As Moscow reels from the impact of sanctions, experts warn Russian exporters could deploy a range of deceptive shipping practices to dodge restrictive measures and continue trading globally. Felix Thompson examines the risks facing compliance teams, and the role of technology in countering sanctions evasion at sea.
Having loaded up cargoes at ports on the Baltic or Black Seas or terminals in the Arctic in mid-February this year, dozens of Russian ships laden with oil were sailing enroute to their destinations across Europe, Asia and North America.
But by the end of that month, Moscow’s vast network of tankers and gas carriers was suddenly in limbo, with US and European port bans – alongside other retaliatory sanctions imposed on Russia – leaving many ships without a port of call.
In one case, the NS Champion, a vessel owned by Russian state-shipping firm Sovcomflot, had been due to dock in Orkney, Scotland, but was forced to change course when the UK banned Russian vessels from its ports in early March.
The tanker then set sail for Denmark, but did not unload or pick up goods there. After nearly a month of idling at sea, it changed its reported destination to “awaiting orders” for over a fortnight before heading towards India in late April.
Analysts estimate over 2,000 Russian ships and vessels are affected by the US and European sanctions on banks and companies, with western governments specifically targeting Sovcomflot, Russia’s largest tanker operator.
In May, having been hit by sanctions and struggling to source insurance cover, the company moved to sell a third of its fleet to pay off mounting debt.
Meanwhile, shipping companies – even those not affiliated with Russia – are bracing for the impact of new EU sanctions on Russia’s oil sector.
The bloc is the largest buyer of Russian energy, and according to statistics from the International Energy Agency (IEA) imported 2.2 million barrels per day of Russian crude oil last year – around two-thirds of which arrived at coastal ports.
Following weeks of wrangling, the European Commission revealed on June 3 that as part of a sixth wave of levies it would slash Russian oil imports by 90% – though it included temporary exemptions for a handful of member states such as Croatia, the Czech Republic and Bulgaria that are dependent on Russian imports via pipelines.
Crucially, Brussels said it would ban firms from insuring or financing the transport of Russian oil, “in particular through maritime routes”.
While companies are still permitted to transport Russian crude to third countries, the cost and difficulty of doing so without funding or insurance will likely have a sizeable hit on the number of vessels available for uplifting oil.
“The coordinated implementation of the EU and UK marine insurance ban alongside the EU oil embargo mean that Russia’s ability to export oil anywhere in the world will be heavily disrupted,” law firm Reed Smith said in a client alert.
“Shipowners will now struggle to find alternative cover as P&I Clubs cover around 90% of the world’s fleet,” it added.
Against this evolving backdrop, evidence has started to emerge of Russian shipping firms attempting to nullify the impact of western sanctions, with the rate of vessels engaging in so-called “flag hopping” ramping up in the initial phase of the war.
“There was a big surge in changes of flag from the Russian flag to other flags of convenience, mainly because it’s easier to conduct trade that way,” Dror Salzman, a product manager at maritime intelligence company Windward, tells GTR.
Data from Windward puts the total number of Russian vessels that swapped their flags to that of a non-sanctioned country in March at 18, the highest monthly showing since the firm started collecting data in January 2020.
Windward’s report says this trend could indicate “bad actors” were working to intentionally hide their Russian identity, or business connections, from authorities and trading counterparts; or that honest businesses were merely seeking to continue trading without unnecessary hurdles.
There were also signs in the initial weeks of the crisis that Russian ships were increasingly being linked to so-called “dark activity” – instances when a vessel’s automatic identification system (AIS) transponder stops emitting a signal showing its location.
This is not necessarily evidence of illicit behaviour: such an event may occur when a vessel is moving through a crowded waterway, or if there are data privacy issues with transponders in a particular network.
But other countries, notably North Korea and Iran, have relied on this tactic to continue exporting coal and oil, despite being heavily sanctioned.
According to Windward, there were 33 occurrences of dark activity lasting three or more hours by Russian oil-chemical and oil-product tankers in the week up to March 25, more than double the weekly average of 14 seen prior to the invasion of Ukraine.
