Byron McKinney

Hello. Welcome to today's podcast episode. My name is Byron McKinney. I'm part of the S&P Global Market Intelligence team. I look after the trade risk and compliance team within Maritime, Trade & Supply Chain.

Today's topic is the effectiveness of sanctions on shipping, trade and export controls in restricting the Russian economy from funding the current conflict in Ukraine. I have two guests with me. Agnieszka Maciejewska from the Market Intelligence team. Agnieszka is the manager for Economics within the Global Trade team here. And I also have Fotios Katsoulas, who is the principal analyst for the liquid bulk market from the Commodity and Insights team. So thank you both to Agnieszka and Fotios for joining me today. Great to have you both here.

Question and Answer

Byron McKinney

Agnieszka, I was going to ask you first. Do you think there's kind of a success that Russia has had in pivoting to kind of transshipments between these third countries to circumvent current sanctions? In the example we have here with Georgia and Armenia, is this kind of common at the moment?

Agnieszka Maciejewska

Well, for Georgia, yes, we have two sides of the trade. So we have imports from European Union and Western countries. And we have imports from Western countries and exports to Russia. In other countries, I have some slides that are showing a spike in imports from U.S., America and so on. But we do not have like great data in exports to Russia. But Georgia, Serbia and other former Soviet republics are, for sure, in some part, reexporting at least cars and luxury goods to Russia.

Byron McKinney

We looked at Georgia and Armenia in terms of luxury consumer goods and the kind of third-party transshipment there, so items which potentially could be coming from the U.S., from the EU passing through a third country before they get to Russia. I guess, in this context here, especially with the semiconductor items, which are kind of more -- kind of have a dual-use military aspect to them, maybe the pattern, I don't know if you'd agree, kind of suggests that the more established partners, trading partners, which Russia has, such as Turkey, China, India, is where it is probably sourcing directly the more kind of sophisticated items, dual-use items, rather than those which are kind of luxury goods. Would you say that's kind of a fair assumption?

Agnieszka Maciejewska

So looking at the data, we can look at Turkey and Iran, for example. And there are gas turbines and there are bulldozers. So this is like a heavy machinery through those countries that's like, let's say, more established partners of Russia. While with the smaller countries, ex-Soviet republics, what we can see in the data would be mainly pattern of luxury goods.

Byron McKinney

Thanks very much, Agnieszka, really great detail in terms of the information, where the kind of the trade patterns are merging. I think maybe one of the key takeaways here is people kind of understand the Russian trade sanctions as kind of pushing trade away from Russia. And to an extent, they've been successful in that regard, direct trade from the U.S., the European Union...

Agnieszka Maciejewska

North America, Europe, of course, yes.

Byron McKinney

Yes. Certain aspects of trade there have definitely reduced. But it's more a case of they've -- rather than reduce completely, they've just shifted to other locations. And then via a transshipment or reexport it, they've made their way to Russia.

Maybe one of the questions here, I don't know if you have the data available, how much of a reduction we've actually seen? We obviously know that trade from the EU, the U.S., some parts of Asia has reduced dramatically. But whether the new trading partners and also the circumvention of the sanctions in this case as well, whether Russia has been able to kind of make up for that loss with other kind of Western trading partners?

Agnieszka Maciejewska

I would say not in 100%, at least not in official data. But the drop is milder than we anticipated at the beginning, 50%. It is not it anymore.

Byron McKinney

Okay, thanks very much, Agnieszka. Fotios, you mentioned the upcoming cut in Russian oil production. And also, there's a large number of vessels, either Russian nationality or Russian-registered, on the water at the moment, which have their status set as for orders.

Is this kind of an indication that the price cap is actually working in some respects? Because you also mentioned the Peloponnese Kalamata region, STS is down on average in terms of the number of STSs which are being conducted. Is there anything you could kind of highlight as an overview there as to why that is?

Fotios Katsoulas

Yes. I think there is still a lot of interest in market, especially due to the significant discounts. So most of these cargoes that we're talking to heading to either India or China, all of them may have been sold for a price below the actual price cap. So there are -- we still have significant discounts in the market. And of course, there is still an interest across importers for cheap oil.

