According to an analysis, the inflated shipping costs have enabled Russian companies to earn much more from crude oil exports to India than they previously thought. The charges could have generated more than $1bn for a single quarter.
Russia, up until recent times, seemed to be following the western measures to reduce its revenue, which were implemented after its invasion of Ukraine. India has been buying crude oil from Russia at prices below $60 per barrel.
When freight costs are added, the prices they charge and those of their traders have increased dramatically.
The combined fees from the shipping of oil by vessels linked to Russia and the overcharging that occurred in the first three months of July could have totaled $1.2bn.
Benjamin Hilgenstock is an academic from the Kyiv School of Economics who has studied evasion of price caps. He said that “inflated shipping costs are of major concern, as they create a leakage in the price-cap regime, through which someone can siphon billions of dollars.”
James Cleverly said that it was no surprise that Putin has become more desperate and dishonest with his attempts to reduce the impact of the price cap, which has severely restricted Russian revenues ever since its introduction. The UK will continue to work with our partners in order to enforce this measure.
The G7 price cap is meant to maintain Russian oil production while cutting back on revenues that could have been used to finance the war. The cap, which imposes requirements on buyers and shipowners in participating countries as well as insurers, does not limit freight costs.
The average price for crude oil exported to India from Russia’s Baltic port between December and June was $50 per barrel. The cap was maintained by keeping the price of crude oil in line with what is known as the “free on board”, or cost of the fuel at the port where it was loaded.
Indian customs data show that, over the same time period, the actual prices paid in India (the so-called CIF price – cost insurance and freight) amounted $68. The price difference between India and the Baltic was $18 per barrel. This is a significant discount to the world oil prices which were around $79 a barrel on average over the same period.
Argus figures, a pricing agency also show a wide spread. Argus estimates the average price of Urals oil in India is $14.90 higher per barrel than in the Baltic, since the data collection began in February. This is higher than Argus’s estimate of the actual shipping price, which averages around $9 per barrel.
Officials at a state-owned Indian oil company that bought some of the oil said Indian buyers paid for shipping costs in addition to the price of the oil. Officials at the Indian state-owned oil company said that there was no room for negotiation on freight costs or arrangements.
It is therefore likely that the excess charges were captured by the oil sellers. Kpler, a data analytics company, reports that the oil producers Lukoil & Rosneft sold directly to Indian refineries. In some cases, the sales are managed by trading firms that have emerged over the last year and have close ties to Russian oil companies.
Kpler estimates Russia shipped 108mn barils from the Baltic to India between May and July in 134 ships, a period when the spread between Argus’ prices averaged $17 a barrel after accounting for the lag time between departure from delivery. Argus estimated that shipping rates were $9 per barrel on average at that time. This suggests that the overcharging could be worth $800mn.
Hilgenstock stated: “If Russian oil traders and companies agree to such contractual conditions, then we must assume that Russia is capturing a portion — regardless of whether Russia owns or leases the oil tankers.”
Russia has a role in the fleet of tankers. Kpler has identified 134 vessels that were moving Russian oil from India to May-July. It was able to link 23 of these vessels directly to Russian entities through insurance, ownership, or management documents.
The majority of these ships are operated by Sun Ship Management. This company has been sanctioned by the UK and EU because it is connected to Sovcomflot – the Russian state fleet.
The report has also identified 26 more “ghost” ships that were purchased by their owners since the beginning of the war. The owners of these vessels are hidden behind shell companies, mainly in the Marshall Islands or Liberia. However, they have all diverted to Russian oil routes after being purchased.
Around 40 percent of the oil transported from the Baltic in the three-month period ending July was carried by a fleet connected to Russia. According to Argus’ freight cost estimates, this fleet could have made more than $350mn on the route in the last quarter.
By adding the $800mn in fees, it is possible that Russian entities have secretly earned a billion dollars extra over this period.
India accounts for about a quarter (25%) of Russia’s crude oil and refined oil exports. According to the International Energy Agency, Russia’s total global oil exports in these three months amounted at $39bn.
Russia was able to use western-insured ships in its Baltic ports because the price of the vessels was kept below the price cap. More than half the vessels that plied the route in the last quarter were insured by the G7, and 46 of those vessels were managed by Greek ship managers.
However, the number of western vessels has dropped. This is due to a 15 percent increase in international crude oil prices over the last month. They are now near $85 per barrel. The price of crude oil in Russia has been pushed higher, and even closer to the limit. Argus estimates that the average price quoted in Primorsk – a major Baltic Port – rose to $60 or more last month.
It is therefore more difficult for companies with western links to move oil and still adhere to the cap. In July, ship managers with Greek citizenship began to suddenly leave the Russian crude oil market.
International Energy Agency reported on Friday that Russia’s oil export revenue in July was at its highest level since cap was implemented, and this is without adding in inflated freight costs.
However, the higher prices could also discourage buyers. A senior Indian oil official stated that the discount is now only $2 to $10 per barrel.
Amrita Sen, Energy Aspects, said that Indian imports could now be declining as the discounts weren’t as generous. Their banks are also becoming anxious, now that there are signs of most cargoes trading above the price limit.