In a recent move targeting oil tankers allegedly breaching price caps, the US imposed sanctions on Sovcomflot, Russia’s state-owned shipping giant, and 14 associated tankers on February 23. This action follows similar measures taken against other shippers involved in transporting Russian oil in recent months. Notably, many of the sanctioned tankers have supplied oil to Indian refiners over the past year, according to ship tracking data.
As a result of these sanctions, Indian refiners are now declining deliveries of crude carried by Sovcomflot tankers to avoid potential secondary sanction risks. A senior government official emphasized the importance of avoiding sanctions-related risks and compliance with international price regulations.
The Sovcomflot Impact
India’s import of Russian crude in Q1 2024 has decreased compared to the previous quarter, citing commercial and logistical challenges including payment issues and tanker sanctions as contributing factors.
The reluctance of Indian refiners to accept crude from Sovcomflot tankers underscores the impact of US and Western sanctions, leading to a significant reduction in the share of crude transported by these tankers in recent months.
Sovcomflot, or SCF Group, is Russia’s largest shipping company and a global leader in energy shipping. It specializes in offshore services, liquefied gas transportation, and the conventional shipping of crude oil and petroleum products. Sovcomflot also services several large-scale oil and gas projects in Russia.
Sovcomflot, with a fleet comprising around 80 vessels including crude oil, oil products, and liquefied natural gas tankers, has faced challenges due to capital restrictions in the past year. To adapt to these constraints, the company has relocated its overseas operations from Cyprus to Dubai. As part of this transition, 45 tankers have been transferred to Oil Tankers SCF MGMT FZCO, a Dubai-based entity, since July.
While some crude deliveries are now being redirected to China, India’s reliance on Russian oil may continue due to the involvement of a vast network of opaque tankers in Russian oil trade. Despite India’s cautious approach compared to China, the extensive presence of opaque tankers suggests minimal disruption to both markets from US sanctions.
Opaque Tanker Fleet
The term “opaque tanker fleet” refers to vessels with unclear ownership involved in trade with countries under international sanctions. These tankers, often registered in jurisdictions with lax regulations, operate with limited transparency and substandard insurance.
The imposition of sanctions on Russia has led to a significant expansion of what is known as the “dark fleet” or “shadow fleet” – a fleet of older tankers with unclear ownership that operate outside the traditional Western insurance, financial, and shipping-service networks. These vessels, which often disable their location beacons, are typically older, less efficient, and more polluting than modern vessels. Normally, these older tankers would be scrapped and replaced by newer, more efficient ones. However, the sanctions have created a lucrative opportunity for these vessels to earn substantial premiums in sanctioned or semi-sanctioned trades, leading to a surge in their numbers.
The concept of the shadow fleet initially emerged on a smaller scale when the United States imposed sanctions on oil exports from Iran and Venezuela.
However, over the past year, the fleet has grown significantly as older tankers were acquired to transport Russian cargoes. While the shadow fleet now transports most Russian crude and products, there are still opportunities for mainstream tankers to carry cargoes under a price cap set by the European Union and the Group of Seven (G-7). Western shipping service providers can participate in these trades if they can provide written proof that the cargo is priced below the specified cap.
Despite the sanctions, the majority of tankers supplying Russian oil to India remain unaffected, highlighting the ample availability of tankers for trade.
Following Russia’s invasion of Ukraine in February 2022, Indian refiners increased purchases of Russian oil, attracted by deep discounts offered by Moscow. As a result, Russia has become India’s largest crude oil supplier, surpassing traditional suppliers such as Iraq and Saudi Arabia. Despite this shift, India maintains a diverse supplier base, mitigating potential disruptions in oil supply from any single source.
