NEW YORK (CNN Business) — The Russian invasion of Ukraine has made Ukraine a pariah in the global energy market. Since the war began, a de facto embargo on Russian oil has emerged, with oil companies, trading companies, shipping and banks all at the same time tumbling.
Now, however, there are signs that Russian energy is attracting the interest of potential buyers, at least in the shadows.
As the war in Ukraine continues, Russian tankers carrying crude oil and petroleum products are increasingly disappearing from tracking systems.
In the past, US officials viewed so-called dark activity, where ships’ transponders would be turned off for hours at a time, as a deceptive shipping practice often used to evade sanctions.
Predictive intelligence firm Windward told CNN that dark activity among Russia’s crude tankers is up 600% compared to before the war began.
“We are seeing a rise in the number of Russian tankers that have deliberately halted transmissions to get around sanctions. The Russian fleet is beginning to hide its whereabouts and its exports,” Windward CEO Amy Daniel said in an interview.
And this doesn’t just happen with crude oil. Similar trends play a role in other petroleum products as well.
During the week of March 12, there were 33 dark activity of Russian tankers of oil, chemicals and petroleum products, according to Windward, which uses artificial intelligence to track the offshore industry. This is 236% higher than the weekly average for the previous 12 months.
“These ships want to disappear.”
International regulations require ships such as oil tankers to keep their transponders on almost all the time.
In May 2020, the US Treasury sent an advisory report on sanctions to the marine, energy, and mineral industries to address “unlawful shipping and sanctions evasion.”
The first example included is the “disruption or tampering” of automatic identification systems (AIS) on ships to “disguise their movement”.
The Treasury Department warned that “tampering and disruption may indicate potentially illegal or sanctionable activities.”
Ships may also darken for safety reasons, including when traveling through pirate-infested waters. But Daniel, chief executive of Windward, said that was not why ships were turning off their identification systems now.
“These ships want to hide from the radar,” he said. “From a compliance perspective, that’s a sign of doubt.”
In a statement to CNN, a Treasury spokesperson said the department is “aware of these reports” and is working with partners and through a “variety of methods” to not rely solely on transmitted broadcasts to monitor ships of interest.
A page from the playbook in Iran
Similar behavior was observed in the past decade when the United States imposed sanctions on Venezuela and Iran, making it illegal to buy oil from those countries.
“Russia is following the Venezuelan and Iranian rules of the game, with little change,” said Andy Lipow, president of the consultancy Lipow Oil Associates.
The turning point is that the West, unlike Venezuela and Iran, has not imposed direct sanctions on Russian oil.
Yes, the White House has banned imports of Russian oil to the United States. But this does not prevent other countries from buying Russian energy.
public relations disaster
However, the sheer stigma of doing business with Russia, along with uncertainty about sanctions, has led to a de facto ban. Analysts say this helps explain the rise in dark activity among Russian-flagged ships. Buyers don’t want to be exposed like those collecting Russian oil during the deadly war in Ukraine.
“It’s a public relations disaster,” said Robert Yuger, vice president of energy futures at Mizuho Securities.
Likewise, shipping companies may want to avoid the scrutiny that comes from dealing with Russian crude.
“These ships are getting hidden because they are afraid that they will be blacklisted for a while and won’t be able to get work in the future if they do Russian business,” Lipow said.
However, there is a financial reason to buy Russian oil now. Energy demand is so high — largely because of sanctions — Russian crude is trading about $30 cheaper than Brent crude, the global benchmark.
“You’re getting a huge discount,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “The economic incentive is there if you are not concerned with sanctions.”
Where does the oil go?
Research firm Rystad Energy estimates that between 1.2 million and 1.5 million barrels per day of Russian crude oil exports have vanished in the five weeks since the start of the war.
“The destination of the remaining crude exports from Russia… is increasingly unknown,” Rystad Energy wrote in a report this week, noting that this mysterious oil is about 4.5 million barrels per day.
So who is buying Russian oil?
Analysts said there was evidence that refineries in China and India, the world’s two largest consumers of oil and the fastest growing economies, were stealthily buying Russian energy.
Tran said trading companies may buy Russian oil and store the barrels, including “floating storage,” on tankers still at sea.
Besides dark activity, predictive intelligence firm Windward has found that some ships and companies are still dealing with tankers belonging to Russia and are involved in ship-to-ship transfers.
In 2020, the Treasury Department warned that ship-to-ship transfers, especially at night or in areas considered high risk for sanctions evasion, are “frequently used to evade sanctions by disguising the source or destination” of oil, coal and other materials.
Windward said that despite the war in Ukraine and sanctions against Russia, the number of ship-to-ship encounters that lasted at least three hours between Russia’s oil tankers and other ships was “relatively normal.”