Listen: Maritime and Trade Talk | Episode 16: Ghosting sanctions with a shadow fleet

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Kristen Hallam

Hi. I'm Kristen Hallam, Content Strategist at S&P Global Market Intelligence and your host for this episode of the podcast.

Russia has repeatedly stated that it will not work with the G7 oil price cap for crude oil that took effect on December 5, 2022, or with the subsequent price cap on refined products that became effective on February 5, 2023. If Russia insists on not conforming to the price cap, it cannot use services located in G7 countries due to sanctions controls. This scenario gives rise to the need for a substantial shadow or ghost fleet of vessels able to transport Russian oil as close to capacity as possible while potentially evading G7 sanctions and the crude and refined oil price caps.

Here with us to discuss these ghost ships is Byron McKinney, Product Management Director for Maritime Trade and Supply Chain at S&P Global Market Intelligence. Thanks for joining us today, Byron.

Byron McKinney

Thanks, Kristen.

Question and Answer

Kristen Hallam

Let's start by going back in time before the war in Ukraine began. How reliant was Russia on services located in the G7?

Byron McKinney

Before the start of the conflict around this time last year, February 2022, Russia's engagement with European, mostly trade in terms of its maritime services, was quite large. So refined and crude oil products generally would have been hold from various locations within Russia, mostly the Baltic, into various discharge points around European coastlines.

Most of the ghost fleet, the Russian crude that were taken at that point were very short, obviously, as opposed to where they go to today. They make longer journeys now to India, the UAE, China as well and other countries. So now the first thing to mention in that regard in how that has now changed, those European trade routes are not as predominant as they once were. They pretty much grown to a halt.

In terms of services, though, the need for Russia to be reliant on some North American and European services is quite high, especially in the year with insurance and indemnity. So within the maritime world, there are P&I clubs, which provide that to fleet owners. They're all based within G7 countries. Obviously, G7 countries are countries which have sanctioned Russia fairly heavily since the outbreak of the conflict. And that's one area where Russia is now -- doesn't have the coverage, which it once did. And we are now in a situation, which is quite unique really, where vessels which once has P&I coverage from G7 countries. Many of them still do, which are Russian owned or Russian flagged, for instance. But there are many of them which are not, and they're generally still trading, still carrying crude refined products around the world, but they're not necessarily insured anymore. Many of them are aging vessels as well.

There has been talk recently of the environmental -- or the potential environmental costs, which can occur where you have aging tankers carrying crude oil products around the world, and they're uninsured also. What would happen if there was an oil spill, for example? Where does the P&I club come into this and the moment for some vessels? Obviously, it wouldn't. So it's one area, which is particularly interesting to watch for the remainder of the year to see what happens there. But that is one service, which Russia was not reliant on, but it was a kind of clear connection between itself and Western countries.

Kristen Hallam

I definitely want to come back to the P&I club. But first, I want to talk a little bit about the white paper that you wrote recently on the Russian ghost fleet. How many vessels in it?

Byron McKinney

The number of vessels which we've estimated at the moment, and this was when we wrote the paper which was back at the end of February, early March, was just over 440, I think to be exactly was 443 vessels, which we had in that fleet. That number was based on a number of calculations, which we made in regards to data available to us. So vessels which have been previously involved in Russian trade, we've made journeys to Russian ports since the 2 oil caps have come into effect, vessels which never made those journeys prior to that.

Then we've looked at things like ownership structures behind the vessels themselves. So where the group owner is known or maybe the group owner has changed to what appears to be more of a front organization, which does seem to have a Russian nexus in some way. And then we've also looked at vessels, which were involved in the calling of crude and refined products for Iran and Venezuela as well. So vessels potentially, which needs journeys to the Malacca Straits around Singapore and have then transferred cargoes onto other vessels, which have made their way to China. And there's been a clear Iranian link within those particular journeys.

And then similar with Venezuela as well. So vessels which have gone dark where the AIS transponder has no longer been able to be found on the radar around the coastline of Venezuela. Vessels such as that have also been included within that 443 number as well. So we've come to a clear picture. And maybe the number has grown since we first did the analysis, but that 443 is based on those particular numbers as well.

