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Banks start selling Sovcomflot fleet as sanctions deadlines loom

Sanctions are severely restricting trading options for Sovcomflot ships. According to Lloyd’s List Intelligence 40% of the fleet is waiting for orders, 26% of the vessels are in ballast and just 18% have oil on the water with destinations unknown

Sovcomflot is negotiating the sales of dozens of its vessels to multiple Chinese and Middle Eastern buyers before sanctions deadlines kick in, but sales are also now taking place via Western banks allowing legitimate sales to many of the shipping industry’s largest shipowners to go through with no sanctions restrictions

WESTERN banks have started selling off sections of Russian tanker giant Sovcomflot’s fleet, having taken direct ownership of vessels in lieu of mortgage repayments. 

Sovcomflot is attempting to negotiate sales of at least 40 of its vessels to multiple Chinese, Indian and Middle Eastern buyers while simultaneously transferring classification and insurance arrangements across its remaining fleet before European sanctions wind-down periods end this weekend. 

At least 12 vessels sales are known to have been completed already, but not all of the sales are being negotiated directly with Sovcomflot.

Lloyd’s List has learned that sales are also now taking place via Western banks, allowing legitimate sales to many of the shipping industry’s largest shipowners to go through with no sanctions restrictions. 

Four LNG vessels on charter to Shell have been bought by Idan Ofer’s Eastern Pacific Shipping direct from ING Bank, which is representing a consortium of eight Western banks winding down their exposure to Sovcomflot. 

The sales of SCF Timmerman (IMO: 9870525), SCF Barents (IMO: 9864746), SCF Mitre (IMO: 9654880) and SCF Melampus (IMO: 9654878) for a total of just over $700m on Thursday is the first major sale of previously owned Russian assets since sanctions were applied to Russian companies in the wake of the Ukraine invasion. 

Under the terms of sanctions issued by both UK and EU governments, banks have been given a grace period to extricate themselves from Russian contracts. Both jurisdictions have set May 15 as the deadline for cutting ties.

Given the short window of opportunity it was unclear how Sovcomflot would force through a sufficient volume of ship sales and transfer the funds before the deadline closed. 

The precise exposure of western banks to Sovcomflot is still not clear. However, the last available consolidated accounts detail $2.1bn of debt, made up of short- and long-term bank loans.

The fact that Eastern Pacific is known to have bought direct from ING suggests that banks have opted for the quicker route of taking ownership of vessels direct from Sovcomflot. 

ING declined to comment on the deal or confirm how many other Sovcomflot vessels it now owns. It is not clear how the sales process will change after the May 15 deadline. 

 

Several leading European owners have been quick to distance themselves from rumoured sales of Sovcomflot vessels. However, Lloyd’s List understands that several are privately discussing options. 

Most of the sales already agreed directly with Sovcomflot have gone to companies established in Dubai, with Chinese financing understood to be behind many of the sales. Dubai-based Koban Shipping is now known to have bought five vessels. The company has declined to comment on the sales. 

Officials from China Merchants Energy Shipping and COSCO Shipping Energy Transport, which operates the tanker fleet of their respective state conglomerate parent, told Lloyd’s List they were not aware of the discussion about acquiring Sovcomflot’s vessels.

However, a person close to China Merchants said some of the Russian owner’s young tanker tonnage, such as its aframax fleet built between 2018-20, are considered to be attractive assets to CMES, which is seeking more growth potential. 

While Sovcomflot has downplayed the number of vessel sales going through, the company has been preparing the way for a sell-off for several weeks. 

In the immediate aftermath of sanctions being imposed on Russia by western governments, Sovcomflot moved the registered ownership of 113 of its vessels to SCF Management Services (Dubai) over a 24-hour period starting on April 21.

Sovcomflot has also been seeking alternative class and insurance options, having been given notice by the majority of its classification providers and the International Group of P&I clubs. 

The vast majority of Sovcomflot vessels not already moved under the Russian Register are in the process of moving to the Indian Register of Shipping, after the China Classification Society is understood to have rejected Russia’s request to take over class for Sovcomflot. 

While the Indian Register told Lloyd’s List “we have not classed vessels which are owned, flagged or managed by Russian companies”, the influx of Sovcomflot vessels to Indian class is now simply a question of timing.

Lloyd’s Register, ABS and DNV have all given notice to Sovcomflot that class would be withdrawn from its vessels, but that process is not yet complete in most cases and therefore new class status is not yet reflected in industry databases. 

Senior class sources from all societies previously linked to Sovcomflot vessels have confirmed that transfer of class to the Indian Register is underway. Indian Register declined to discuss the influx of Sovcomflot tonnage.

The frenetic pace of sales and negotiations is happening in advance of Russian sanctions wind-down periods due to close on May 15, although Lloyd’s List understands that the sales will continue well beyond that deadline.

Meanwhile, senior sources in the P&I sector said they could not see any liability insurance solutions for Sovcomflot other than backing from the Russian state.

The degree of risk involved would be beyond the capacity of China P&I to pick up, a non-International Group affiliate, to pick up.

Of the 13 IG clubs, both Gard and Skuld are registered in Norway, which is not a member of the European Union and therefore not forced to follow EU sanctions.

In practice, the Norwegian government usually mirrors EU sanctions exactly. But in this instance — perhaps because of the importance of oil to the local economy — it has not restricted insurance for Sovcomflot vessels.

Even so, Gard and Skuld have terminated contracts with the company anyway, perhaps mindful that US financial restrictions would make it difficult to pay claims, which would leave them unable to compensate third party victims.

While the expiration of the sanctions wind-down periods is driving much of the urgency surrounding Sovcomflot’s dramatic restructuring, the deadline is unlikely to be the end of Sovcomflot’s immediate challenges. 

It is not yet clear how many of the eight western banks seeking repayment from Sovcomflot now own vessels, however any subsequent sales will not be restricted by sanctions deadlines. 

Direct sales from Sovcomflot to any company based in the US, EU or UK are already off the table, however sales in the works to China, Dubai and India can continue to be negotiated and buyers are understood to be demanding fire-sale prices. 

While Sovcomflot has declined to comment on the sell off strategy, Lloyd’s List understands that senior management inside Sovcomflot anticipate the company’s future will be as a state-owned enterprise and therefore severely restricted in the trades it will be able to play as long as international sanctions remain in place. 

The Sovcomflot fleet is already starting to cease much of its activity. Sovcomflot was one of the 13 Russian companies first sanctioned by the US on February 24 and since then the company has been restricted in where it can sale while its partners have been blocked from financial transactions.

According to Lloyd’s List’s analysis of Lloyd’s List Intelligence vessel tracking data 40% of the fleet is currently waiting for orders, 26% of the vessels are in ballast and only 18% have oil on the water with destinations unknown. 

 

 

 

 

 

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