As another embargo looms, the grey trade is about to explode.
In the year since the war in Ukraine began, once-dominant Western firms have pulled back from trading, shipping and insuring Russian oil. In their place, mysterious newcomers have begun to help sell the country’s crude. They are based not in Geneva, but in Hong Kong or Dubai. Many have never dealt in the stuff before. The global energy system is becoming more dispersed, divided—and dangerous.
Russia’s need for this alternative supply chain, present since the war started, became more pressing after December 5th, when a package of Western sanctions came into effect. The measures ban European imports of seaborne crude, and allow Russian ships to make use of the West’s logistics and insurance firms only if their cargo is priced below $60 a barrel. More sanctions on diesel and other refined products will come into force on February 5th, making the new back channels more vital still.
The Economist has spoken to a range of intermediaries in the oil market, and studied evidence from across the supply chain, to assess the effect of the sanctions and get a sense of what will happen next. We find, to the West’s chagrin and Russia’s relief, that the new “shadow” shipping and financing infrastructure is robust and extensive. Rather than fade away, the grey market stands ready to expand when the next set of sanctions is enforced.
Shifty shades of grey
Russia’s exports took a knock after Europe’s initial salvo in December. Two months on, however, they have recovered to levels last seen in June. The volume of oil on water, which tends to climb when the market jams up, is back to normal. As expected, China and India are picking up most of the embargoed barrels. Yet there is a surprise: the volume of cargo with unknown destinations has jumped. Russian oil, once easy to track, is now being distributed through more shadowy channels.
Some trade still uses the same Greek shippers, British insurers and Dutch and Japanese banks that have long ruled the industry. This channel survives thanks to the price cap set by the West. In December, as European firms paused to consider the paperwork involved, the share of western Russian crude they picked up collapsed, from 60% to 13%.
The legal trudge now done, the share has recovered to 36%. But it seems likely to drop off again. On January 1st the world’s biggest reinsurers, which insure insurers, decided to no longer cover shipping from Russian ports. Western insurers now have little choice but to exit the business or pass on the extra costs resulting from the increased risk.
At the other end of the spectrum lies the “black” trade, tried and tested by producers such as Iran and Venezuela. Battered tankers as much as half a century old sail to clandestine customers with their transponders off. They are renamed and repainted, sometimes several times a journey. They often transit via busy terminals where their crude is blended with others, making it hard to detect.
Recently, several huge tankers formerly anchored in the Gulf were spotted taking cargo from smaller Russian ships off Gibraltar. Oman and the United Arab Emirates (uae), which imported more Russian oil in the first ten months of 2022 than in the previous three years combined, seem to have blended and re-sold some to Europe. Malaysia is exporting twice as much crude to China as it can produce. Much of it is probably Iranian, but ship-watchers suspect a few Russian barrels have snuck in, too.
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Credit: Alamy
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