Kristen Hallam

Lots of calculations went into that, I'm sure.

Byron McKinney

Yes, yes.

Kristen Hallam

If these ships have gone dark, does that increase the risk potentially for accidents, for collisions?

Byron McKinney

Potentially, yes. I mean the original use and aim of AIS on a vessel was to prevent a collision. That was the first reason why that has been installed on a vessel anyway. So we can increase that potential. We haven't really seen any instances of that actually being the case at the moment. The reason for why the AIS kind of goes dark and why it's used as a tactic to obscure where vessels go to and who they engage with is because the AIS on the vessel is a manual kind of process. You can switch it on, and you can switch it off.

They put processes or a framework in place, which stop it from just being something which you can just flip on and flip off like a light switch. But the potential to do that is still there, and we still see as well. It's one of the kind of the most basic but the most often used tactic to client, what your intentions might be and what your activity actually is. So if you want to evade sanctions, then dark activity is pretty much one of the first things which will be higher pure list of things to do.

Kristen Hallam

Sounds similar, just switching off your smartphone if you don't want to be tracked.

Byron McKinney

Yes, yes. Well, the location, you switch off the location right on your phone, if you're going to go off the radar, same kind of thing.

Kristen Hallam

Got it. So how many non-Russian vessels have potential for risk regarding Russian sanctions?

Byron McKinney

So I think the number there is a lot bigger. Obviously, we estimated on the shadow fleet go sleep, there was 443. I think when you get to the number which potentially would trade or carry Russian oil, the number goes a lot higher. And I think we're probably looking closer towards maybe 2,000 vessels in terms of that number.

And to give a bit of context around that, those 2,000 vessels come out of a tanker fleet of around maybe 9,000, 9,500. So it's a fair chunk of that fleet. That -- I guess, briefly, really, they're not in that kind of ghost shadow fleet section, but they're also not completely clean as well. But there are vessels, which potentially started to visit Russian ports. Maybe they've conducted at sea cargo transfers with vessels, which have visited Russian ports as well. So the potential for those to lift Russian cargoes is quite high as well. And that number is pretty big in terms of the overall fleet as well.

I think one of the things we found with the analysis is most of those vessels do have a group ownership structure where the owner is pretty much unknown. So it's hard to go back through the registered owner or the operator or the manager and find who is the actual entity behind it, who is the overall owner for that particular vessel. And that kind of ownership structure is if it's missing for some reason, then it's a good indicator of potential risk on that as well.

One of the other things we noticed as well, which I think is maybe not too surprising for people in the maritime industry, but there are the 3 biggest flags globally, Liberia, the Marshall Islands, Panama, that generally have a high relevance within that particular statistic as well. So out of the 1,900, I can't remember the percentage off the top of my head, but it's a high figure, which is represented by those 3 flags, which, again, is flags of convenience. It means that maybe the ability to obscure the ultimate owner is a little bit easier than if you were a close registry, so to speak.

Kristen Hallam

I think you have alluded to this already, but where are some of the hotspots for Russian oil and diesel ship-to-ship transfers? Where is this activity happening?

Byron McKinney

Depending on the time of the year and the weather, there are quite a few at the moment. The ones which are kind of the biggest hotspots are the waters around South Korea and then also the Mediterranean as well. And then within the Mediterranean, there are particular areas there as well. The key one is off the southernmost tip of Greece, the Peloponnese region, which obviously when you think about it is gateway from the Black Sea down into the Mediterranean. It's an obvious key area. Obviously, a lot of vessels, which kind of move that route will then go down into the UAE to India and further afield as well. So that is a particular hotspot.

And in terms of the numbers there, they are very, very high. The other way which we've seen a lot of activity as well is then the Strait of Gibraltar. So the small Spanish enclave on the North African coast of Cueta, just off that location. There's also been a large number of vessels, which have engaged in cargo transfers from time to time. And a lot of it is just happening still the same kind of vessels, which are coming from Russian Black Sea ports, but they're just coming further west in terms of where they conduct that particular transfer. And we've seen a lot of transfers, which happen there, which then move over to -- further down into Africa and then also across to Brazil. As the ultimate destination is to where our cargo actually reaches.