The important thing to consider is that these volumes have been replacing, to a significant extent, the volumes that Iran would typically have shipped to China, for example. So they have been establishing in the market, taking the position, which is, I would say, not necessarily stable but quite strong at the moment. So it would be a bit difficult to see this behavior completely lost within the next couple of weeks or months.

Nevertheless, we have seen a decline in the volumes, shifting away from Europe to Asia. And of course, this is also related to travel parameters. But at the moment, we still see that, as I said, more than 70% of the total flows heading directly to these countries, so India and China. In terms of the production cuts, I think we would see an impact which is not completely developed at the moment. But yes, my expectation is that -- is we have an impact in the total exports, of course. And of course, it flows through to these countries.

Byron McKinney

Okay. Thanks, Fotios. Just one follow-up there, kind of centered around STS and some of the details, which have kind of emerged through various media over the last month or 2. I guess, the key one is the kind of the Singaporean-flagged Magellan on North Africa, the [ Ceuta ], which was denied to port landing in Spain because of an STS with a previously Russian-flagged vessel.

Do you think -- obviously, in Spain, the Spanish authorities are obviously kind of cracking down and kind of making a statement in terms of how STS can be conducted and who with. Do you see the same type of example and situation in Greece as well? Because there's obviously large amount of Greece -- Greek-owned vessels involved in lifting Russian crude, Greek-flagged vessels as well?

Fotios Katsoulas

Yes, that's a very good question. I think there's...

Byron McKinney

Do you think there's any kind of ships here as well similar to what's going on in Spain?

Agnieszka Maciejewska

Yes. I think the Spanish authorities may have been the ones to act first. But we might see similar road for most of the EU members in their local authorities. This is another reason why I said that the activity might be voided near Azores, for example, in the future, which was expected from April onwards.

Regarding Kalamata, there has only been a very brief period where we started seeing a decline in the region. But we understand that most of the efforts -- I mean, they take into consideration what has happened elsewhere. And they might say they might be more careful and they might still simply ship the entire cargo on one ship if possible. So this has been what is understood to be preferred in the market at the moment.

So we might -- this might affect the volumes that we see in ship-to-ship activity in the future, so definitely. And of course, as I said, we still see a lot of activity most recently near South Korea. But in terms of the Med Sea, we might have -- we might see a significant impact in the coming weeks, even for Kalamata.

Byron McKinney

We kind of touched on slightly in terms of the shadow fleet and the number of vessels, which have been purchased potentially by Russia since the oil cap was first announced back in, I guess, late August, early September.

Fotios Katsoulas

Yes.

Byron McKinney

Do we have any indication in terms of the -- what are the kind of key characteristics of that shadow fleet? I think before, we mentioned age.

Fotios Katsoulas

So first of all, we are talking for about vessels, primarily within the range of Aframaxes, Suezmaxes and VLCCs. These have been the size classes that have been mostly preferred so far due to -- especially when we started seeing the peak of the interest in the market. So we're talking about September, October 2022. In the most recent months, this activity has been focusing on smaller tankers as well.

In terms of other characteristics, as I said, several of these vessels might have been basically transferred from one fleet to another that might be controlled by the same interest. But they might have been shown as an S&P transaction, purchase transactions. So in terms of counting how many vessels, that would be a bit difficult, I would expect.

But we are talking about hundreds of vessels basically. Apart from those involved in lifting frozen cargoes, this has driven another wave in the market overall. So this has been affecting the rest of the market in terms of an increase in asset prices and the interest of potential investors in the sector.

Byron McKinney

Thanks, Fotios. Thanks very much. In terms of the detail, which we've gone through now, we can kind of see there are kind of areas where Russian trade has been dented quite significantly. But then there's been areas where it's popped up elsewhere. It has been able to maintain potential trade routes and the imports of certain goods as well.

And obviously, its energy business, especially on the crude oil side, has been pretty firm since the price cap has taken place. But it will be good to kind of get your opinion, Agnieszka, if we could start with you. How effective do you actually think Russian trade sanctions are at the moment on the Russian economy?

Agnieszka Maciejewska

Yes, they are effective in a trade with North America, with European Union, with U.K. They are effective. When we are looking at consumer goods, we can see some circumventing of the sanctions to smaller countries, to Soviet republics. I would not tell you a lot about dual-use goods going through this because this is not visible in official data. It doesn't matter if it is not happening, but I do operate in an official data.

