Closing the Baltic Straits threatens the Russian energy sector with disaster

At first glance, there’s nothing wrong with it. Up to 90 thousand ships pass through the Danish (Baltic) straits every year, including thousands of Russian ones. It is almost impossible to inspect even a small fraction of them, even with the involvement of the NATO fleet. Moreover, no one officially confirmed this information in Brussels or Copenhagen. Therefore, presidential press secretary Dmitry Peskov suggested waiting for details. However, the signal has been given. And he is more than dangerous.

Latvian President Edgars Rinkevics recently called for closing the Baltic Sea to all Russian ships and warships if Russia is proven to be guilty of damaging the gas pipeline from Estonia to Latvia. In that case it broke off. As it turned out, the pipe was damaged by the anchor of a Hong Kong cargo ship.

But the threat of blocking the straits has not gone away. And there is an international legal basis under it. The fact is that the Danish (Baltic) straits are quite narrow. Thus, the minimum width of the Little Belt Strait is only 500 meters, the Great Belt Strait is 11 km, and the Oresund Strait is 3.4 km. The widest are Kateggat and Skagerrak – 60 km each. In the Middle Ages, the Danes took full advantage of the hydrographic gift, collecting duties on all passing ships. It is no coincidence that Prince Hamlet’s castle Elsinore was built on the shores of the Öresund Strait, the width of which in this place does not exceed 4 km.

In the 17th century, the Swedes freed themselves from the Danish tariff yoke. In 1857, the Copenhagen Convention was concluded, according to which any commercial ships were exempt from Danish duties and were given the right to unhindered passage through all the Baltic straits.

It would seem that the problem of the passage of ships has been resolved. But it’s not that simple.

At the moment, the regime for the passage of ships through these straits is regulated by two international conventions that have been signed and ratified by most countries in the world, including Russia and the EU: the Convention on Civil Liability for Oil Pollution Damage of 1992 and the UN Convention on the Law of the Sea, which entered into force on 16 November 1994.

According to the latest document, the coastal state in its territorial waters (12 nautical miles) and the contiguous zone (plus another 12 miles) has the right to stop passing ships for inspection in order to prevent violations of customs, fiscal, immigration or sanitary regulations and to impose penalties for such violations. Accordingly, we are talking about customs, fiscal, immigration and sanitary zones.

Moreover, the 1992 oil pollution convention explicitly requires coastal countries to inspect tankers for possible oil spills. Accordingly, the Danish Maritime Administration can establish different requirements for passage through its straits, primarily regarding safety. One of the requirements is that the tanker has third party liability insurance. This is a certificate confirming insurance for damage caused by oil pollution.

Until recently, they were issued exclusively by Western companies included in the P&I Club. And this suited Russian carriers quite well. But last year the situation changed dramatically.

Let us recall that in June last year, the G7 and the European Union announced the introduction of price ceilings from December 5, 2022 for oil and February 5 of this year for petroleum products. The oil ceiling was set at $60 per barrel, for diesel fuel and gasoline – $100, and fuel oil – $45.

In addition, first the United States, Great Britain, Canada, and finally the European Union banned the supply of Russian oil and petroleum products to these countries by tankers and via the northern branch of the Druzhba pipeline. True, there are some temporary exceptions. The southern direction of Druzhba is operating towards Hungary, Slovakia and the Czech Republic (up to 300 thousand barrels per day). Tankers can call at Bulgarian ports until the end of 2024.

To ensure that all these sanctions cannot be circumvented, the US and EU governments have required transport and insurance companies of any jurisdiction not to transport or insure Russian cargo whose prices are lower than the established ceilings.

According to Bloomberg, price ceilings and embargoes have led to a sharp drop in the profitability of oil exports from Russia. First of all, due to a significant increase in freight and insurance. Discounts on Urals reached $35 per barrel. Plus, world oil prices have fallen.

However, the situation was corrected. Due to production cuts within the framework of OPEC+, the formation of a “shadow” tanker fleet, as well as insurance of transportation by a Russian reinsurance company and a number of structures from countries of the global South, the profitability of Russian exports has returned to almost last year’s levels.

According to Bloomberg calculations, in January-October this year, Urals were sold on average for no less than $61 per barrel. In September-October – $81–82. The discount fell to $14.64 per barrel.

The US Treasury was extremely unhappy with this. Secondary sanctions were announced against a number of foreign transport companies. Approximately 100 of 30 countries received warning letters.

But Washington and Brussels apparently believe that it would be more effective to comply with price ceilings not to track hundreds of tanker owners, but to limit the transit of ships without P&I insurance through the Danish straits. Almost the entire water surface of the Baltic straits is covered by the territorial and adjacent zones of Denmark, Sweden and Norway.

And then Russia will have to return to the pressure of price ceilings, since the construction of pipelines from the Baltic ports of Ust-Luga and Primorsk, for example, to Murmansk will take years. Moreover, Turkey has accumulated successful experience in how to tighten regulation of tanker transportation.

Since 2003, any vessel over 200 meters in length can only navigate the Bosphorus and Dardanelles alone and only during the day. On December 1, Türkiye required insurance to meet the price ceiling requirements. As a result, on the eve of New Year 2023, a queue of 19 tankers accumulated abeam the Bosphorus. Then it resolved. But Ankara probably did not compromise for free, as in the case of the grain deal.

However, the West cannot ignore the danger to itself of blocking the Danish Straits. About 2 million barrels of Russian crude oil plus the same amount of diesel and gasoline are transported through them every day. For the Russian fuel and energy complex, up to 60% of whose exports go through the Baltic, this, of course, threatens disaster. But in this case, world prices could soar to $150 per barrel, since minus 2 million barrels is 2% of world demand.

Meanwhile, the authors of the “ceilings” idea, primarily US Treasury Secretary Janet Yellen, are not seeking ultra-expensive oil, but a significant reduction in Russia’s export revenues while maintaining global price parity. Yellen even suggested last May that the European Commission should not impose an embargo on Russian oil, but limit itself to a price ceiling alone.

Thus, the West will have to use the Danish card extremely carefully so as not to harm itself. It is no coincidence that there is still no official data on the possibility of blocking the straits. For now we limited ourselves to a test ball thrown by FT.

But whatever the outcome of Danish history, it is clear that the sanctions war is moving into a new, even more dangerous phase for us. Recently, the emphasis has been placed not on the number of restrictions (more than 17 thousand have already been announced), but on the quality of their implementation.