The other one I mentioned, which was South Korea, is important because it offers another locational hotspot really, which is the Southeast of Russia. So Kozmino is another Russian port within that particular area, which handles oil, which then kind of drifts south from there into China as well. But those are probably the 3 areas. And if anyone is a seasoned vessel watcher for this kind of stuff, those are the 3 areas I would say that you'd need to keep an eye on.

The other one, final one is probably the Atlantic as well. But because of weather issues, it hasn't been as big as the others. But as we come towards the end of spring and into summer, it's likely to pick up slightly from this point on. So one kind of area we will be keeping a watchful eye on in the next couple of months.

Kristen Hallam

So how do these vessels manage to evade sanctions on the movement of oil and its refined products?

Byron McKinney

Yes. So it's a good question because there's kind of 2 things here really. One is some of the vessels are just making direct port calls to Russia, fully visible. So you see them on the radar on AIS. They make port calls. They go off to various discharge points and load the product.

It's very different to how you see sanctions evasion in the case of a country like North Korea. With North Korea, pretty much everything is done off the radar. It's not open. It's not visible. But Russia still pass that option because the price cap says, you can still trade oil at a particular price or below that price. And as long as the documentation is there and can be seen, then it's okay for oil to kind of move in a particular direction, shipments can happen, et cetera. That's all okay.

But there is that kind of second piece to it where there have been instances where certain oil shipments have tried to obscure their exact origin. So if they do come from a Russian port, they have instances where they've tried to prevent the relocation being numb. And the way in which that's done, we come back to AIS and dark activity. That's the most obvious way to try and hide it. But if you do that, then there are obviously -- there is a point where the AIS has to come back on. You can't keep out indefinitely. Keeping the AIS off indefinitely raises a lot more suspicion around the vessel.

Also, when you get to a particular port, you should put the AIS back on. So if you go to North African pool, for example, if you have a refined product, you're going to have to switch it back on before you enter port. So there has to be that kind of period where you'll lit up again, so to speak, on the radar. So that's one tactic.

The other one is to spoof your location as well. And there has been a few instances of this in the news recently. One quite prominent where the office of foreign assets control raised a short advisory notice quite recently, where I mentioned the Russian ports of Kozmino, there has been some instances of vessels, which have tried to spoof their AIS and the MMSI number, which is generated for each vessel. So it looks like the vessel is in one location, but really it's been somewhere completely different. So that vessel might be at the port of Kozmino. It might be loading Russian oil, but the vessel is given off a different location through its broadcast, and it appears somewhere completely different. So that's another much more sophisticated way of trying to obscure your activity and your patents of trade. And it's the one which you really want to hide, that's the one you would probably try. And there are instances of that happening.

Kristen Hallam

Some sound pretty simple and some sound more sophisticated.

Byron McKinney

Yes.

Kristen Hallam

Interesting. So is the use of these ghost ships or shadow fleets as high as one might expect?

Byron McKinney

I think at the start of the first price cap in December, potentially it was. An activity did look to be increasing with that ghost fleet. But I think maybe as time has gone, there are some instances where it hasn't been as stark as maybe people thought it might be. There's still a huge amount of trade which happens, which looks to be working at the price cap limit and within the boundaries and definitions of the price cap. But it hasn't been the case that the ghost ship fleet has started growing. It's bringing in much more vessels than previously thought.

So it hasn't, in my opinion, as being as big as maybe people potentially [indiscernible]. Current news reports and stories as well, which have been out there, have highlighted ensuring that the price cap is actually working to the effect it was intended to have as well. So it's been able to keep Russian production at a particular level. Oil has been flowing as well. But we haven't stepped outside of it. We haven't seen anything unnatural, which has raised any issue, which would say the ghost fleet has to increase in number or we would see much more sanctions of Asian activity. Even though there are instances of it, as we've discussed, it hasn't been as great as first thought of. It's weakened slightly over the last couple of weeks and months. But yes, we will see what happens as we get into the summer and beyond. But currently, that looks to be the case.

