US Sanctions on Russia’s Shadow Fleet and Their Implications for India
Context:
The US has intensified sanctions on Russia’s oil trade, targeting 183 “shadow fleet” tankers and major firms like Gazprom Neft and Surgutneftegas to curb energy revenues from crude oil exports following the 2022 Ukraine invasion.
Russia’s Stand on the Sanctions:
- Moscow has criticised the sanctions, calling them destabilising for global markets. The Kremlin has vowed to take measures to minimise the impact of these sanctions, including possibly restructuring its oil export mechanisms.
India’s Approach:
- India, not being part of the sanctions regime, purchases Russian oil on a delivered basis, insulating its refiners from complications related to shipping and insurance.
The Shadow Fleet: Purpose and Objectives
- The “shadow fleet” refers to aging oil tankers of uncertain ownership that have enabled Russia to bypass Western sanctions.
- These vessels primarily transport Russian oil to countries like India and China while circumventing the $60 per barrel price cap set by Western nations.
- By avoiding Western shipping and insurance services, this fleet ensures the continued flow of Russian oil to key markets.
Importance of the Shadow Fleet in Indo-China Oil Trade: The shadow fleet has been instrumental in ensuring uninterrupted oil supplies to India and China. In 2024 alone, these tankers transported over 530 million barrels of Russian crude, highlighting their critical role in sustaining Moscow’s oil revenues.
Need for the Sanctions:
- Limit Russia’s ability to finance the Ukraine war by reducing energy revenues.
- Strengthen the enforcement of the oil price cap.
- Deter entities and nations from engaging with the shadow fleet and Russian oil companies.
Impact on India and Its Stand on the Sanctions:
- Short-term Implications
- Wind-down Period: Indian refiners will accept deliveries on sanctioned vessels booked before January 10, 2025, with cargoes deliverable until March 12.
- Freight Costs: Reduced tanker availability may increase freight costs, impacting the competitiveness of Russian oil.
- Long-term Implications
- India, which relies on imports for over 85% of its crude oil needs, may shift to alternative suppliers like Iraq, Saudi Arabia, and the UAE.
- Russian oil, which accounted for 38% of India’s imports in 2024, may lose its cost advantage without significant discounts.
Global Impacts of the Sanctions:
- Shift to West Asia: Countries like India are expected to increase imports from traditional suppliers in West Asia due to higher freight costs and reduced discounts on Russian oil.
- Market Volatility: Potential disruptions in global oil supply chains could lead to increased energy prices and inflation.
- Russia’s Options: Rebuilding a non-sanctioned tanker fleet will be a time-consuming and expensive endeavour.
The Oil Price Cap: Implementation and India’s Stand
Objectives of the Price Cap
- Limit Russian oil revenues while maintaining global supply stability.
- Encourage compliance through restrictions on Western shipping and insurance for oil priced above $60 per barrel.
India’s Position
India has not endorsed the price cap but benefits indirectly from the discounts offered by Russia to compete in global markets. The delivered basis purchase model keeps Indian refiners insulated from sanctions-related risks.
Russia: India’s Major Oil Supplier
Before the Ukraine war, Russia was a marginal supplier to India. However, Western sanctions and significant discounts transformed Russia into India’s largest crude oil supplier. In 2024, approximately 300 million barrels of Russian oil were shipped to India via the shadow fleet.
Impact of Sanctions on Russia and its options :
- Short-term Impacts
- Reduced revenues due to higher freight costs and potential compliance with the price cap.
- Limited availability of tankers, impacting export volumes.
- Long-term Options
- Fleet Expansion: Invest in rebuilding and expanding a non-sanctioned tanker fleet to reduce dependency on shadow fleet operations.
- Deeper Discounts: Offer substantial price reductions to key buyers like India and China to sustain export volumes.
- Diversification of Markets: Strengthen ties with non-Western nations and explore new markets to bypass Western sanctions.
- Infrastructure Development: Focus on developing overland pipelines and alternative export routes to reduce reliance on maritime shipping.
- Strategic Alliances: Collaborate with other sanctioned or non-aligned nations to create a parallel trade and logistics system.
