The Navy ships will response to Europe’s theft of Russian oil

Alexey Gromov, Principal Director on Energy studies at the Institute for Energy and Finance, commented to the URA.RU online portal on Russia’s possible response to the EU’s initiative to confiscate Russian oil transported by the “shadow fleet” tankers.

— The European Union has developed a mechanism that allows it to dispose of confiscated Russian oil without transferring the proceeds to the original owners. As part of the 21st package of anti‑Russian sanctions, cargo can be temporarily stored in the EU, removed from the purchase ban, and sold to a third party. How can Russia respond in the event of confiscation of our raw materials?

— Initially, it is important to say that there is no legal basis under international law for such actions. Our response to attempts of this kind can be only one — to protect our merchant fleet using the Navy. However, there is an important clarification: only ships flying the Russian flag can count on protection from such encroachments, as they are subject to our jurisdiction.

Vessels of the “shadow fleet,” which are used in the trade of Russian oil but operate under the convenient flags of African states, Panama, or Hong Kong, will find themselves in a risky zone, because, from a formal standpoint, Russia is not obliged to protect such carriers, even if they transport oil in the interests of Russian companies.

— How might this situation affect the structure of oil supply contracts?

— The traditional contractual arrangement for Russian oil often followed the FOB (Free on Board) rule, under which the raw material was considered sold immediately after it was placed on board the vessel, and the responsibility for delivery fell on the buyer or intermediary. Now, with the emergence of confiscation risks, buyers will seek to enter into contracts on different terms, where the seller assumes the costs and risks of delivery to the destination port.

Russian companies will have to decide whether they are willing to enter into such deals. I believe these terms will become dominant.

In this regard, the issue of revising routes will inevitably arise in order to minimize passage through the EU’s territorial waters, where ships may become targets for attack. At key points that cannot be avoided (the Danish straits, the English Channel, the Mediterranean Sea area), ships may need to be escorted by the Russian Navy.

— What could be the consequences of this for the global market and Russian exports?

— For the global market, this will create a dangerous precedent. Economically, the cost of freight will inevitably rise. If tankers are forced to travel under the protection of warships, companies will bear part of the costs associated with such escort. All of this will affect the cost of transportation and, unfortunately, reduce the profitability of Russian exports. As for export volumes, I assess the risks as minimal. The market needs Russian oil, and isolated cases of seizure will not be able to paralyze maritime supplies.

It will be much more unpleasant if the United States gives the green light to a new sanctions package that presumes the introduction of 100 % customs duties for countries that purchase our oil. However, its possible entry into force is not expected before September.