Why has India been accused of hosting a shadow fleet? | Explained

Western media outlets use the term 'shadow fleet' to describe Russian oil tankers, evading U.S. sanctions through complex ownership structures.

The story so far: While covering the Russia-Ukraine conflict, many western media outlets have used the term ‘shadow fleet’ to describe tanker ships that carry Russian crude oil or oil products to other countries. The term conjures up images of pirate-like vessels and phantom owners trading in illegal, contraband substances. India has been painted as a host of a shadow fleet that is ‘laundering’ Russian crude.

When the U.S. sanctions a country, as is the case with Russia, it launches investigations into entities, companies and individuals who violate the sanctions. Their assets in the U.S. are seized, bank accounts accessible to the western banking system are frozen and, sometimes, criminal prosecutions are launched against them. U.S. sanctions against Russian oil mandate that Russia can only sell its crude oil at $60 a barrel. Current market prices are at least $15 more. This is to ensure Russia doesn’t profit much from oil sales and use that to fund its war effort in Ukraine.

Also Read: Shadow fleet tankers shipping dirty fuel in a setback for clean-up efforts

The global shipping industry is highly diversified. Greeks own 20% of the global merchant shipping fleet with China now crossing Japan to become the second leading nation in terms of merchant shipping fleet ownership. Most ships are built and repaired in China, Japan and South Korea. Yet, marine insurance, ship finance as well as global shipping regulations revolve around the U.K. and rest of Europe. U.S. sanctions are sought to be enforced through these levers.

Each ship is associated with different stakeholders at various nations and locations. Although tracking systems allow authorities to access previous ports of call, some companies do succeed in hiding the original source of their cargo. Ships are registered in particular nations called flag states as they fly that country’s flag. Flag states were meant to indicate the origins of the ship.

To beat sanctions, ships often hop between flags. There are Flags of Convenience (FoCs), such as Panama and Liberia, which started out as tax avoidance entities, and to avoid too rigorous a scrutiny or inspection of a ship. FoCs obscure the ownership of ships. Then there are classifications societies (class, in shipping parlance) that certify ship structures and machinery for safety of life at sea and marine pollution, facilitating insurance cover for these. An insurance type called Protection and Indemnity (P&I) covers loss of life and damage to property. These P&I insurance firms form ‘clubs’ to pool the risk.

Turkey, a member of the NATO, has been found to be extensively trading in Russian oil. A Turkish-owned ship found to be trading in Russian oil at more than $60 a barrel may lose its P&I club, since clubs are controlled from London and the U.S. has leverage there. However, the owner can divest the management of the vessel and contract with a European manager that has P&I cover. And the ship will be back in business with the same owner but with a new European manager. Corporations with large fleets often set up shell companies that own just one or two ships. Such complex ownership structures hide the true identity of a ship and its owner. Yet, another phenomenon is registering the ships within jurisdictions that are not compliant with regulatory agencies such as the International Maritime Organization (IMO). Eswatini, a country in southern Africa, is not a signatory to the IMO charter. It has therefore emerged as a FoC.