Sanctions, uncertainty and the shadow fleet

Baltic Exchange debate lays bare the paradox of Russian oil trade

By Carly Fields

Contradictions muddying the waters of the global sanctions regime on Russian oil are making it increasingly difficult for ship operators, even with the best intentions, to stay on the right side of the law.

At a Baltic Exchange presentation that took place at Posidonia earlier this month, Siiri Duddington, head of sanctions at Hill Dickinson, examined the widening gap between political messaging and operational reality.

“Russian oil obviously remains a hot topic nearly four and a half years later,” she said, pointing to the persistent tension between policy goals and market functionality. While Western governments have repeatedly stressed that sanctions are designed to limit revenues funding Moscow’s war in Ukraine, the mechanisms used to achieve that aim have produced unintended—and often contradictory—outcomes for shipping stakeholders.

At the centre of that contradiction lies the price cap regime. On paper, the policy allows Russian crude to continue flowing to third countries, provided it is traded below a set threshold, preserving global energy stability. “The rationale behind that is for there to be energy security for third [world] countries…and also to keep global energy markets stable,” Duddington said. Yet, in practice, compliance with the price cap does not guarantee protection from sanctions exposure.

This reflects a broader legal construct under UK and EU frameworks, where entities can be penalised not only for breaches, but for their perceived involvement in sectors deemed strategically significant to Russia.

“You do not have to breach sanctions in order to be sanctioned,” Duddington said, underscoring a critical risk for operators. “If you are a company which carries out business in…energy, thus Russian oil, you can be sanctioned.”

Risky business

For shipowners and charterers, this creates a compliance environment mired in uncertainty. Even compaies that meticulously follow due diligence requirements and adhere to price cap guidelines may find themselves exposed to designation risk.

This ambiguity is compounded by the trust-based structure of price cap compliance. Operators often rely on documentation and attestations provided within a transaction chain, without full visibility of cargo origin or pricing details. “You wouldn’t know necessarily if that CN code is correct…if you’re in the chain, you’re not going to know what that end use is,” Duddington explained. CN codes are a classification number used to identify products for customs declarations, trade statistics, and determining duty rates within the European Union.

Citing a recent case, she described how fraudulent documentation obscured the origin of oil during a ship-to-ship transfer. “It actually took a lot of investigation to work out that in fact the oil had come from Russia…even the databases were not showing this information,” she said.

Tim Wilkins, managing director of INTERTANKO, reinforced the sense of dislocation between political rhetoric and regulatory practice. “From the outset, we’ve seen an intertwine between the policy, the political…rhetoric…and the hard legislation,” he said.

“There’s always been this intertwined political versus regulatory intent,” Wilkins said.

This dynamic has created two distinct categories of risk for operators. The first is compliance risk—unintentionally breaching sanctions due to opaque cargo histories or shifting rules. The second is reputational. “Even if you were entering into price cap chain trade, if you were seen…carrying Russian cargo, it was bad,” Wilkins said.

Reputational concerns have become particularly acute as public narratives have lagged behind regulatory nuance. Misinterpretations of policy adjustments, such as limited waivers or jurisdictional differences, have further muddied the waters. As Duddington noted, “people contact us…proceeding on the assumption that the US thinks it’s okay now, so maybe there’s a certain amount of leniency.”

Overlaying these challenges is the growing presence of the so-called shadow fleet—vessels operating outside mainstream regulatory oversight, often with opaque ownership structures and questionable safety standards. According to Wilkins, the unintended consequence of sanctions enforcement has been to advantage these operators over compliant counterparts.

“Legislation was generally targeting the compliant owner rather than the shadow fleet,” he said. “They were making the business life more difficult for the compliant quality owner rather than the shadow fleet.”

Regulatory mismatch

Both speakers agreed that divergence among sanctioning authorities remains a key obstacle. Differences between US, UK and EU approaches—combined with frequent policy adjustments—have created what Wilkins described as a lack of “convergent, coherent regulations.”

That fragmentation has direct operational consequences. “It increases the commercial risk for the compliant fleet,” he said, as well as the “amount of due diligence and the administrative burden” required simply to trade.

In the absence of clear regulatory guidance, industry bodies have stepped in to develop their own compliance frameworks. Wilkins outlined efforts to provide INTERTANKO members with standardised tools, including due diligence checklists, model sanctions clauses and structured questionnaires for counterparties.

“We’ve had to arrange a suite of tools for our members,” he said. “Regulators are still not coming to us and saying what the minimum standard is, so it’s been left to us to fill that breach.”

Despite these efforts, frustration within the industry is mounting. Operators argue that while they bear increasing compliance costs and reputational risks, shadow fleets continue to capture market share.

For Duddington, the broader concern is whether sanctions are still fulfilling their original purpose. “They’re supposed to be a means to bring about a change in behaviour,” she said. “I query whether that still holds true if they’re becoming a tool that’s being used for political reasons.”

The continued flow of Russian oil—albeit under new constraints—suggests that market forces remain resilient. Yet for the legitimate shipping sector, operating in this landscape has rarely been more complex. As Duddington concluded: “It just feels that the position is always dynamic. What might ring true today may not tomorrow.”