Kristen Hallam

So now we'll come back to the P&I club. Why does the P&I club need to be so concerned about ghost ships? And what other companies or financial institutions should be concerned?

Byron McKinney

So the reason, obviously, for being concerned is vessels of that huge entities on their own in terms of structure. The cargoes they carry, especially when it comes to oil products, are hugely expensive. When you think about it on particular vessels, even of various sizes, you'd imagine the cargo is many millions of dollars. So it makes sense that if you own the cargo or you own the vessel, that there has to be kind of insurance at some point through the process to ensure that things operate in the way they do, and there's no issue which could arise if something goes wrong within a particular journey, which might last weeks or months. So it's very important that, that is in place.

Again, it's the same way in which the supply chain is put together and why insurance companies, financial institutions such as banks have involved in the trade as well, to be able to ensure that various instruments around trade finance, for example, how to ease the passage and flow of cargoes from one location to another. So it's important that those particular types of service are in place and are available to the maritime industry as well.

The reason why they need to be concerned about ghost ships is obviously because the activity which we mentioned and which we talked about such as switching off your AIS transponder, trying to spoof the location as to where you actually are when you're not in those particular locations. Also if you're conducting cargo transfers and maybe you do those cargo transfers dark as well and doing it the accepted norms and parameters of conducting a ship-to-ship transfer, those are all reasons why banks and P&I clubs and others should be concerned, right, because they increase risk not just from a compliance perspective, but one of safety at sea as well.

So it's for those reasons which financial institutions, banks, insurance companies, P&Is and the rest of them need to be very aware of what it is that ghost ships are up to and also why there really shouldn't be ghost ships on the water at the moment as well, why there should be some form of transparency as to who is working where, who is trading with who, what fleet they are part of, what nationality in the vessel is registered with. All that kind of information and detail is very important and needs to be out there for people to see as well.

Kristen Hallam

Speaking of ownership data, you wrote another paper more recently, a case study looking at vessels with unknown ownership visiting U.S. ports. What conclusions did you draw from that?

Byron McKinney

The reason we decided to write that was based on the Russian ghost fleet originally. But there was also another element or another angle to it as well, which we wanted to take a look at and we wanted to test. So there was a conversation we had with a particular partner of us, S&P Global, who mentioned that within their screening checks, their organization, their institution. If they see a particular vessel, which is involved in the trade, which they're working with, and they noticed that the ultimate group owner of the vessel is not known or is unavailable, then they generally see that as more high risk.

We wanted to look at that and see whether there was anything within the data itself in terms of overall ownership of each and every cargo carrying vessel globally, whether that was true. So we wanted to test the hypothesis. So we decided to take all the cargo carrier vessels and then group them by those which have a group owner, those which don't have a group owner. And then we wanted to categorize them by their particular compliance status, which would have been kind of a green okay status.

Then there was a status which has been the middle of that, maybe more of an amber slight warning. And then there was the severe red status. And the severe status is obviously based on whether that vessel visited a sanction port, whether the vessel is on a sanctioned watch list from OFAC or some of the regulatory agency and then put those 2 pieces of information together. So the ownership data and the compliance status to see whether there was any basis to that angle we wanted to test, which was there's a vessel which doesn't have the group owner indicates higher risk. And we saw the clear link correlation, which was true. So we do see. If there is no group owner, then generally the vessel is more likely to be engaged in suspicious activity or sanctions of Asian activity.

Kristen Hallam

And what percentage of ships have unknown owners?

Byron McKinney

So from the methodology and the analysis of the data, we came to a figure of just over 12%, which is 12% of cargo carrier vessels. I think, in total, it was around 70,000 or just under 70,000 vessels, which we looked at, which would have covered tanker vessels, bulkers, containership, general cargo, et cetera. So that 12% is made up of that figure.

Kristen Hallam

That it sounds like a lot to me.

