The sanctions by the outgoing Biden administration on Friday 10 January mark the largest round of individual vessel-designations related to Russian trade. Individual vessel sanctions by the US have been very effective in limiting further employment in Russian trade, with OFAC sanctions serving to effectively cut off designated vessels from the ability to participate in the international market. We expect fleet capacity to tighten significantly. The global freight market is already responding, with spot freight rates in the VLCC and Aframax markets driven higher over the last few days.

This could play out in a few ways:

•       Most likely scenario: Russian crude exports will most likely face serious logistical difficulty due to the lack of available tonnage. In order to keep export volumes at the same level, Russia will be forced to sell crude below the price cap. At that point, Western vessel operators would be able to get involved to lift Russian crude. We have previously observed a very low barrier for entry on the part of certain EU-linked operators. As soon as Urals has priced below the cap, loading commences by these operators.
•       Less likely scenario: Russia will not countenance selling crude at a discount and attempts to source non-sanctioned tonnage to replace the vessels sidelined by sanctions. While we may see some older vessels leave the mainstream trade, there is a limited pool of candidates for this move. New vessels would likely come from non-EU operators due to restrictions on S&P for EU-linked entities. Ageing Aframax and Suezmax tonnage not linked to EU entities and which have never previously participated in sanctioned trades is very limited.

Most of the tankers sanctioned on Friday predominantly handle Russia Far East shipments to China. While the Shandong Port Group has banned these sanctioned vessels (read more here), it remains to be seen how non-Shandong ports will respond to their presence. Ultimately, the effectiveness of these sanctions will depend on whether China allows the sanctioned vessels to call in its ports.