“Targeting the insurance side of things is the best way to stop the flow of Russian oil, not just redirect it,” said Matt Smith, lead oil analyst at Kpler, a market research firm.
The European Union has announced that EU companies will be prohibited from “insurance and financing the transportation” of Russian oil to third countries after a six-month transition period.
The UK is expected to join the EU effort. This would further tighten the vise, as Lloyd’s of London has been at the center of the marine insurance market for centuries.
So far, Russia has been able to cushion the blow from falling exports to Europe by attracting other customers with deep discounts. But if ships can’t get the insurance they need for delivery, it will become much more difficult in the near future.
“Restrictions on Russian ship insurance are extremely important and we believe this is the main reason why not all Russian barrels can simply be diverted from Europe to other countries, in particular China and India,” said Shin Kim, head of analysis supply and production at S&P. Global outlook on commodities. “The ban will add political and economic complexity to the movement of Russian oil.”
China and India factor
The EU ban on Russian oil transported by sea is being phased in. But European customers have already backed off, wanting to avoid complex logistics and reputational damage.
But rising exports to Asia helped offset much of that loss. Taking advantage of huge price discounts, China and India imported about 938,700 barrels a day in May, according to Kpler data. In January, imports from these two countries totaled just 170,800 bpd.
“Fast forward three months into the war and we see that Russian oil exports are still going strong,” Smith said. “They just redirect and find new homes.”
The EU ban on Russian oil transportation insurance is directly aimed at solving this problem. If the UK cooperates, it will be much more difficult for India to pick up the slack. The same goes for China, where demand for fuel is expected to pick up as coronavirus restrictions ease in major cities.
The insurance market also includes a network of reinsurers who help pool risks. Many of these firms are based in Europe.
“At least initially, I think it will have a huge impact on the market,” said Lee Hansson, partner in the global compliance group at law firm Reed Smith.
Excluding Russia from other markets would have the desired effect of tightening the screws on Moscow, but could push global energy prices even further, just as Europe and the United States are trying to tame soaring inflation.
Insurance as a weapon
Refiners and other importers are not the only ones who care about acceptable insurance for ships carrying crude oil.
Financial institutions also remain wary of violating sanctions, which could result in huge fines from regulators.
“This is not just a deal between a refinery and a Russian producer,” said Richard Bronz, head of geopolitics at Energy Aspects, a London-based research consultancy. “There are all these other parties that need to be involved.”
“This problem is solvable,” said Dmitry Medvedev, Deputy Chairman of the Russian Security Council, on his official Telegram channel. “The issue of supply insurance can be closed by state guarantees within the framework of international agreements with third countries. Russia has always been a responsible and reliable partner and will remain so in the future.”
This means that Russian supplies will most likely not be completely cut off.
“It’s a breakthrough, but it won’t wipe out all Russian exports,” Bronz said.
But not everyone will see this as an adequate solution, especially given questions about whether Russia will be able to pay claims if it needs to while it is under heavy sanctions.
“There will be a lot more doubts,” Bronz said. “I think it narrows down the countries that are willing to buy.”
— Claire Sebastian contributed to the report.