The Daily View: Shadow boxing

WHEN it comes to sanctions disruptions, the shipping industry has long understood what politicians routinely fail to grasp; namely that any impact will be temporary and probably less effective than intended.

We started the week wondering whether the prospect of a Ukraine peace deal might ultimately see the evaporation of a shadow fleet, and if so, what that may mean for the markets. The answer is less seismic than you might think.

Essentially anything above 20 years old that has been part of the shadow fleet will not return. Any vessels below 20 years and of decent quality could theoretically return through sales to a third party, and then enrolment into “proper” insurance and classification registries.

It therefore boils down to the regulators to make up their mind if they will allow the latter to get away with not having followed rules and regulations.

Right now, those inside the UK and EU governments are shrugging when questioned what happens next. They know how quickly oil flows adapt and they are still not willing to move against the sizeable amount of EU businesses still prepared to operate in the shadow fleet.

Meanwhile, for all the talk of US sanctions on Rosneft and Lukoil cutting off Moscow’s petrodollar lifeline, the inevitable has happened and Russian firms are starting to find workarounds.

Rather than shipping directly to India, those sanctioned barrels are finding their way to market via new, non-sanctioned entities, allowing Indian refiners to keep on taking the discounted crude.

Putin’s state visit to India this week requires prime minister Modi to tread a careful line of reassuring Moscow without angering Trump, but there’s little concern from anyone in the sanctioned oil trade that the barrels will go unsold.

Russian oil trading networks are reorganising quickly, and as Goldman Sachs noted earlier this week, the Rosneft and Lukoil sanctions have barely dented the volume of seaborne crude sold by Moscow.

But at what cost? According to the Goldman Sachs analysis, the steady flow of barrels in the face of sanctions masks a far deeper financial squeeze.

Russia’s oil export revenues, measured in rubles, have plunged 50% this year, tumbling from the equivalent of 7.6% of GDP to just 3.7%, according to the investment bank’s analysis.

Even the Russian finance ministry confirms that oil and gas tax revenues have fallen 34% from a year ago, suggesting that the fiscal strain from discounting the oil is having an impact.

The sanctions game to date has not been about stopping oil from flowing; most of those savvy enough to understand have long viewed this about hurting Russia’s economy rather than stopping ships from trading.

It has now got to the stage that Russia’s shadow fleet is hugely inefficient and costing Moscow dearly. But while there is oil to be moved that also means that there is profit to be made in shipping it, making the shadow fleet ever more attractive to the owners willing to trade.

Richard Meade
Editor-in-chief, Lloyd’s List

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