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What is the Shadow Fleet?

The term “shadow fleet” has recently surfaced in discussions about the Russia-Ukraine conflict, particularly in reference to tanker ships transporting Russian crude oil to various countries, often bypassing international sanctions. As Western nations attempt to curb Russia’s oil revenue through sanctions, the shadow fleet has emerged as a key player in helping Russia continue its exports. India has been named as a significant hub for these operations, raising concerns about its involvement in what some are calling the laundering of Russian oil.

Understanding Sanctions

Sanctions are a tool used by governments to restrict trade and financial transactions with specific nations, often as a form of economic or political pressure. In response to the Russia-Ukraine war, the U.S. and its allies have imposed stringent sanctions on Russia, especially targeting its oil exports. One key measure is a price cap that limits Russia’s ability to sell oil at more than $60 per barrel. However, global market prices often exceed this cap, enabling Russia to sell its oil at higher prices, thereby undermining the effectiveness of the sanctions and generating additional revenue.

The Global Shipping Structure

The complexity of the global shipping industry makes enforcing these sanctions particularly difficult. Greek ship owners dominate the shipping sector, controlling around 20% of the global fleet. China, which has recently overtaken Japan in terms of ship ownership, also plays a major role. Meanwhile, most vessels are constructed in China, Japan, and South Korea.

While shipbuilding and ownership are largely concentrated in these regions, marine insurance and regulatory oversight are centered in Europe, particularly in the U.K. This fragmented structure complicates the enforcement of sanctions, as ships often operate under different national jurisdictions and legal frameworks.

Flag States and Evasion Tactics

Ships are typically registered under a “flag state,” which signifies their country of origin. However, to avoid the scrutiny that comes with sanctions, many vessels engaged in transporting Russian oil are switching their flags. Ships may opt for so-called “Flags of Convenience” (FoCs), such as those from Panama or Liberia, which allow ship owners to obscure their identities and evade strict regulatory checks. This practice makes it exceedingly difficult for authorities to trace the true ownership of vessels and enforce sanctions effectively.

The Role of Marine Insurance

Marine insurance is critical to the operation of ships, covering risks such as loss or damage at sea. Most of this insurance is provided by Protection and Indemnity (P&I) clubs, which pool risks among members and are largely based in London. Ships that are found breaching sanctions may lose their P&I coverage, jeopardizing their ability to continue operations.

To avoid this, some shipowners engage in creative management practices. For example, a Turkish vessel transporting Russian oil might switch to a European management company to retain its P&I coverage while continuing the same activities. This tactic allows the ship to bypass sanctions by operating under a different management structure, even if the ownership remains unchanged.

Shell Companies and Complex Ownership

Another layer of complexity in sanction enforcement stems from the use of shell companies. Many shipowners register their vessels under these entities, which often own only one or two ships. This strategy makes it nearly impossible to identify the actual owner of the ships. Additionally, some vessels are registered in jurisdictions with limited regulatory oversight, such as Eswatini, which has recently emerged as a new Flag of Convenience.

India’s Role in the Shadow Fleet

India’s involvement in the shadow fleet has raised eyebrows. Following the imposition of sanctions on Russia, several Russian ships formed partnerships with Indian firms. Many of these ships shifted their operations to Dubai, a hub where Indian shipping companies maintain a strong presence. The Indian Register of Shipping (IRS) has reported an increase in vessel certifications, adding to suspicions that India may be facilitating the operations of the shadow fleet.

Challenges in Enforcing Sanctions

Experts have pointed out the inherent difficulties in enforcing sanctions on Russian oil. The global shipping industry is an intricate web of ownership structures, flag-switching, and management changes, making it hard to trace compliance. Additionally, there is concern about the potential ripple effects that strict enforcement of these sanctions could have on the global economy, particularly in terms of rising oil prices and supply chain disruptions.

U.K.’s Response

The U.K. has taken limited steps to penalize companies that are violating the price cap on Russian oil. Reports indicate that only mild measures have been enforced against 35 companies. This cautious approach reflects the tension between the need for regulatory compliance and the potential economic impact on U.K. businesses, as stricter actions could hurt the country’s maritime and insurance sectors.

Summing Up

The shadow fleet represents a complex challenge in the global effort to enforce sanctions on Russia. With its intricate shipping networks, flag-switching practices, and shell companies, this fleet allows Russian oil to continue flowing to international markets, often in defiance of price caps and other restrictions. India’s potential involvement, coupled with the difficulties in tracking ownership and enforcing sanctions, highlights the broader issues facing the global community as it seeks to pressure Russia while avoiding economic disruption. As this situation continues to evolve, greater international cooperation and stricter oversight will be essential in tackling the growing influence of the shadow fleet.

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