“Targeting the insurance side of things is the best way to stop Russian oil flows, instead of just diverting them,” said Matt Smith, a leading oil analyst at Kpler, a market intelligence firm.
The European Union has announced that EU companies will be blocked from “transport insurance and financing” of Russian oil to third countries after a transitional period of six months.
The United Kingdom is expected to join the EU’s efforts. This will further tighten the vise, as Lloyd’s of London has been at the heart of the marine insurance market for centuries.
So far, Russia has managed to mitigate the impact of falling exports to Europe by attracting other customers with big discounts. But if ships cannot get the necessary delivery insurance, it will become much more difficult in the near future.
“Restrictions on insurance of Russian ships are extremely important and the main reason to assume that not all Russian barrels can simply be diverted far from Europe to other places, especially China and India,” said Shin Kim, head of supply analysis and production in S&P. Global Commodity Insights. “The ban will add political and economic complications to the relocation of Russian oil.
The factor China and India
The EU’s ban on offshore Russian oil supplies is being phased in. But European customers have already withdrawn, wanting to avoid difficult logistics and reputational damage.
But rising exports to Asia have helped offset much of that loss. China and India – taking advantage of huge price discounts – imported about 938,700 barrels a day in May, according to Kpler. In January, imports from the two countries amounted to just 170,800 barrels per day.
“Fast forward three months after the start of the war, and Russian crude oil exports are still fast,” Smith said. “They just relocate and find new homes.”
The EU’s ban on insuring the transport of Russian oil is aimed at this very issue. If the United Kingdom cooperates, it will make it much harder for India to raise the gap. The same is true for China, where demand for fuel is expected to increase as coronavirus restrictions in major cities are eased.
The insurance market also includes a network of reinsurers who help consolidate risk. Many of these companies are based in Europe.
“At least initially, I think this will have a huge impact on the market,” said Lee Hanson, a partner in the global regulatory enforcement group at Reed Smith.
Excluding Russia from other markets would have the desired effect of tightening Moscow’s screws, but could further raise world energy prices just as Europe and the United States try to curb rising inflation.
Insurance as a weapon
Refineries and other importers are not the only ones interested in crude oil ships having acceptable insurance.
Financial institutions also remain cautious not to face sanctions, which could lead to huge sanctions from regulators.
“This is not just a deal involving a refiner and a Russian producer,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based research consultancy. “There are all these other countries that need to be involved.”
“This problem is solvable,” Dmitry Medvedev, deputy chairman of Russia’s Security Council, told his official Telegram channel. “The issue of supply insurance can be closed through state guarantees in the framework of international agreements with third countries. Russia has always been a responsible and reliable partner and will remain so. “
This means that Russian supplies are unlikely to be cut off completely.
“This is destructive, but it will not destroy all Russian exports,” Bronze said.
But not everyone will see this as an adequate solution – especially given the question of whether Russia will be able to pay claims if necessary while subject to harsh sanctions.
“There will be much more doubt,” Bronze said. “I think this narrows the circle of countries that want to buy.
“Claire Sebastian contributed to the report.”