Europe is making it much harder for Russia to supply oil everywhere

But a smaller part of the latest package of sanctions could be just as important. A ban on insuring Russian oil ships would make it difficult for Moscow to divert hundreds of thousands of barrels a day to other buyers in India and Chinaand this could lead to even higher oil prices.

“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.

“This will make it difficult for Russia to continue exporting crude oil and petroleum products to the rest of the world, as EU operators are important providers of such services,” the Commission, the EU’s executive body. said in a statement.

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 But European customers have already withdrawn, wanting to avoid difficult logistics and reputational damage.

Exports to northwestern Europe fell from 1.08 million barrels per day in January to just under 325,000 barrels per day in May, according to Kpler. Western pressure has forced Russia to limit its production, which is the country’s economy ministry said in April may fall by as much as 17% this year.
India shows no signs of delaying the purchase of Russian oil

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.

“Yes, Russia will suffer a loss of revenue, but Europe and the United States are likely to suffer from significant increases in world oil prices,” wrote Olivier Blanchard, a former chief economist at the International Monetary Fund, last week. article for the Peterson Institute for International Economics.

Insurance as a weapon

Refineries and other importers are not the only ones interested in crude oil ships having acceptable insurance.

“Uninsured or underinsured vessels will not be allowed to enter any large port or pass through important shipping suffocation points such as the Bosphorus or the Suez Canal,” wrote Sergei Vakulenko, an energy analyst based in Germany. blog post for the Carnegie Endowment for International Peace.

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.”

Russia has promised to circumvent the new rules, relying on state guarantees that could theoretically be used instead of traditional insurance coverage. Reuters has reported that the state-controlled Russian national reinsurance company is now the main reinsurer of Russian vessels.

“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.”

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