited data transfers abroad generally except to trusted geographies. Penalties for breach are as high as Rs. 250 Cr., with platforms facing possible blocks in India in case of repeat violations - a significant change from the previous draft. The bill also separately classifies “significant data fiduciaries”, based on factors such as the volume of data processed by entities, their impact on public order, and so on. Lastly, the DPDP Bill looks to set up a Data Protection Board, an adjudicatory authority to decide on disputes under the bill and to hear privacy-related grievances.
Flurry of bills passed in Parliament
The latest monsoon session of the Indian Parliament witnessed the passage of significant bills that brought about substantial changes in various sectors.
The Cinematograph (Amendment) Bill, 2023 was passed by the Rajya Sabha with significant changes to the existing Cinematograph Act, 1952. The new amendments introduce age-based certification for films, including three new categories under the 'U/A' category: U/A 7+, U/A 13+, and UA 16+. Film certificates will now be perpetually valid throughout India. The Bill also addresses film piracy, proposing jail terms and fines for unauthorized recording and exhibition of films. Additionally, the CBFC will be empowered to issue separate certificates for films meant for television or "other media," but the mention of OTT platforms remains unclear. Minister Anurag Thakur has recently discussed self-regulation with OTT players under the Code of Ethics under the IT Act.
The Biological Diversity (Amendment) Bill, 2023 has been passed by both houses of Parliament and aims to provide benefits to tribal and local communities by simplifying processes and promoting Ayush and Ayurved. The amendment widens the scope of access benefit sharing with local communities and encourages the cultivation of medicinal plants. It also decriminalizes biodiversity offenses to reduce fear among stakeholders for effective compliance. The bill simplifies the patent application process and aims to create a conducive environment for research and investment. The legislation faced concerns from a joint committee but was eventually passed with the inclusion of their recommendations.
Amidst strong protests from the Opposition, Parliament passed the Government of National Capital Territory of Delhi (Amendment) Bill, 2023, in the Lok Sabha to replace an existing Ordinance concerning control over Delhi services. The Bill grants the Delhi Lieutenant-Governor final authority in the transfer and posting of officials within the Delhi government. This move comes following a Supreme Court ruling on 11 May that previously gave the Delhi government control over administrative services, except for police law and land matters, in the absence of any legislation to the contrary. Earlier, a May 19 Ordinance had been introduced to establish a governing body for the transfer and posting of Group-A officers in Delhi. With the new Bill, restrictions preventing the Delhi Assembly from enacting laws related to 'State Public Services and State Public Service Commission' are removed. It explicitly states that the Lieutenant-Governor will have control over bodies set up by an act of parliament. This Bill has sparked controversy and heated discussions on its potential impact on the governance structure in Delhi.
A Few Good Reads
Dr. Prabhash Ranjan provides his expert take on reform of arbitration law in India.
Can India help broker peace between Russia and Ukraine? Happymon Jacob pens an intriguing analysis on the frontiers of New Delhi's diplomacy.
David Brooks argues that much of Trumpism can be explained as a backlash against an insular professional elite.
Aatish Bhatia, Claire Cain Miller and Josh Katz recap research on the impact that wealth has on admissions to elite colleges.
Jason Crawford writes about the ‘flywheels of progress’.