EU mulls insurance ban for ships carrying Russian oil

EU officials have proposed a ban on insuring vessels carrying Russian oil, a move aimed at blocking Russia’s access to global oil markets and the revenue that has fueled his military invasion of Ukraine.

“Indeed, that would be a very big obstacle to the export of Russian crude,” said Lars Barstad, managing director of

First line ltd.

which has one of the largest tanker fleets in the world.

Mr Barstad said his ships are not carrying oil if Frontline cannot insure the ships against risks such as environmental damage.

Oil and gas revenues accounted for 45% of the Russian federal government’s budget in 2021, according to the International Energy Agency. Russian crude has continued to sink, albeit with increasing difficulty, since Moscow invaded Ukraine.

The insurance ban is part of a sixth batch of restrictions EU officials are preparing against Russia, including an embargo on the import of oil from the country within the bloc by the end of the year.

The embargo in Europe would cut Russia off from what has always been the biggest export market for its oil. Insurance sanctions would hamper exports to buyers in Asia and elsewhere, as European companies handle most of the world’s oil trade.

The tactic was used effectively by Europe a decade ago to cut Iranian oil exports as part of efforts to force Tehran to negotiate over its nuclear program.

The insurance proposal has been the subject of tough negotiations between EU member states, which must all approve it to move forward.

The European Union has proposed a ban on Russian crude within six months; Moscow and kyiv have accused each other of breaking a ceasefire in Mariupol. Photo: Julien Warnand/Shutterstock

Greece, Cyprus and Malta, major maritime nations, have expressed their concerns. A number of Greek shipowners have contracts with major oil companies such as

Chevron Corp.

and Shell PLC to ship Russian crude to customers in China and India.

Responding to their concerns, the European Commission, which presented new draft sanctions proposals on Friday, suggested extending the deadline before which the measure would take effect from one month to three months.

Diplomats say Brussels and the bloc’s biggest members, such as Germany, have also promised to use the Group of Seven talks to seek commitments from countries like Japan, Canada and the United States. so as not to undermine the Greek, Cypriot and Maltese shipping companies.

Germany holds the presidency of the G-7 this year. That could be enough to win support for the insurance ban, diplomats say.

Shipowners and traders take out insurance policies to protect themselves against huge potential costs resulting from damage to tankers, oil spills and other hazards. A bucket is hull and machinery insurance, which covers physical damage to vessels and is usually purchased from Lloyd’s Market in London.

Protection and indemnification, on the other hand, cover the liability of third parties, such as in the event of collision or pollution. The International Group of P&I Clubs, which includes member clubs in the UK, Norway, EU and elsewhere, provides P&I insurance to approximately 95% by tonnage of the world’s tanker fleet.

SHARE YOUR THOUGHTS

Is insurance an effective financial weapon against Russia? Why or why not? Join the conversation below.

“Clubs will always abide by bans on the provision of insurance and reinsurance, whether in the context of Russia, Iran or other countries on which trade, financial and other restrictions have been imposed,” said its managing director, Nick Shaw. Shipowners will have to look elsewhere for their liability insurance arrangements where such bans are in place, he added.

If the P&I Clubs do not provide insurance, “the greatest impediment to a first-class tanker owner continuing to market his vessel on the spot market may be the credibility and reliability of the insurance” purchased elsewhere, said Mike Salthouse, global director at the North of England Protecting and Indemnity Association Ltd., one of IG’s member clubs.

The state-aligned Russian giant,

Rosneft Oil Co.

, struggling to find buyers huge amounts of crude in recent weeks. Sanctions on dealings with the company, due to come into force on May 15 push some big traders give up exporting Russian oil. Russia’s flagship Ural crude is trading at very favorable prices.

Insurance sanctions would add another hurdle to Russian producers looking to tap foreign demand for their crude.

Sanctions would push Russian oil further into a parallel market facilitated by lesser-known traders and shipowners willing to operate without insurance, according to Frontline’s Mr Barstad. Such a market has allowed Iran and Venezuela to continue exporting oil in recent years, even though the underlying crude is subject to US sanctions.

For Russia, shipping uninsured oil could be more difficult than in the case of Iran. Ships leaving the country’s ports in the Baltic Sea sail close to the coasts of Denmark en route to the North Sea. Danish authorities may be reluctant to allow such vessels to pass near its shores, analysts and shipowners have said.

Other insurers could fill part of the void. As long as Turkey withdraws from sanctions, insurers operating there will be able to cover Russian exports, said Andreas Krebs, international insurance broker at GrECo International Holding AG in Vienna. He expects this coverage to be provided by insurance companies based in the Middle East and the Gulf.

Still, Russian companies “will not be able to sell all the crude they are currently producing,” said Hugo De Stoop, chief executive of

Euronav

NV, another tanker owner who recently agreed to merge with Frontline.

Shipowners and traders already face additional insurance costs for doing business in some Russian ports in the form of war risk premiums. The product, which protects vessels for voyages made throughout the year, typically costs 0.04% of a vessel’s value, said Marcus Baker, global head of marine and freight at the brokerage. Insurance Marsh Inc., a unit of

McLennan Marsh

cos.

Shipowners trading in the Black Sea have recently paid more than 5% of the ship’s value per single voyage, Mr Baker said.

To be sure, there is other markets that Russia can exploitsuch as China and India, industry participants say, although it’s unclear what the country’s appetite for commodities will be.

“Will the EU ban on European insurers prevent Russian oil shipments from leaving Russia? Probably not, if there is political will elsewhere to import these shipments,” Mr Salthouse said.

Write to Julie Steinberg at julie.steinberg@wsj.comLaurence Norman at laurence.norman@wsj.com and Joe Wallace at Joe.Wallace@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

.

Leave a Comment