More than half of those ships carry European flags (the majority Greek-flagged) but, even more significantly, their insurance cover is provided almost entirely by UK, European and US insurers and their reinsurers.
Lloyds of London dominates the provision of insurance cover for damage to ships while protection and indemnity insurance, covering third-party liabilities (think oil spills and the like), is provided largely by a group of UK and European insurers. They insure about 95 percent of the global tanker fleet.
The US has, with the Europeans, a major share of the global reinsurance market that enables the primary insurers to cap their exposures.
Without insurance Russia will be unable to get much of its oil to end customers. Few, if any, tanker owners or commodity traders or their financiers will want to take the risk of shipping oil without coverage.
Russia could write its own insurance coverage, backed by sovereign guarantees, but it would still need access to the global tanker fleet if it is to redirect the volumes it will lose from the EU ban.
There are also other obstacles to diverting its exports to new markets.
While China and India have been happily buying Russian oil at heavily discounted prices and have suitable refining capacity to handle its Urals crude flagship, there is a limit to how much they require. Other Asian markets don’t have the capacity to handle Urals’ high-sulfur content.
Thus, there is a limited market for that Russian oil that makes it unlikely that it will be able to simply sell all its oil elsewhere. It’s also probably the case that the Middle Eastern producers who dominate Asian markets are unlikely to sacrifice a big slice of their own volumes to make way for more Russian crude.
The insurance ban is clever because it will have a chilling and global effect on Russia’s seaborne energy exports under-pinning logistics. It’s not costless (it will cost the insurance sector) but it is a relatively cheap way of creating a leveraged impact on Russia’s economy and amplifying the effects of the EU’s ban on imports.
Apart from the loss of income for insurers (the tanker fleet will inevitably reorganize to carry the same volumes on different routes as the world will still need similar volumes of oil) there will be some flow-on effects to the rest of the world.
There is a limited market for that Russian oil that makes it unlikely that it will be able to simply sell all its oil elsewhere.
If the combination of the EU ban and the withdrawal of insurance act as intended, a major supply of oil – Russia produces about 10 percent of the world’s oil – will be frozen out of the market. That means oil prices, already high, will remain high indefinitely. The current price is about $ US122 a barrel.
In turn, that will continue to feed into inflation rates around the world that are already at levels not experienced for decades and, in response to those rates, force interest rates to go higher for longer.
None of the sanctions the West has imposed on Russia in response to its invasion of Ukraine are without significant cost to the West and particularly to Europe, which is heavily dependent on Russian oil and gas. There is a global price attached to the sanctions.
Neither the EU ban nor the planned withdrawal of insurance will have an immediate impact on Russia, although there could be a larger element of self-sanctioning by insurers and ship owners and traders and their financiers before the insurance agreement comes into effect, with the EU ban, towards the end of this year.
That six-month period of grace allows the tanker fleet, its insurers and the wider market for oil time to plan, not just how to implement the bans, but for a market without a very material proportion of Russia’s production.
It also provides a window for circumstances and the course of the war in Ukraine to change.
The responsibility for the types of change that would see the sanctions withdrawn would be very one-sided and rest mainly with Russia, which would be looking at the sanctions now piling up – the EU’s latest are its sixth package of sanctions and it is working on a seventh – and would realize that from the end of this year they will really start to bite as the squeeze on its primary source of income tightens significantly.
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