The Shadow Fleet Fueling Russia’s War | Bloomberg Investigates

The energy world is completely disrupted by the Russian invasion of Ukraine. We see the rise of what is called the

shadow

fleet

. New ship owners, new shipping companies that we have never encountered before. The sanctions that have been adopted are being effectively circumvented by those who are willing to participate. Russia has dethroned Saudi Arabia as one of the largest suppliers. That's how important Russia has become. This is a business that has made them multimillionaires in the process. Even the most conservative estimates we have would suggest that at least $5 billion a year goes into this dark trade with people.

We don't know who, but we believe that much of it is being channeled toward Russian interests. It's an incredibly difficult problem for Western politicians who are terrified that higher energy prices will push voters over the edge. To actually see clandestine behavior was really surprising. That makes you think, well, what else is going on? This is a story that begins in the corridors of power in Brussels, in Washington, in the Kremlin, passes through the trading floors of Singapore and Dubai, where we are seeing these dark intermediaries emerge, and finally emerges into the very opaque world of globalization. shipment.

Europe has depended for decades on Russian gas and oil to keep its economy going, and suddenly people are saying: we can't let this continue, given that Russia has launched an illegal and unprovoked attack on a European country. The European position is quickly becoming that we should stop buying Russian oil and gas. But people also always realize that that will drive up the price. So this is the genesis of the whole price ceiling idea. The price cap is a mechanism that is supposed to ensure that the price of Russian oil does not rise too much. It is supposed to deprive Russia of revenue while allowing Russian crude to flow.

If you pay $60 a barrel, you can use Western services. That means Greek tankers. That means insurance from London, Bermuda, New York, and if you pay 60 dollars and 1 cent, you can't. They wanted to keep the oil flowing, but they wanted to reduce Putin's income and that's a really difficult balancing act. That's why it's such an interesting and strange idea and why so many people thought it would fail. In the first four months of the year, Russia's budget deficit was larger than it was supposed to be for all of 2023. So, at least for the first six months of the year, the price cap worked as intended.

Then, as the summer progressed, the price limit was seen to be exceeded. Russia's oil exports amount to many billions of dollars a year. What you have are two main prices. You have a price at the point of export and you have a price at the point of import. Since the war, the export price has been much, much lower than the import price. And what that has done is create a huge amount of money that we don't know exactly where it goes. It must be remembered that the price of Russian oil throughout the world is above the maximum price.

So how can a ship be truly legitimate? So we have a policy that does very little to limit the flow of money to the Kremlin, but has created this dark world that funnels billions of dollars to a network of ship owners and traders that we know very little about. Yes, of course there are rules and you are supposed to follow them, but the reality is that people turn a blind eye. Once this policy went into effect, the energy world quickly reoriented itself. We see the rise of what is called the

shadow

fleet

. Russian shipping companies were buying up old, rusty tankers that really should have been retired and buying them up quickly.

The shadow fleet is essentially made up of several hundred ships that have been acquired by, we don't know who, for the purpose of transporting Russian oil. A very large portion, probably most of the fleet, has some kind of dark component, whether it's insurance, the boat owner, or the boat operator. Very often there will be something about it that is not clear. What is happening is that Russia will get its oil from its ports and take it to a bay in southern Greece, from where it will transfer it to other tankers that will then transport the same oil to the buying countries, often China and India.

So, thanks to tracking this shadow fleet of tankers, we know that many of them are heading to this bay in southern Greece. We don't know exactly what they're doing, but we know that there is some transfer of Russian oil, and what we want to do is go there and find out exactly what they're doing. The shipping industry has been around for a long time, right? It's one of the oldest crafts there is and these guys are very, very resourceful. Russia still needs to get its oil to China and India, and that's why we rely heavily on this shadow fleet to get that oil to customers.

So what really happens is that, for example, China and India, they buy cargo on a delivery basis. You can give different estimates on how much the freight would have cost. There are many miscellaneous expenses in between that can be inflated or deflated as you wish. And then it can fall below the price limit because we all know there are many ways to split a price. Chinese refineries are soaking up all the oil they can and right now we are seeing an average increase of around 25%. And for India this increase is even more significant, right? Because India used to consume almost no Russian crude oil before the war, and right now it consumes between 1.5 and 2 million barrels per day.

