By Vaishali Basu Sharma
The US Department of the Treasury has targeted Russia’s state-owned shipping company and fleet operator, Sovcomflot, in its effort to reduce Russia’s revenues from oil sales that has, over the last year, seen a whopping rise.
Marinelink reported that the US Treasury Department’s Office of Foreign Asset Control has implicated Sovcomflot as a parent company for “price cap violations in addition to deceptive activity.” The US Treasury, however, has not indicated the specific violations Sovcomflot, one of the world’s largest tanker operators, is accused of.
In the immediate aftermath of the breakout of war in Ukraine, St. Petersburg-based shipping giant, Sovcomflot, faced challenges in hauling oil and natural gas after Western ports, buyers, insurers, and other companies withdrew from Russia.
The US had earlier placed debt and equity sanctions on Sovcomflot among 13 major Russian enterprises and entities, forcing the company to sell at least 40 of its 121 vessels at short notice.
Last week, the US again imposed wide-ranging sanctions against Russia, targeting more than 500 people and entities to mark the second anniversary of Moscow’s invasion of Ukraine and retaliate for the death of Alexei Navalny, the Russian opposition leader.
American sanctions on Russia are indeed a complex and contentious issue. The inclusion of Sovcomflot in the current round of sanctions aims to further limit the company’s ability to transport oil.
To limit Russia’s oil revenues and to prevent an economically catastrophic increase in oil prices, US-led European sanctions against Russia took effect at the end of 2022.
The US wanted to put a cap on Russia’s oil prices between $40 and about $60 a barrel. The mechanism was aimed to maintain a supply of crude oil globally while reducing Russia’s oil revenues.
In 2022, the Group of Seven (G7) leading industrialized nations, the European Union, and Australia imposed a $60/barrel price cap on Russian oil and banned the use of Western maritime services such as transport, insurance, and financing for shipments of oil priced at or above the cap.
Western companies have been prohibited from providing services for oil sold above the $60/barrel cap. The EU also halted imports of Russian oil by sea and banned refined oil product imports from Russia.
The US tried to prevail upon other countries to agree to the price cap on Russian oil. To convince global leaders about the idea of a ‘buyers cartel’ that should aim to cap the price of oil to limit how much refiners and traders can pay for Russian crude, US Treasury Secretary Janet Yellen toured Asian capitals in July 2022.
But market forces have undermined the US price cap stratagem. Russia pushed all the crude oil that it could onto the global markets. To bypass the US-led oil price cap, Russia has been using a shadow fleet of aging tankers for consumers like India and China.
Before the Ukraine war, Russia exported more oil to Europe. Despite Western sanctions, demand from India and China has significantly impacted Russia’s oil revenue. India bought $37 billion worth of Russian oil last year, which is 13 times more than its pre-Ukraine war purchases, contributing to Russia’s record federal revenue of $320 billion in 2023.
Russian oil now constitutes nearly 20% of India’s annual crude imports, up from a mere 2% in 2021. China, too, has been buying heavily discounted Russian crude, importing nearly 800,000 barrels per day. New Delhi and Beijing have effectively bypassed sanctions by utilizing alternative delivery and insurance options.
In 2023, Russian oil exports generated $11 billion through a shadow fleet and obscure entities. Bloomberg reported that Russia’s petrodollars went through anonymous traders and unknown shipping companies, adding that the country’s domestic and shadow fleet owners together moved more than 70% of Russian oil in January-September 2023.
In response to the US-led sanctions, Russia has reduced its dependence on Western markets considerably and strengthened economic ties with other countries. Alliances with India, China, and Middle Eastern countries have provided Moscow with support and diplomatic backing during these times of economic pressure.
It is interesting to note that amid Houthi attacks on shipping in the Red Sea lanes, Russian oil tankers have sailed through the Suez Canal and the Red Sea unscathed. The Houthis, who have shown their solidarity with the Palestinians in Gaza, are backed by Iran. Russia has close ties with Iran, because of which ships carrying Russian oil appear to have been spared.
Enforcing the price cap on Russian oil by targeting oil companies and their ships remains a top priority for the US and its coalition partners. On December 1, 2023, the US Office of Foreign Assets Control (OFAC) imposed sanctions on three tankers and their owners for shipping Russian oil above the price cap.
These included Sterling Shipping and Streymoy Shipping Ltd., based in the United Arab Emirates, and another ship registered to HS Atlantica Ltd, based in Liberia. The ships have been blocked under the sanctions, while all property held by their registered owners in the United States has also been blocked. People in the United States and its jurisdictions have been prevented from dealing with them.
The current round of sanctions and the specific targeting of Sovcomflot is aimed at further targeting Moscow’s income from oil sales. The Treasury Department has designated 14 crude oil tankers as property in which Sovcomflot has an interest, allowing 45 days for offloading of crude oil or other cargo from these vessels.
- Vaishali Basu Sharma is a strategic and economic affairs analyst. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.
- She tweets at @basu_vaishali.
