By Stefanos Roulakis and Efimia Karageorgiou
In response to the Russian Federation’s invasion of Ukraine, the United States has coordinated with its allies to target Russia’s energy sector. One aspect of this strategy has been the imposition of sanctions against key operators. Another measure involves establishing a price ceiling on oil and other energy products to restrict access to Western shipping-related services. In reaction to this approach, a “parallel” shipping system has emerged to transport Russian oil without using U.S. or European services. Vessels operating in this parallel system—colloquially referred to as the “ghost” or “dark” fleet—operate without insurance from International Group (“IG”) members, use flags based outside the EU or U.S., receive services from classification societies outside the G7, and transact in non-G7 currencies. To conceal the non-compliant origin of their cargo, “dark fleet” vessels frequently engage in ship-to-ship transfers and disable their Automatic Identification System (“AIS”), which creates hazards for all maritime commerce.
Ironically, sanctions are victims of their own success. They have incentivized the creation of a parallel system with profound effects that cannot be fully foreseen. As a starting point, it poses the most serious threat to dollar dominance in shipping and trade in several decades. It increases costs for compliant actors, while scofflaws benefit by operating in a gray zone effectively devoid of regulation. This jeopardizes the international system of treaties, funds, and regulations under which the shipping community has operated for decades. In a final twist of irony, the success of these sanctions limits the effectiveness of future foreign policy measures.
Background
The United States and its allies implemented several measures in response to Russia’s invasion of Ukraine in 2022. The U.S., EU, Canada, and UK swiftly banned the importation of Russian oil and energy products. The ban also prohibited new investments in the energy sector of the Russian Federation by U.S. persons. By the end of 2022, the G7 established the Price Cap Coalition, which set a price cap of $60 per barrel on Russian oil which uses G7 (primarily U.S. and EU) trading infrastructure. In 2023, the U.S. took further steps and applied OFAC sanctions to foreign financial institutions that conduct significant transactions or provide services related to Russia’s military-industrial base.[1] In 2024, OFAC introduced new sanctions targeting foreign financial institutions, heavy industries such as metal, and Russia’s military-industrial base.
Emergence of the Dark Fleet
As a result of these sanctions, Russia formed alliances with several emerging market countries, including China and Iran, to circumvent Western sanctions and sell their oil above the established price cap. This circumvention of sanctions has fractured the oil market and relies on Russia’s “dark” fleet to transport the sanctioned oil. Russia has developed a fleet of “ghost” ships, typically old oil tankers which disable their AIS to mask their location, use irreputable flags, and lack IG P&I coverage. These evasive tactics increase collision risks and raise the likelihood of spills, endangering both crews and coastal states. These ships also often take irregular routes and conduct ship-to-ship oil transfers to mask their cargo’s origin, further heightening environmental risks. Any such spills would be outside of traditional insurance coverage, with serious questions about who would pay for response and cleanup.
Insurance Concerns
Sanctions have incentivized the creation of a parallel non-IG P&I insurance market for ghost ships, with countries like Russia, Iran, China, and India providing coverage. However, these insurers lack the financial strength of IG P&I Clubs and therefore do not have the same ability to pool claims. In cases of a major accident, claims may remain unpaid, as dark fleet operators are untraceable by design and their insurers may not have assets ready to pay. This parallel system of non-IG P&I insurance ultimately undermines the established global marine insurance system, which has proven its reliability in paying claims over the decades.
Threats to U.S. Dollar Dominance
The U.S. dollar has been the dominant currency of world trade for decades, offering significant benefits to the U.S. by having its currency used for payments worldwide. Use of the dollar abroad acts as an interest-free loan to the U.S. Treasury. It also makes the dollar a key tool of U.S. foreign policy. Indeed, the pervasiveness of sanctions is intrinsically tied to the use of the dollar, as USD usage is the most frequent “hook” OFAC uses to establish jurisdiction. A decline in use of the USD hurts the U.S. economically and impedes its foreign policy goals.
Traders and vessel owners/operators are shifting to a variety of currencies to avoid trading in USD. Five main currencies trade for rubles: the Turkish lira, the Belarusian ruble, the Kazakhstani tenge, the Emirati Dirham, and the Chinese RMB.[2] The People’s Bank of China (“PBC”) supports this shift, implementing the Cross-Border Interbank Payments System (CIPS) to facilitate international RMB transactions.[3] CIPS allows RMB to compete with the dollar globally, encouraging emerging-market currencies to shift away from the U.S. dollar. Thus, these parallel systems created in response to sanctions on Russia have decreased the reliance on the U.S. dollar in international trade, threatening its dominance.
Inordinate Effects Felt by Compliance-Facing Shipowners
Another irony of the sanctions regime is its inefficient allocation of costs. Compliance costs largely fall on operators serving the U.S. and EU markets, many of whom are EU nationals. Significant costs arise from the need for additional personnel to screen cargo, monitor developments, and communicate with relevant authorities. Opportunity costs are also high, as shipping companies that operate in illegal trades or a gray zone can earn substantial premiums compared to compliant operators. Thus, compliant shipowners face a double burden of lower earnings and higher costs than less scrupulous competitors.
Future Sanctions Effectiveness
It is axiomatic that some tools blunt with use. Sanctions may be one such tool. Here, Russia and its allies have made tremendous investments in developing a dark fleet to blunt the effect of U.S. sanctions. Parallel service structures—such as insurance, legal, banking, and currency exchange—have also emerged outside G7 constraints. These systems are unlikely to vanish and may well dull the effectiveness of future sanctions.
Conclusion
Sanctions against Russia are a victim of their own success. While G7 members measure success by the amount of reduced revenue for Russia, regulators should also consider other indicators. G7 maritime companies face significant opportunity costs as non-EU shipping companies grow their share of the global market. Another measure is the emergence of parallel systems that bypass sanctions restrictions. These systems pose new risks, such as challenges to P&I insurance, increased collision and oil spill risks, and threats to U.S. dollar dominance. These effects could reverberate for years to come and may even make future sanctions less tenable.
[1] Exec. Order 14114, 88 Fed. Reg. 89271 (Dec. 22, 2023).
[2] Alexandra Prokopenko, How the Latest Sanctions Will Impact Russia – and the World, Carnegie Politika (June 20, 2024), https://carnegieendowment.org/russia-eurasia/politika/2024/06/finance-sanctions-russia-currency?lang=en.
[3] Gita Gopinath, Geopolitics and its Impact on Global Trade and the Dollar, International Monetary Fund (May 7, 2024), https://www.imf.org/en/News/Articles/2024/05/07/sp-geopolitics-impact-global-trade-and-dollar-gita-gopinath.