The analysis notes there was a notable rise in such activity among Russian tankers carrying crude.
“Before the invasion and subsequent sanctions, Russian crude oil tankers were barely involved in dark activities, with a weekly average of 1.1 such activities per week. Between March 19 and 25, that number skyrocketed to 20,” it says.
A threat on the horizon
For now, experts say these figures do not prove the widespread use of illegal shipping activities, with Moscow continuing to find shippers willing to transport its oil and gas, as well as ready buyers in China and India.
“30 or so instances of vessels going dark isn’t necessarily a major jump for such a large fleet,” says David Tannenbaum, a director at Blackstone Compliance Services.
“People are still using Russian ships, which are chartering out at well below market rates; or, when Russian energy companies are chartering ships, they’re paying a multiple of 16 as compared to what they paid previously. Currently, there’s not a lot of big incentives for Russia to engage in a lot of these tactics, such as going dark.”
There is a growing divide between shippers actively seeking Russian business and those wary of having any affiliation with Moscow. For some, fears over reputational damage or mistakenly violating sanctions are simply too great.
“There is definitely a split within the maritime community between the people that say, ‘I’m not going to touch this with a 10-foot pole because we don’t know what’s on the horizon’ and those that are willing to accept more risk,” Tannenbaum tells GTR.
Shipping companies based in Greece, Malta and Cyprus have reportedly ramped up their transportation of Russian oil around the world, and are taking advantage of sharp jumps in rates for tanker cargoes as a result of the war.
Data compiled by Bloomberg show how Russian seaborne crude exports have continued to flow unabated, in spite of sanctions, with Moscow having swung towards buyers in Asian countries in the wake of shrinking demand in the EU and US.
A little over 1 million out of the 1.46 million barrels of crude departing from Baltic ports were destined for Europe in the week ending March 11. The following week, just 310,000 barrels arrived at European ports, while the rest were sent to Asia or other unknown destinations.
But the situation could change if further sanctions are implemented, at which point Tannenbaum expects Russian ships and those docking at the country’s ports to start using tactics such as going dark, or manipulating their AIS.
Salzman tells GTR a tipping point could come if the EU and US ban ships from conducting port calls and loading goods in Russia. “Should that happen, we will see a very fast shift in terms of behaviour for vessels that are conducting business with Russia or trading commodities from Russia.”
Speaking at an online event in March, Tannenbaum said Russian vessels are likely to turn to more novel sanctions evasion techniques such as “super-spoofing”.
“People have already shown a capability to pretend that a vessel’s AIS transponder is in one location, when it is in a different one. But with a full network of transponders, and high-end cyber capabilities, they could start creating completely fraudulent AIS trails to make it look like a vessel has never been in a certain place,” he said.
Unlike fellow sanctioned nations Iran and North Korea, Russia’s coastline is lengthy and not contiguous with the shores of other countries.
As such, Moscow could effectively create an AIS dead zone by blocking operators of on-the-ground receivers – those that relay AIS information, such as name, speed and destination from vessels – from sharing data with foreign parties.
“The other thing Russia has, which North Korea and Iran do not, is a large number of surplus vessels. One of the problems with turning off or messing with terrestrial AIS is we still have the satellite AIS data. But Russia has decoy vessels that it could use,” Tannenbaum tells GTR.
He says a spoof Russian ship could use its AIS equipment to broadcast the identity number of an oil tanker, while the other vessel “just never turns its transponder on and goes to places”.
Windward’s CEO, Ami Daniel, also expects a surge in ship-to-ship transfers involving Russia-affiliated ships, whereby vessels unload cargo to another ship at sea. “We have already seen a few cases of this,” he told GTR in April.
Due diligence concerns
Regulatory scrutiny of maritime trade and deceptive shipping tactics to evade sanctions has been growing, even prior to the Ukraine crisis.
In May 2020, the US Office of Foreign Assets Control (OFAC) released a landmark advisory on how it expects banks, traders and other players to detect possible sanctions evasion at sea.
Since then, parties involved in trade transactions have faced pressure to identify potential red flags and cut false positives.
