EU sanctions: how will the latest package of measures against Russia affect shipping?

THE latest package of sanctions measures unveiled by the EU on Friday contains several significant shifts in sanctions policy that will both directly and indirectly affect shipping markets.

Adding another 105 vessels, alongside 14 individuals and 41 entities, represents a continuation of previous designations and circumvention tightening, but beyond the growing lists there are more notable changes to the oil price cap and the approach to shutting down the facilitating networks behind the shadow fleet*.

Oil price cap implications

The headline policy shift in this 18th package of EU sanctions is a lower price cap on Russian oil; a move designed to shrink Moscow’s energy revenues without disrupting global markets by severing Russian supply entirely.

Following a 90-day transition period, the current $60 per barrel price cap will be reduced to $47.60 and the new “dynamic” approach from the EU ensures regular revisions to that price which will remain 15% below average international oil prices.

With no show of support from the US, the EU and UK have effectively fragmented what was previously a largely unified G7 approach, albeit with significant differences in appetite for enforcement.

Previous rounds of EU sanctions had a negligible impact on the tradability of the target vessels or the flow of Russian crude. But the new dynamic price cap has the potential to disrupt the balance between the shadow fleet and the European trading fleet that had previously been carrying price cap compliant Russian cargoes.

Those, largely Greek, owners have been happy to carry Russian crude only when it trades below the price cap, to remain in compliance with EU/UK/G7 laws. But with the new cap set to take Urals around $20 per barrel below Brent, against today’s prices, these owners will likely have to exit the Russian trade by mid-October if they want to remain compliant.

According to estimates from Oil Brokerage, that will affect a “swing fleet” of around 60 aframaxes and 35 suezmaxes of capacity, once ballast legs are factored in.

“Over the next few months, increasing numbers of swing fleet vessels will migrate to the mainstream trades,” said Oil Brokerage global head of research Anoop Singh.

The reverse migration from mainstream to shadow trade at this scale will be relatively difficult and time-consuming, even with a 90-day window baked into the EU rules.

“Precedence shows Russia has lost crude output to the Ofac-induced tonnage squeeze from six months earlier this year. That loss in Russian crude exports, was broadly positive for VLCCs as the carrier fleet for replacement crudes. Therefore, we expect Russian crude exports to get disrupted as we near October,” said Singh.

A shadow fleet flag shake-up

While the EU’s previous packages have targeted specific facilitators of the sanctioned shadow fleet vessels, the inclusion of Intershipping Services LLC, the UAE-based company behind the Gabon and Comoros ship registries, signifies a more robust approach that comes with implications.

This is the first time any sanctioning body has targeted a company behind a flag registry and while it is the company rather than the ships they flag that are designated in these new sanctions, the impact remains much the same. If the entities behind the ships registered by Gabon or Comoros continue to make payments to Intershipping Services, they will be themselves in breach of EU sanctions, which comes with operational complications that most will not want.

While Gabon had already seen an exodus of tonnage to other shadow fleet-friendly flags in recent months, the designation is expected to spark another round of flag-hopping away from Comoros, which is now home to 118 sanctioned vessel following the latest round of EU designations.

The problem for the EU is that there is now a thriving market for alternatives, including a growing number of entirely fraudulent registries taking in sanctioned ships that have moved from other flags.

While this initial warning shot to the companies behind flag registries will no doubt be taken seriously by the companies themselves, the prospect of more designations to follow will only increase the speed at which flag hopping occurs without additional restrictions tackling such moves.

A warning to the flagless Baltic fleet

When the shadow fleet tanker Blint (IMO: 9293002), then named Jaguar, sailed through the Baltic in May with no valid flag registration, it sparked a series of events that saw Russia scramble fighter jets in its defence as Estonia forces intercepted it. What has followed since has been an uneasy stand off between the Baltic states routinely demanding to see passing shadow fleet paperwork, but with no clear indication what those checks result in. The latest sanctions suggest that the strategy is to go behind the ships themselves and tackles the facilitating network of companies and individuals behind them.

In this latest round the EU has designated several brass plate entities associated with Blint, in addition to the master of the tanker. These sanctions hit the Hong-Kong registered owner of the tanker, Zhu Jian Shipmanagement; the Mauritius-registered owner of the tanker, Sapang Shipping; and the Mauritius-registered provider of corporate and trust services behind the tanker, Redbird Corporate Services.

While the designations are unlikely to further complicate the operational exploits of a tanker that has swapped identities, flag and ownership several times already since this incident, the statement of intent from the EU to hit the network behind such vessels is likely to be carefully watched.

Whether it dents the current flow of shadow fleet ships, often without any flag registration flowing through the Baltic, however, remains to be seen. On Monday there were at least three tankers without a flag heading through the Baltic.

Will EU sanctions dampen Indian refiners’ appetite?

Both the Indian government and Russia’s biggest oil producer, Rosneft, were predictably aggrieved by the targeting of Nayara Energy in the latest sanctions package.

Rosneft, which holds a 49.13% stake in Nayara that it has been looking to sell, asserted that these sanctions threaten India’s energy security and could negatively impact its economy.

But in terms of shipping impacts, the mainstream VLCC fleet could potentially lose tonnage to the shadow fleet if Nayara looks for non-EU/UK insured tonnage to sustain non-Russian crude imports. The company imports some 100,000 barrels a day of mostly Iraqi crudes, according to Oil Brokerage data.

But the move is unlikely to dampen Indian refiners’ appetite for Russian crude beyond the volumes that are likely to be disrupted by a tonnage squeeze.

Unless the US also steps up to enforce the lower price cap, the overall flow of Russian oil into India is unlikely to be affected.

India’s private refiners import 1.1m barrels a day of Russian crude. They export approximately 250,000 barrels a day of diesel and jet fuel to the EU and UK markets.

“Their purchase mode, on a delivered basis, makes them immune to the EU’s shipping sanctions,” said Oil Brokerage’s Anoop Singh.

“Theirs is a commercial decision. With a ratio of more than four to one between the import of Russian crude and EU-bound CPP products, the trade-off will be to remain fully engaged with Russian crude.”

The same calculus applies to Turkish and Chinese buyers, each of whom receives crude on a delivered basis.

Potential push back from China and India?

The latest package of sanctions continued recent designations of third-country operators, notably sanctioning several more UAE-registered entities. However, the targeting of two Chinese banks and five companies based in China was sufficient to prompt a response from Beijing.

According to a Bloomberg report, an official statement from China’s Ministry of Commerce on Monday complained the sanctions “seriously harmed the trade, economic and financial ties” and that it would take necessary steps to “safeguard the legitimate rights and interests of Chinese firms and financial institutions”.

It’s the first time that Chinese banks have been added to the European sanctions list since the Russian invasion of Ukraine in 2022.

India’s government was similarly nonplussed by the inclusion of Nayara Energy on the sanctions list.

India does not subscribe to any unilateral sanction measures, the Ministry of External Affairs said in response to the EU designation.

While the sanction itself likely won’t interrupt overall volumes, it sets a new precedent that is likely to provoke further responses from New Delhi.

Nayara Energy has already reportedly changed the payment terms to sell a spot naphtha cargo as a result of the sanctions.

Following Friday’s designation, a Nayara tender to sell a spot naphtha cargo shows Nayara seeking advance payment or a letter of credit from the potential buyer for loading of the cargo in the middle of August, according to documents seen by both Reuters and Bloomberg.