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Facing sanctions, Russia finds crude oil customers in 'shadow fleets'

SCOTT SIMON, HOST:

A ban by the European Union on Russian oil that went into effect late last year over the war in Ukraine is forcing Russia to look further afield to sell its fuel. But transporting the oil has become an increasing challenge for Russia. So it's having to turn to a fleet of tankers willing to bust sanctions. NPR's Jackie Northam reports.

JACKIE NORTHAM, BYLINE: Before Russia invaded Ukraine, Europe was by far and away the largest customer for its oil, even bigger than Russia's domestic market.

CRAIG KENNEDY: Pipelines, ports, oil fields in West Siberia, everything has been oriented toward selling to Europe. But now it's being forced into a much smaller market, much further away.

NORTHAM: Craig Kennedy is with the Davis Center for Russian Eurasian Studies at Harvard and spent years in Moscow. He says the Kremlin has been scrambling to come up with ways to get crude to those other markets. But it would take years to build a series of pipelines to Asia and elsewhere.

KENNEDY: And so they realized, we are going to be stuck with seaborne exports. Eighty percent of our oil has to reach its own customers by sea, and that means tankers.

NORTHAM: But there was a problem. Russia faces a shortage of tankers willing to transport the oil. Its own fleet isn't big enough. Many Western companies have refused to carry Russian crude since the war in Ukraine. And the U.S. and its allies implemented a plan that would prevent tankers from transporting Russian oil unless it came at or below $60 a barrel for its own brand of crude. Right now prices are below that. But that could change. So the Kremlin has been building up a network known as a shadow fleet.

ERIK BROEKHUIZEN: The shadow fleet is a group of ships. It's difficult to estimate exactly how many ships there are, but probably between 200 and 300.

NORTHAM: Erik Broekhuizen is with Poten & Partners, a brokerage and consulting firm specializing in energy and maritime transportation.

BROEKHUIZEN: A lot of those ships have been acquired in recent months in anticipation of this EU ban. And the sole purpose of these ships is to move Russian crude just in case it would be illegal for regular owners to do so.

NORTHAM: Most vessels in the shadow fleets are owned by offshore companies in countries with more lenient shipping rules, like Panama, Liberia and the Marshall Islands, says Basil Karatzas, CEO of New York-based Karatzas Marine Advisors, a shipping finance advisory firm. He says the owners have limited exposure to U.S. or EU governments or banks, and so their fear of sanctions is limited, and enforcement is difficult. Karatzas says the risk-reward ratio is favorable to the owners of the shadow fleet tankers.

BASIL KARATZAS: If you can make 10, $20 per barrel spread and the vessel holds a million barrels of oil, you can make, like, 5-, $10 million profit per voyage. If you do it five times a year, you can see the economics of that

NORTHAM: Karatzas says shadow fleets have long been used by Iran and Venezuela to evade sanctions. He says shadow fleet tankers tend to be old and junky. But since the start of the Ukraine war, they've become highly valuable because of the cargo.

KARATZAS: In Feb. 2022, a 20-year-old vessel was more or less valued at close to scrap. Now these vessels are worth 40 million apiece. So at the very least, I mean, Putin gave to the shipowners a very nice present.

NORTHAM: Putin will need plenty more shadow fleet tankers if the price of Russian oil rises past $60 a barrel and legitimate ships are then banned from carrying the crude. But with such a highly lucrative business and a small chance of getting caught, more tankers could be lured into joining the shadow fleet.

Jackie Northam, NPR News. Transcript provided by NPR, Copyright NPR.

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Jackie Northam is NPR's International Affairs Correspondent. She is a veteran journalist who has spent three decades reporting on conflict, geopolitics, and life across the globe - from the mountains of Afghanistan and the desert sands of Saudi Arabia, to the gritty prison camp at Guantanamo Bay and the pristine beauty of the Arctic.