One More Reason Sanctions Don’t Work. Ghost Tankers Are on The Move.

I’ve taught a seminar in financial warfare at the U.S. Army War College for the past seven years. It’s always a delight and a challenge because the class is so smart to begin with.

I usually have about 12 students from all branches (Army, Navy, Marines, Air Force, and Coast Guard) as well as civilians from the State Department, CIA and other agencies. They are generally mid-career, about 35 years old, some older with the rank of Lt. Colonel, Commander, or a fighter pilot. (I once had the real TOPGUN from the U.S. Navy Fighter Weapons School in my class. Great guy).

The students are all hand-picked as part of the Advanced Strategic Arts Program and are being fast-tracked toward future high leadership positions in combat commands or the National Security Council. My 2023 seminar is coming up soon. My 2022 seminar was the most interesting so far because I told the students that after six years of studying hypothetical financial wars, we finally had a real war to discuss.

The U.S. and Allied financial sanctions on Russia were extreme and unprecedented. This allowed us to discuss real-world outcomes instead of war gaming scenarios.

I told the class that the U.S. sanctions would be worse than failures. Not only would the sanctions fail to deter Russia or even cause much economic damage, but they would also blowback to the U.S. and injure our economic standing in the world. I encountered a lot of skepticism from the class.

That’s OK; that’s how seminars are conducted. They are intended to be round table discussions with lots of interaction. It’s not a case of teacher knows best. Seminars are designed to bring out the best in everyone so that nothing is overlooked.

That said, my forecast was exactly right. The Russian economy had a mild slowdown in 2022, not the collapse many predicted. The best estimates for 2023 are that the Russian economy will outperform the U.S. economy. The U.S. dollar is being widely displaced around the world as a payment currency in favor of rubles, yuan, rupees, and other developing market currencies.

I also explained how easy it is to evade sanctions even in a world of satellite surveillance and GPS tracking. This article provides a  good example.

The U.S. and EU have prohibited the purchase of oil exported by Russia using tankers unless the price falls below an arbitrary price cap imposed by the U.S. This ban on high-priced oil exports by tanker was enforced by denying insurance to the shippers and prohibiting any tanker that shipped Russian oil from participating in commerce with any state that joined the sanctions.

How’s that working out? It’s not.

The article explains how a “Ghost Fleet” has emerged to ship Russian oil regardless of the sanctions. The vessels were sold by prior owners to new owners whose name and address is unclear. The tankers can turn off GPS transmitters while underway.

Offices of the ship operators were moved frequently. Insurance is obtained from ad hoc syndicates that can use self-insurance pools or that can obtain reinsurance through layers of shell companies. Some needed services can be obtained from countries like India and China that never joined the sanctions regime.

In short, it’s business as usual for Russian oil exports, subject to a few documentation hurdles and some fees to middlemen. This technique was perfected by world-famous commodities trader Marc Rich in the 1990s to help Iraq export oil at a time when Saddam Hussein and Iraq were the targets of sanctions. Rich made a fortune in the process.

Seasoned observers of international trade and sanctions know the sanctions are easy to work around. The only ones who don’t know how easy are eggheads like Janet Yellen, who have spent their entire careers in a government cocoon and have never worked in the real-world of international trade.

Maybe someone should give her a clue. I’ll be sure to explain this carefully to my class. Let’s hope they’re in charge sooner than later.

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