Byron McKinney

Yes, it is quite a bit. I think when you go down into the data and you look at the flags, which those vessels are associated with, there are some good reasons as to why that number is at that level. And there are also some kind of elements in there where you could see, whilst the group owner is unknown, there are some other instances where it could be clearly explained as not being by risk in some cases. So we noticed there's a large number of Japanese vessels, which is in that 12.2% number. But when you look at those vessels in more detail, you kind of see that the trade which those vessels are engaged in, most of it is Japan to the U.S. Some of it is done because they want to operate with a particular type of flank state. In this case, Panama. Potentially, they get cheaper rates as they move through the Panama Canal. So those vessels, they come into that 12% number, but they wouldn't be as high risk as maybe others which we found or witnessed within the overall number itself.

Kristen Hallam

So how might banks and insurers use this information to reduce compliance risk?

Byron McKinney

It was one of the key areas why we want to do this, which was around how financial institutions, banks, insurers could use that information. I believe that the ownership structure of a vessel in terms of a compliance screening check is fairly low down the overall checklist, if you will. It's not as high as looking at the vessel in terms of its overall sanction states, as you know. Is it on a watch list? Is it not on the watch list? Has it visited a sanction port or not? Those are the kind of things which I think people go to as first protocol and look at those and try and determine what kind of analysis they can get from the historical movement of the vessel.

Vessel ownership, I think, comes much further down the schedule. From what we pulled out and what we found within the data itself, we would say that it should be a lot higher. If you find the vessel ultimate owner isn't available, then there is a potential risk there as well because based on the information which we've extracted, those vessels are more likely to be engaged in either severe compliance activity, all in a kind of a slightly downgraded compliance activity, which is more of an amber status where maybe the vessel does have a couple of days where the AIS is often in a slight high-risk jurisdiction, for example, or maybe there's been a flag within the history of that vessel, which was sanctioned maybe or again high risk, that kind of status in there as well.

So I think those are the reasons why financial institutions should look at this and maybe pay a bit more attention to it than they currently do.

Kristen Hallam

Well, you've given us thoughts to think about in this episode today, Byron. Can you give us some high-level takeaways from our conversation, particularly focused on our listeners in the C-suite? What do they need to think about when it comes to the risks presented by ghost ships and the shadow fleet?

Byron McKinney

The kind of key thing to be aware of really is that the level of risk is a lot higher than it was 3, February 2022. It's been mentioned many times in the past that Russia is the most sanctioned country now in terms of trade sanctions, the number of goods which are under sanction, plus the oil price cap, various elements around maritime services as well. It means that, that risk is growing and it's got a lot busier than it once was as well.

Russia is obviously a much bigger country than previous states, which have come under G7 sanctions initiatives as well. Iran, North Korea, Venezuela, they haven't been as fully integrated into the global economy as Russia has. And obviously, Russia has a huge energy sector there as well, which means on the maritime side, that level of Russian risk is quite high.

And I think the key takeaway to remember is there's kind of an overland silk road, which runs from China up to the borders of Eastern Europe. And I think it's worth remembering and understanding that there is potentially a maritime version of that as well, which is extended over the last 12 months. It now runs all the way at the Black Sea through parts of Greece, Turkey. And then it goes all the way Eastwoods, potentially up through the South China Sea and to the borders of Russia on the Eastern side as well. So that has grown.

As we can see with previous sanctions in these areas as well, that ability to butter up against potential risk around various types of vessel, the types of cargo they carry, who is owned in those vessels, who is the ultimate beneficiary of the cargo itself, who is the end user, all that kind of information is much more important now as well. And it's much more preponderant in terms of where it occurs, how often it occurs, and to be fully aware of that is the key thing now. Sanctions are much more out there and the chances of you coming up against it has increased hugely over the last 12 months.

And maybe the final takeaway really is to understand that 2022 as kind of the area where a lot of the sanctions around Russia were first codified and built and put in place. And 2023 is probably the year where we'll see more sanctions enforcement, penalties, notices, which are released by various regulatory authorities and state authorities to ensure that they're being adhered to. So I think in 2023, we're likely to see a lot more enforcement action.

Kristen Hallam

That's something definitely to keep an eye on, and I like that image of maritime version of the Silk Road. That's one of my takeaways from our conversation, for sure. Thanks again for sharing your insights, Byron, and thanks to our listeners for tuning in.