Industry trade

The Achilles heel of Russian oil: insurance

LONDON/NEW DELHI/TOKYO, May 25 (Reuters) – Russia has so far diverted much of the impact of sanctions from its oil trade, but the insurance industry is threatening to put a damper on action unless Moscow and its clients can fill the void left by Western underwriters.

Insurers in Europe and the United States, which dominate the international shipping market, are cutting cover for Russian tankers, industry sources say, to avoid violating sanctions imposed following the invasion of Russia. Ukraine via Moscow. Even non-Russian vessels now risk being dumped by Western insurers if they carry Russian crude.

Actions by Western insurers could undermine Moscow’s recent success in rerouting crude supplies from Europe and the United States to Asia, hasten the decline of its European business and dig a bigger hole in markets energy as restrictions ensnare the world’s second-largest crude oil exporter.

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The pullback is expected to occur in June and July, when policies that were withdrawn this month in anticipation of tougher European Union restrictions will fully expire, four shipping and industry sources told Reuters. They declined to be named due to the sensitivity of discussions on Russia-related affairs.

“There is continued pressure on international marine insurers not to cover shipping companies around the world for the transport of Russian oil,” said Maria Bertzeletou, an analyst at Signal Maritime Services, which is headquartered in Greece. , one of the leading tanker managers.

“turbulence or a short-term interruption of the marine insurance cannot be ruled out.”

Vessels are commercially required to have Protection and Indemnity (P&I) insurance, which covers liability claims, including environmental damage and injury. Separate hull and machinery policies cover vessels against physical damage.

While insurance companies based in countries that are big buyers of Russian oil may be able to step in, their ability to cover potentially huge risks by obtaining their own insurance policies from reinsurers is also expected to be affected. .

Just as the marine insurance market is dominated by Western companies, the global reinsurance market is dominated by American and European companies who now have to take into account a wide range of sanctions targeting Russian maritime interests and banks. .

“It will be difficult now to identify a reinsured claim that is not somehow affected by these sanctions,” said Mike Salthouse, claims manager at North, a member of the International Group, an association insurers who provide P&I insurance to approximately 90% of ocean-going vessels.

GOVERNMENT GUARANTEES?

Without reinsurance, an insurer taking out a policy for an oil tanker would likely need a government guarantee to cover potential liabilities of up to billions of dollars.

“There are probably insurers in Russia who are able to write liability and reinsurance programs that could then be backed by a sovereign wealth fund from China or Russia or a combination of the two,” said Salthouse, who is also Chairman of the International Group Sanctions. subcommittee.

“It is technically possible. It depends on the political will and on the markets on which Russia will concentrate its cargoes.”

For now, customers in India and China are picking up shipments of Russian oil shunned in the West, and cheaper because of it, according to industry data and traders. Russian oil exports returned to their pre-invasion average in April, according to a report released this month by the International Energy Agency. Read more

In the absence of Western insurers, Russia is turning to local insurance companies, including the country’s fourth-largest provider, Ingosstrakh, according to three of the industry sources.

Reuters could not determine whether the Russian government or any other sovereign state had given or planned to give private company Ingosstrakh any financial guarantees. Russia’s economy and transport ministries and Ingosstrakh did not respond to requests for comment.

India, a longtime ally of Moscow, has taken over Russian crude. Its share in Russian oil exports has risen from zero to 10% since the start of this year, according to the IEA.

New Delhi does not see insurance as a barrier to future purchases, as Ingosstrakh is responsible for any danger occurring at sea, according to a senior government official.

“India recognizes insurance cover including P&I by Ingosstrakh, so there will be no problem as long as the vessels comply with port entry rules. Since we do not recognize US sanctions, we will accept Russian ships. Our responsibility will only arise after the ship is unloaded,” said the official, who requested anonymity.

China, the world’s biggest oil importer, is also increasing its oil purchases from Russia at bargain prices, according to shipping data and oil traders who spoke to Reuters.

But Chinese insurers looking to take over business that was previously covered by their Western counterparts would likely need a sovereign guarantee, according to the three industry sources.

“It will not be a commercially viable decision for a Chinese insurer to take over insurance cover from European companies,” said Leonard Li, a partner at management consultancy Oliver Wyman.

“Chinese companies don’t have much experience or knowledge of this industry,” he added.

Chinese government officials did not respond to requests for comment.

RUN IN FEAR

There is precedent for governments to step in to insure the maritime risks associated with shipping sanctioned goods.

In 2012, Japan used a sovereign liability guarantee to help bring in Iranian oil shipments after Western insurers cut off cover due to sanctions before a nuclear deal was struck with Tehran.

A Japanese official, who declined to be named due to the sensitivity of the issue, said legislation passed in 2012 was strictly for Iranian oil imports and that new rules would have to be approved for any guarantees covering Russia.

Two Japanese government officials, including the first source, said they were unaware of any discussion of such backup plans.

Japanese insurers continue to cover tankers carrying Russian oil as long as they are not linked to companies on sanctions lists, a Japanese industry source familiar with the matter said.

The source added that if the UK and other Western reinsurance companies stop offering cover, Japanese insurers are likely to do the same.

A complex patchwork of US, EU and UK sanctions has barred Russian-owned or Russian-flagged ships from calling at ports or entering into new commercial contracts, raising capital or obtaining new insurance cover from companies operating in these jurisdictions.

There is no ban on insuring foreign vessels carrying Russian oil, but it is being considered as part of a new set of European Union restrictions, which would also include an import embargo of Russian oil.

In the meantime, the insurance industry is self-sanctioning ahead of possible future restrictions and Russia’s maritime sector is seeing the end of several services, including certification of ships by major foreign providers – vital for accessing ports and guarantee insurance – shipping lines are pulling out and ship engine builders suspending training on their equipment.

“Private companies are going harder and higher than governments ever would because they are afraid of activist investors and shareholders,” said Ross Denton, head of international trade at law firm Ashurst.

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Additional reporting by Yuka Obayashi in Tokyo, Francesco Guarascio in Brussels, Selena Li and Xie Yu in Hong Kong, Beijing bureau; Editing by Carmel Crimmins

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