So you take your Russian oil and you send it to a refinery in India, you turn it into gasoline. Now, according to all the rules, sanctions and the way the industry works, the moment it is gasoline, it is no longer Russian. Now, much of that fuel will be used in India, but India has also become a place where it exports much of that fuel to Europe. In that sense, there is another way in which Russian oil flows freely into the global economy. People and merchants are making money from it. Indian refiners are making money from it, and Russia is making money from it.

It is extremely difficult for anyone to see the amounts of money being wasted on people who carry out these trades to encourage them to get involved. We are a self-regulated industry. This is half the problem. You know, when you don't know the origin of the interest you have in renting, buying or building a boat. You know that if you pay a premium, you have to be on your guard and people are not on their guard. In fact, they are actively pursuing such businesses. It has to stop. There are new brokers, new traders are appearing. There are a lot of big houses, ship brokerage houses, that have offices in Dubai that we know are actually creating cells to operate from.

That's why they try to distance themselves even more. No, I'm not going to point fingers. You walk into a restaurant, you walk into an elevator, and often Russian is the main language you hear. Dubai has always been a place of wealth and where people like to spend their wealth somewhere extravagant, but it has certainly reached another level in the last two years. Dubai has gained many entities that perhaps, their ultimate beneficiaries, previously had companies in Geneva, London or Singapore. And those same... some of those same individuals have since moved their operations to Dubai. They are moving teams, they are creating new companies and Dubai has been the main base.

They are also masking the ownership structure of their companies to try to minimize the likelihood that their beneficial ownership could be under sanctions or face legal repercussions. The oil industry has always been full of middlemen. It's easier for a refiner, for example, in China to go to a trader it knows and say, "I need a shipment of Russian oil" than to pick up the phone and call Rosneft. And those intermediaries have always existed and work for very, very large companies. Now, those traders after the invasion didn't really want to be a part of Russian oil. There is a new group of brokers, a new group of intermediaries that has emerged very quickly, many of them based in Dubai.

As Dubai is a jurisdiction that has been very happy to welcome Russians, please continue doing business with Russia. And we've looked at a lot of these merchants, whether they are merchants or not... The people on paper are the rightful owners and beneficial owners of these companies or not. But there are many people who have discovered how to make money with this. So, for a single shipment, the trader, in theory, earns between 10 and 15 million dollars. This is a business that has made them multimillionaires in the process. Washington's main concern, for example, is how much of the windfall actually returns to Moscow?

How much of that money will ultimately go to the Kremlin to boost Russia's war efforts? So we are here in the Gulf of Lakonikos. We have spent more than two hours coming here by boat and we are here to visit a center of the Russian oil trade. Can we see those ships there? We have two tankers there. They are transferring oil from one to another. There is a ship to ship transfer going on where these ships will come with cargoes from Russia, millions of barrels of oil are transferred every month. Another ship will approach and then spend a couple of days simply transferring cargo from one to the other.

This here is the shadow fleet. You have two tanker trucks whose owners are not clear. The insurance is not clear in terms of the depth of insurance. The flag is as bad as it looks. These are shadow fleet tankers. When we got to that bay, I expected to see some oil tankers. We have seen them in satellite tracking systems. What I really didn't expect to see was one of the most notorious ships in the world fleet next to another oil tanker when we couldn't see it on global tracking systems. You can see that there are two tankers there, a black one called Simba and a red one called Turba.

Now if you look here, this is a global tracking system and it shows you the signal from the automatic identification system and you can only see one ship. That ship is the Simba, not the Turba. If you look further you will find that the Peat is about seven kilometers away and has been giving a signal. There is a name for this type of behavior: it's called spoofing. And what that means is that you modify the AIS system so that the signal appears to be somewhere it isn't. Someone is doing something to make that ship appear somewhere else.

Honestly, we don't fully know why they do it, but what it does mean is that there is some degree of separation. A trader may not feel completely comfortable receiving oil that originated in Russia and may simply want to hide it so he can import it without too many questions being asked. Seeing that and comparing it to the following we have was really shocking and made me wonder about everything else. The dark fleet is growing and growing and of course the price of oil is now above $90. So it's a growing gap from where the peak price was.