But there are exceptions that we can treat. And we should be looking at the spikes in commodities, like those turbines, pipes, bulldozers and so on that are still exported to Russia, to Turkey, to Iran. And trade with China, we can see that it is going still both ways. Trade with India, still doing good. Brazil exports from Russia, still going strong on fertilizers.

So wrapping it up, the sanctions are working for the countries that impose them, for U.S. and EU but with a small circumventing through smaller countries. But there is a trade pattern change happening. So in the bigger picture, we will see how it goes. But the trade just shifted and there is more trade with other parties.

Byron McKinney

Yes, it's a good insight, right? Yes, for the country which has imposed trade sanctions, they have worked very well, either through full sanctions or self-sanction. But it does seem like there's been a shift rather than a complete drop-off in that regard. Fotios, same question really for you on the effectiveness of the oil price cap so far.

Fotios Katsoulas

Sure. I think it has been a good effort by the Western bloc, so the EU and the rest of the countries. In terms of volumes, we have seen that it hasn't really worked until the end of February at least for crude oil. Nevertheless, in terms of earnings, we understand that this has had an impact.

And of course, this might be related to the decision of Russia to cut its production, both in terms of responding to the lower prices that their cargoes have been sold for but also in an effort to maybe drive an increase in the global prices due to the less supply available. So I think that overall, it has an impact but not as strong as previously expected.

Byron McKinney

We were kind of looking at the transportation costs. In general, some of the tanker rates between various -- on various routes has increased hugely even since the oil price cap has come into effect. Do you think there's kind of any evidence that indicates that, that kind of higher transportation cost is kind of making the Urals price whole again? Because obviously, it's trading at a discount in respect to weather blends. Do you think that's the case here?

Fotios Katsoulas

They do. The cost of freight against the commodity price are, of course, affected by similar parameters. But they are not necessarily behaving in a similar way or moving in parallel to each other. What we have seen is that the impact is very clear in terms of the utilization of the fleet. So this has been affected due to the longer distances to be covered as I said.

And of course, I'd say due to the fact that some of the vessels involved in lifting Russian cargoes might be avoided from other routes basically, like from other charters in the rest of the market. But I think that the [ premium ] that we have seen in terms of freight rates may not necessarily be achieved in the cost of the cargo as well. So I don't think that we will see Urals maybe sold at the full price.

Byron McKinney

Yes. Okay, no problem. Agnieszka, what is the potential for trade via transshipment or directly to Russia over the next 6 months or so? Is there anything which you could share with us on that particular point?

Agnieszka Maciejewska

Yes, we will have to follow a couple of things here. First of all, the trade pattern changed. So we are following those patterns right now. Secondly, some countries that do reexport to Russia doesn't mean that they would not put restrictions on that. Because they are worried that some countries couldn't be put on a spot. And they would like to limit that, at least in the official statistics. So we would have to check that also.

Third thing is diversification of trade, like Brazil, importing fertilizers from Russia. But in the future, the suppliers that -- like if Russia was the main supplier, countries are looking for alternative sources of not only fertilizers, all the goods that they were importing from Russia. But it takes time. There are new patterns for also production changes, so reshoring, nearshoring and so on.

It is stated, Russia will be alienated for a longer time. And the impact has to take time to be visible in that trade data. So there are a couple of things. Main thing that wouldn't change probably is the new trade pattern, so Russia, not with the West, rather trading with the East. We will see about those dual-use goods. We'll see about consumer goods. Because I think it may change depending on policies.

Byron McKinney

Yes. That's a good point to make as well on policies, right? Because I think we've seen recently in the news as well with U.S. regulators and authorities who've kind of remarked on the amount of goods which are making their way to Russia from countries such as Turkey. And maybe that kind of political pressure is something we might see over the 6 months as well, right? And that could have an impact on those trade routes, which you mentioned, the new trade partners.

Agnieszka Maciejewska

Exactly.

Byron McKinney

So I'd like to say thank you, Fotios and Agnieszka, for your great insights and for joining me today as well. It's been great content. I hope those who have tuned in have enjoyed it as well, and there's a lot to take away also. Thanks, everyone.