The new European measures to strengthen sanctions against Russia, discussed on Friday in Brussels, provide for better control of compliance with the price at which Russia exports its oil abroad. And to do this, Denmark could have to play a central role due to its control of the straits between the Baltic Sea and the North Sea.
There is something rotten in the realm of Russian oil sanctions. The European Union must discuss, on Friday, November 17, the best way to limit Moscow’s revenues, and particularly those from the black gold trade. Denmark would, as such, be expected to play a central role in the new sanctions system, said the Financial Times on Wednesday November 15.
Brussels would like to entrust “Denmark with the task of inspecting and possibly blocking cargo ships carrying Russian oil sailing in its waters”, writes the British daily, citing several “people informed of the discussions” about the next European sanctions plan.
This new mission of “big cop” of sanctions which could fall to Copenhagen is, however, not included anywhere in the proposals for toughening sanctions made public by the European Commission on Thursday evening.
The great return of the ceiling price for Russian oil
“Several European diplomats confirmed that the European working document did not make direct reference to Denmark,” underlines the Reuters news agency. “I don’t think that Denmark will from now on physically stop Russian tankers passing off its coast. I don’t see on what basis,” says Henning Gloystein, energy director for the Eurasia Group. If only, according to him, because there is no ban on anyone transporting Russian oil. The objective of the sanctions is simply “to prevent Russia from selling its oil above the ceiling price of 60 dollars per barrel of Russian crude exported by sea (set in December 2022), not to stop them”, recalls this expert.
However, the new EU proposals plan to increase vigilance in the Baltic Sea and more specifically in the Danish straits which allow ships to pass to the North Sea. “It is a critical corridor for maritime traffic in this region and since it is under the control of Denmark, the role of this country automatically becomes more important,” summarizes Benjamin Hilgenstock, specialist in international sanctions against Russia at the Kyiv School of Economics.
Europe wants to put the famous ceiling price for Russian oil back in the media spotlight because its effect caused a stir. In October 2023, there were “almost no deliveries of (Russian) crude oil by sea below the limit that the G7 and its allies tried to impose”, underlines the Financial Times.
Even Jeffrey A. Sonnenfeld, an American economist who was one of the architects of the price ceiling mechanism, admitted that “his” baby was no longer working.
However, shortly after its introduction, this sanction initially seemed to work very well. Russia thus found itself selling its oil by sea below the famous $60 mark for several months. It was only from the summer that Russian revenues from these exports began to soar again.
Ghost ships and shadow insurers
Today, experts even wonder if, in reality, this price ceiling never worked. “Another explanation is the total embargo on Russian oil for the European market alone (which came into force at the same time as the fixing of the ceiling price on international transport, Editor’s note). Deprived of this outlet, Russia had to consent at significant discounts to continue to sell its oil to new customers, such as India,” explains Elina Ribakova, specialist in sanctions against Russia at the Peterson Institute for International Economics (PIIE).
Another explanation also lies in the fact that Russia ended up finding how to effectively circumvent this system. “It has built up a fleet of ‘ghost ships’ which today carry out 70% of all oil transport for Moscow,” notes Elina Ribakova. These are hundreds of second-hand and end-of-life tankers which are often more than 50 years old.
What is the connection between old boats and the evasion of sanctions? “By purchasing end-of-life tankers, the Russians were able to have them insured by new companies which do not depend on the G7 countries or Europe and thus accept the risk of ensuring the transport of oil abroad. above the ceiling price”, explains Benjamin Hilgenstock.
Read alsoRussia relies on “shadow fleets” to save its oil exports
Insurance companies represent, in fact, the sinews of the war for Russian oil. The system imagined in December 2022 provided that a cargo ship carrying precious Russian hydrocarbon sold for more than 60 dollars should not be insured under penalty of a fine for the insurance company.
Result: in addition to ghost ships, these sanctions have led to the creation of “shadow” maritime insurance companies which agree to take this risk and bank on the fact that the ship will not be inspected before delivering its oil to India or elsewhere. “It must be said that the controls are not sufficient,” assures Henning Gloystein.
And that’s where the Danish Straits come into play. This is the perfect place to increase controls. “More than 70% of all Russian oil exports by sea pass through the Baltic Sea before being delivered to customers mainly in Asia,” emphasizes Henning Gloystein.
To make these controls more effective, the European Union would now like the insurance of these tankers to also cover European environmental regulations. “Clearly, these ships will have to be insured against the risk of oil spills. Which is very expensive,” notes Benjamin Hilgenstock.
Beware of oil spills
A novelty which clearly targets the fleet of Russian “ghost ships”. Indeed, “these are aging ships which pose an increased risk of accident and it may therefore seem entirely natural that a country like Denmark wants to protect its coasts against such a risk by demanding to see proof that the carrier is well and truly covered,” explains Elina Ribakova.
For Moscow this is a problem: “none of these new insurers (in the shadows, Editor’s note) have the financial backbone strong enough to cover the enormous cost of a possible oil spill,” says Benjamin Hilgenstock. In other words, the goal is to push these Russian boats to return to insure themselves with companies that are already well established and can guarantee against this type of risk. All these insurers depend on G7 or European countries and will therefore require that the oil transported will indeed be sold below 60 dollars. And the trick will then be played?
It is always possible that a Russian ghost ship continues to do business with these small “shadow” pharmacies and refuses to provide documents to the Danish authorities. Denmark will not have the means to block these ships. But carriers who make this choice will find themselves in the crosshairs of the American and European authorities who may, in the future, sanction them. A hell of a risk…
“In the short term, that is to say in the coming weeks and months, these adjustments will probably force Russia to sell its oil cheaper. But we should never underestimate the creativity of those who want to circumvent the sanctions “, says Henning Gloystein. But, for Moscow, finding the solution will inevitably have a cost. Russia had already had to spend several billion dollars to build up its “ghost fleet”. That will already be a win.