So actually what is happening is that the amount of illegal trading is creating better results for those who are actually using what they are actually creating in terms of all sales. Do sanctions work? Well, frankly they don't work, unless the culprits are arrested. So I fear that the sanctions that have been created are largely ineffective as a result. Or put that way, people, as I said before, are evading those sanctions. They are finding a way to avoid them. China and India have practically set up a completely different supply chain to ensure that Russian crude oil continues to flow, whether below or above the price ceiling.

So these two countries have created their own kind of separate ecosystem that is outside of the EU or Western services. Therefore, the price cap no longer affects crude oil flows as much because the two largest customers of Russian crude oil have found a very viable way to get around the system. The oil is flowing. We have a very willing seller in Russia. We have very willing buyers in India and China. And we have the middlemen, the middlemen, who can make it happen. When I look at that helmet, it's very, very rusty. It doesn't look in good condition.

Keep in mind that the tanker is supposed to transport one million barrels of oil. You know, that's a risky ship and the red one is even older. Now, what you need to know about the Peat is that she is one of the worst tankers in the fleet. By now it should have been discharged. She is reaching the end of her commercial useful life. It has arrived, she has gone beyond the end of her useful office in life. If you look behind me, you see a beautiful town, which clearly depends on tourism, many restaurants, hotels, there is fishing in the area.

Now those industries don't need to see an oil spill, right? The last thing you need to see is an oil tanker, an oldrusty oil tanker, spilling its cargo into this gulf and at enormous environmental cost. And you have to remember that it's not entirely clear that any insurance company can actually pay to cover the compensation these people would need if something went wrong. Actually, what worries me is that there will be accidents, and they will be big, nasty accidents, and innocent people will get hurt. You know, we have 600, 700 ships, more than 10% in certain categories of tankers, that are now in the dark fleet.

That is a huge percentage. And I think, frankly, that's a big concern for other sailors and other people who are dealing with this fleet. This shadow fleet architecture that we've described, this shadow oil trading community that we've described, it's working, but how much are people paying? They are paying more than they used to because as people become more comfortable with this new architecture, there are fewer reasons not to do it. And there is plenty of evidence that much more oil is trading above the peak price. It is a much more difficult challenge to control this shadow fleet.

These are not businesses subject to Western rules. What can the United States do to tell someone in a foreign country with no ties to the United States that... they can't transport oil? It is a very difficult situation. What I do know is that no one does anything about it, and that is, I'm afraid to say, my biggest problem with this. And I point the finger at the authorities to be frank with you. What is the point of imposing sanctions unless they are properly implemented? The United States has sanctioned a couple of very small entities, but their scale is quite small compared to the scope of the problem.

I think a lot of people will expect them to do more and there will still be a suspicion that what they really care about is keeping the oil flowing. When they agreed on the maximum price, they agreed to review it periodically, and it has already been reviewed, but as they have described to me, the EU member states come into their room, show them a bunch of charts and say, yes. , the price limit is working and has not been reduced. I think there is nervousness about making waves and, you know, I don't think anyone wants to do something that could fuel inflation around the world.

Everyone understands globally that Russia is a big oil producer, a big exporter, and we need its oil. I think the last thing any consumer in the world would want is for oil supplies to Russia to be cut off. This was, in a sense, an attempt to have our cake and eat it. Have a sanctions regime that punished Russia but did not harm the global economy. Now it has been successful in one sense: the global economy has its problems, but oil prices are not a big part of that right now. But on the other hand, Russia is not punished.

But it shows that sanctions have unintended consequences, and those unintended consequences can be unpleasant. There are every incentives to cheat. The sanctions are small, so they clearly want to get this thing moving. They clearly want the oil to flow. It is clear that there is a real desire on the part of the G7 to prioritize the flow of oil. That is simply the reality. There is no doubt that if the price of oil continues to rise and oil continues to flow and if oil trades above the price cap, then that means more money for the Kremlin, and the Kremlin will use much of that money to buy weapons and pay soldiers.