Russian oil export revenues surged to $17.2 billion in March 2024, driven by higher global oil prices and increased crude export volumes, according to the April ‘Russian Oil Tracker’ by KSE Institute. Despite robust US Treasury sanctions targeting the shadow fleet, Russia continues to expand it by incorporating new tankers, allowing for stable exports and further evasion of oil price cap.

Russian seaborne oil exports rose by 4% in March, driven by a 12% increase in crude oil shipments (+400 kb/d), while exports of oil products declined by 6%. Notably, India saw a 3% increase in Russian crude imports (to 1,445 kb/d), maintaining its position as the top importer of Russian crude oil. Meanwhile, Turkey has been meeting around two-thirds of its oil demand through Russian oil products imports, with total imports exceeding 800 kb/d since November 2023.

However, only 36% of Russian oil exports were shipped by IG-insured tankers. For other shipments, Russia utilized its shadow fleet. It was responsible for exports of ~2.8 mb/d of crude and 1.1 mb/d of oil products in March.

Specifically, 223 loaded non-IG-insured tankers left Russian ports, with 2 engaged in STS transfers in March 2024. With 85% of these tankers aged over 15 years, the risk of oil spills at sea is heightened—a potential catastrophe for which Russia would likely refuse to pay.

The US Treasury’s strategy of designating individual vessels effectively removes shadow tankers from regular commercial service. As of April 12, 2024, out of 41 sanctioned vessels, 37 were unloaded and not scheduled for further voyages, while 3 were completing their current voyages in line with the OFAC authorization. One vessel provides coastal shuttle services violating OFAC’s sanctions but only within the Black Sea. On April 4, OFAC also sanctioned Oceanlink Maritime Dmcc and its 13 tankers for its ties with Iran but 7 of these 13 tankers also shipped Russian crude without IG P&I insurance.

Russia managed to expand its shadow tanker fleet, adding 35 new tankers to replace 41 tankers added to OFAC’s SDN list since December 2023. These tankers, all over 15 years old, are managed outside the EU/G7. Nine of them were directly involved in loading Iranian oil in Iran or through STS operations in 2021-2023, as per Kpler.

Russia also continues to evade shadow fleet sanctions by transferring sanctioned tankers to new entities. For instance, when four UAE-registered shipping companies, sanctioned by the UK, passed tankers to other Emirati firms, they continued commercial operations under new management. Similarly, Stream Ship Management Fzco became the top shipper of Russian crude oil after acquiring tankers previously managed by Oil Tankers Scf Mgmt Fzc, sanctioned by the OFAC.

Maintenance and expansion of the shadow fleet enables Russia to bypass the oil price cap. In March 2024, the average Urals FOB Primorsk and Novorossiysk, as well as ESPO FOB Kozmino, increased by ~$2 per barrel, to levels well above price cap threshold. The discount of Urals FOB Primorsk and ESPO FOB Kozmino to Dated Brent decreased by ~$0.4 per barrel over the previous month.

UAE, Chinese and Greek ship managers have played a leading role in transporting Russian crude. In March 2024, 8 of the top 10 shippers of Russian crude were registered in the UAE or China. As for Russian oil products exports, Greek companies dominated the top shippers, although Modern Gemi Isletmeciligi As (Turkey) and Oil Tankers Scf Mgmt Fzco (UAE) led the list in March.

KSE Institute projects Russian oil revenues to reach $175 billion and $152 billion in 2024 and 2025 under the base case with current oil price caps and stronger sanctions enforcement. However, if sanctions enforcement is weak, Russian oil revenues could increase, reaching $206 billion in 2024 and $195 billion in 2025.

Source: Kyiv School of Economics

On 23 April 2024, the US Congress adopted a bipartisan bill “Rebuilding Economic Prosperity and Opportunity for Ukrainians Act” (REPO Act or “the Act”), which proposes to transfer immobilized Russian sovereign assets to fund Ukraine`s reconstruction. Anna Vlasyuk, Legal research fellow at KSE Institute, assesses that the adoption of the REPO Act is a significant step, as it removes legal ambiguity as to how the confiscation can be effectuated at the national level, and it is the first piece of national legislation that explicitly articulates the position that confiscation of Russian sovereign assets represents countermeasures as a matter of international law.

The purpose of the Act is granting the executive branch the necessary powers for confiscation of Russian assets, and making them available for Ukraine. Authorization of the President to take actions in order to confiscate Russian assets also resolves the issues pertaining to applicability of sovereign immunities. Notably, the Act maneuvers around sovereign immunity issues by making a transfer of funds an administrative procedure rather than judicial process and by precluding judicial review of the measure. The Act also instructs the President to require US financial institutions to submit information on Russian sovereign assets to the Secretary of the Treasury.

It is crucial that the Act highlights the need for greater transparency with regard to location of Russian reserves. In addition, it emphasizes the role of international cooperation and instructs that the confiscation of Russian assets should be implemented as a multilateral effort.

Another important aspect of the REPO Act is that it is not limited to CBR reserves, but covers any type of Russian state assets (except for what is covered by diplomatic immunities), including Russian sovereign wealth fund and potentially assets of Russian state-owned companies.

The Act also stipulates safeguards to prevent development of policy precedent of confiscation foreign states’ property, and outlines how the US may use Russian assets for the benefit of Ukraine.

Next, Anna Vlasyuk explores the EU current proposal. It is reported that the mainstream idea in the EU is to use proceeds generated by Russian assets in European central securities depositaries (“CSDs”). However, there is no definitive information on whether the EU will choose to funnel CBR reserves proceeds to Ukraine or opt for securitization of these funds.

The Council Decision 2024/577, which establishes grounds for any further appropriation of proceeds generated by CBR reserves stipulates the following important points: (i) exemption for balance sheet management transactions from general ban on any transaction with CBR reserves (ii) clarification on legal title to the proceeds; (iii) obligation on CSDs to account cash balances linked to CBR reserves separately; (iv) only future proceeds are subject to further disposition for the benefit of Ukraine.

The proposals to use extraordinary revenues accumulated at CSDs are still in development and no detailed plan has been publicly announced. There are three main proposals under consideration: (i) Ukrainian Reparation Loan, By Hugo Dixon, Lee Buchheit and Daleep Singh; (ii) Using proceeds accumulated on Russian reserves to cover coupon and raise funding on capital markets, by Torbjörn Becker and Yuriy Gorodnichenko; (iii) Placing RCB assets into an escrow account as collateral.

Notably, the bond and securitization proposals arise amid discussions for over a decade on creating a eurozone sovereign bond market or a European safe asset. There are strong legal arguments under international law for authorizing confiscation of Russian assets as a state countermeasure, showing readiness to respond to Russia’s military aggression and uphold the UN Charter. Therefore, it is important not to allow discussion of various aspects of financial engineering to stifle the progress on confiscation of Russian reserves.

KSE Institute advocates for confiscating Russian assets, and has provided an overview of the legal grounds for seizure of Russian assets in “Legal Report on Confiscation of Russian State Assets for the Reconstruction of Ukraine.” The report also debunks myths about legal and practical hurdles surrounding the confiscation of Russian reserves.

Source: Kyiv School of Economics