Navigating the Grey Market
Written by Abhishek N. Mathur
In response to Russia’s invasion of Ukraine, the West placed sanctions on Russia’s lucrative oil industry. These sanctions are meant to block Western ships from handling the crude unless the price block of $60 per barrel is adhered to(Rosenburg and Van Nostrand).
However, over a year into the war, Russian crude is still circulating above the mandated price cap, highlighting the looming existence of the grey market.
Grey market refers to a product that is sold via alternative channels to avoid any sanctions placed on the mainstream channel(Hayes). The grey market finds itself in limbo apropos to its status as it remains legal but unofficial and unregulated by the West. However, it is important to note that the grey market is not set, but rather the grey area between the black and white market, in which the white market only handles legal goods and the black deals in illegal goods. To delineate these markets from each other one must look at all aspects of trade. In the black market the channels by which the goods are procured as well as the goods themselves are illegal(Kenton). Grey market goods are not necessarily illegal but the channels navigated to provide the goods are illicit(Hayes).
The grey market casts a shadow upon the oil trade, making it harder to trace oil transactions. Moreover, due to their similarity, the grey and black markets often overlap, meaning that in order to track and halt either market, they both must be rigorously monitored.
The grey market blossoms when there are significant price discrepancies regarding the same item. Therefore, it is normally used to receive a price reduction. Nevertheless, the Kremlin has manipulated the grey market to its advantage, instead of seeking lower prices it seeks to sell its goods at an elevated price.
As Russia increases its use of the grey trade, the demand for more boats subsequently increases (Horowitz). Consequently, this fleet has amassed 600 ships, accounting for approximately 10% of the global tanker capacity. Moreover, as Western tankers recede from this trade, they leave a cavity for non-Western firms to fill. Certain firms based in Dubai and Hong Kong have jumped at this opportunity. These firms are more versatile in trading with countries such as India and China. This has been proved to be an incredible benefit to Russia, as these firms transport their oil to customers that are not constrained by the price cap. Subsequently, China has boosted its imports to 1.9 million barrels a day, a 19% increase since 2021. India followed suit, increasing its imports by 800% to 900k barrels a day.
It is important to understand the structure of the grey market’s fleet to truly punish Russia for its invasion. The grey market fleet is composed of two different two types of tankers. The grey fleet, which has only recently emerged, consists of tankers sold by European firms to firms located in the Middle East and Asia. The grey fleet is composed of ships that have been repurposed to be oil tankers. Besides the evident consequences of Russia being able to sell its oil barrels above the price gap and the obscurity cast upon the oil transactions, the grey fleet poses no other significant threat to geopolitics. However, the second fleet, the dark fleet, is much more problematic. The dark fleet is comprised of older Venezuelan and Iranian tankers with a history of participating in the grey market. These older ships can turn off their AIS (Automatic Identification Systems) transponder, making it increasingly difficult to identify and locate these vessels. Moreover, these unsafe ships way past their prime, pose a threat to the crew operating them and have an unprecedentedly increased environmental risk of oil spills. Demonstrating the dual consequences of the dark fleet.
Dangerous, legal and obscure the grey market fleet will only continue to grow. Reportedly growing 4 fold, with 25–35 new vessels sold into the fleet per month. The buyers operate under anonymity, such that a quarter of oil tankers bought between February 2022-January 2023 were all purchased by undisclosed buyers. The call for anonymity on behalf of the buyers leads one to question whether the Russian government is heavily involved in this market.
As the fleet increased its size and capacity, it has been able to better its ability to dodge and sell its oil above the price block(Horowitz). The more power the grey market fleet gains, the more obscure all oil transactions become, forcing one to rely on estimates for indication of actual profits gained by Russia’s crude trade.
This point was further reiterated by the executive of TotalEnergies, who mentioned how the grey market obscures the global oil trade(Hernandez). These sanctions have been able to reduce Russian state-oil profits, nevertheless, in response Russia has diverted billions of dollars towards shipping and refining firms that participate in this grey trade and have ties to the Kremlin. Certain firms in China, India, Greece and the UAE that have Russian ties have been receiving the diverted money.
The grey market has allowed Russia to elude the unmitigated impact of these Western Sanctions. It is important to shed light on this topic, as only when this market is sanctioned or limited will Russia feel the repercussions of its invasion.
Works Cited
Hayes, Adam. “What Is The Gray Market? Definition and How It Works in Trading.” Investopedia, 7 January 2022, https://www.investopedia.com/terms/g/graymarket.asp. Accessed 1 May 2023.
Hernandez, America. “Russia sanctions are creating a “grey” oil market, says TotalEnergies CEO.” Reuters, 8 February 2023, https://www.reuters.com/business/energy/totalenergies-ceo-russia-sanctions-are-creating-grey-oil-market-2023-02-08/. Accessed 24 May 2023.
Horowitz, Julia. “A mysterious fleet is helping Russia ship oil around the world. And it’s growing.” CNN, 1 March 2023, https://www.cnn.com/2023/03/01/business/russia-oil-shadow-fleet/index.html. Accessed 1 May 2023.
Kenton, Will. “Black Market Definition.” Investopedia, 9 May 2021, https://www.investopedia.com/terms/b/blackmarket.asp. Accessed 5 June 2023.
Rosenburg, Elizabeth, and Eric Van Nostrand. “The Price Cap on Russian Oil: A Progress Report.” Treasury Department, 18 May 2023, https://home.treasury.gov/news/featured-stories/the-price-cap-on-russian-oil-a-progress-report. Accessed 7 June 2023.