But Russia-related risks are expected to be above and beyond anything that has come before with other heavily-sanctioned countries, such as Iran, Venezuela or North Korea, given the size of Moscow’s fleet and technological capabilities.
As detailed in a May report from Pole Star and Blackstone Compliance, almost 90% of vessels which can be traced to a Russian party using International Maritime Organization (IMO) data are registered at different flag states, including Liberia, Malta, Cyprus and Greece.
While this is common industry practice, the paper says IMO data only effectively traces a vessel’s registered owner and operator, with accurate information on the vessel’s ultimate beneficial owners currently lacking. According to Tannenbaum, this key piece of information could be a “made up name”.
“Independent researchers had previously been able to track Iranian and North Korean vessels, both of whose countries had limited fleets and assets. Keeping track of the ultimate beneficial owners tied to a G20 country is a much harder game and will require significantly improved customer due diligence and onboarding practices at flag states,” the report says.
At the same time, there are concerns that western businesses will take an overly risk-averse approach, which could harm legitimate trade in high-risk sectors.
These so-called “moral sanctions” mean many entities are wary of being seen to conduct business with Russia even where laws do not necessarily prohibit them from doing so, experts say.
“When it comes down to the goods themselves, proving the origin of those goods leads to a myriad of issues,” says Simon Ring, global head of maritime trade technologies and ESG at Pole Star.
“If you use ships within your business, under current rules, you could use a vessel that is not designated for [its] owners and benefactors. But it could still have a Russian nexus; it could still be going in and out of Russia. What level of due diligence do firms go to?”
Should sanctions ramp up further, Salzman argues the market is going to “find itself in a pickle, in terms of how do we not flag all the vessels in the world”.
“Russia is one the largest countries, with so many ports, so much territorial water, such a large area of exclusive economic zone – that it is going to be very hard.”
Role of technology?
There is hope that emerging technology can help companies conduct due diligence while allowing legitimate trade to continue flowing, with solutions available to collate data on Russia-linked vessels and identify possible AIS manipulation.
Regulators may be “red hot” on Russia-related risks, but the maritime industry is in a “much better place” to deal with the Russia-Ukraine crisis than a few years ago, in large part because of efforts by OFAC, Ring tells GTR.
“OFAC’s 2020 advisory wasn’t just focused on commodity traders or banks, it focused on everybody, across all participants of the global trade and supply chains. The tech is a lot more developed now, because it had to be.”
Ring says that where technology solutions had previously only helped firms identify the operators of a vessel, they are now much improved and can pinpoint “everybody that’s involved”, including the owners and benefactors of the ship in question.
“These days, the tech can deep dive into where companies are domiciled, where they are controlled from and registered, and the shell groups underneath. A bit further than that, it can start applying the ownership rules around 50%, because a lot of people dilute ownership to get past rules and regulations.”
Also available are solutions that can help traders and banks differentiate possible dark activity from instances where AIS transponders may have simply stopped emitting for more innocent reasons.
Compliance technology companies believe algorithms are now fine-tuned enough to separate natural and unnatural ship behaviour, sending users bespoke alerts when a ship’s AIS appears to be relaying unusual information in a high-risk area.
“If an AIS tracker goes offline, you can determine if another vessel was in the vicinity during that time – or if there was a port they could have visited – based on the vessel’s last known location and heading, as well as the characteristics of the vessel and the possible calling port,” says Nigel Hook, CEO of compliance platform TradeSun.
“Because we have access to the transactional data, we know the parties involved in the transaction, the vessel name, the port of loading and discharge, the cargo information and the transaction dates. When you couple this with ship tracking, ownership and sanctions data we can determine if compliance requirements have been met,” he adds.
Still, Russia’s technological capabilities mean companies, financial institutions and flag registries will need to remain vigilant for evasion efforts in the months ahead, as industry experts warn Moscow could seek to create a dark shipping network akin to those used by Venezuela or Iran – which are continuing to ship sanctioned oil globally.
“We are preparing ourselves for the next ramp up in Russian sanctions already, which we fully expect,” says Salzman.
