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Russian President Vladimir Putin will have a thumping financial headache if the world's tanker fleet gives him a wide berth.
And the shipping industry may well have to do just that because of moves by the EU — and potentially the U.K. too — to cut off access to insurance for any ship carrying Russian oil.
Putin faces an imminent ban on his seaborne oil sales to the EU from the end of this year but most traders have expected him to simply switch to a Plan B by shipping greater volumes of crude further afield to China and India.
That becomes difficult if international tanker fleets can't secure insurance. The EU has already agreed to sanctions banning insurance on Russian oil cargoes, and the U.K. is likely to implement its own prohibition, according to people in the market. London is the center of the global maritime insurance trade and if it pairs up with Brussels on this, Putin's options for finding insurable tankers will be dramatically limited.
“Unless the ships change [their] insurance company, then 90 percent of the world's fleet is suddenly off limits for Russian cargoes,” said Erik Broekhuizen, global manager of tanker research and consulting at the broker and advisory firm Poten & Partners.
The global shipping industry relies on insurance to cover risks like damages to the cargo and the ship itself. But crucially, the industry also needs liability coverage in the event of potentially huge multi-billion-dollar losses from adverse events ranging from a collision to an oil spill.
Join the club
Most of that insurance is provided through protection and indemnity clubs — mutual organizations where shipowners pool their risks — that are mainly based in the U.K. and EU.
Global shipping companies aren't likely to quit deep international insurance pools for smaller Russian or Chinese clubs to get around the ban, Broekhuizen said.
Plus, there would be public relations fallout from switching clubs — with little economic upside to handling only Russian oil cargoes.
“You're taking your fleet away from the 60 million barrel a day international market, to do the two million barrel-a-day Russian crude exports,” he said. “I don’t think many shipowners will think that's a good, attractive proposition.”
What's more, Russia, China and India lack large enough fleets of their own that would be able to step in, he points out.
Then there are the insurers themselves, who won't want to fall foul of international sanctions.
A spokesperson for the International Group of P&I Clubs said it's reviewing the EU regulations and would comply accordingly.
Likewise, a spokesperson for Lloyd’s of London, where cargo and hull insurance is underwritten, said it was working closely with U.K. and international regulators to implement sanctions.
"We're seeing people becoming just a little bit more cautious about what they're doing, asking a lot more questions, trying to find out exactly who owns the oil, where it's come from, what's the provenance of the oil," said Marcus Baker, global head of marine & cargo at the broker Marsh.
For now, all eyes are on the U.K. to see what the exact wording of its ban will be — due to the massive impact on the insurance industry through Lloyds and the P&I clubs based there. The British foreign office declined to comment on whether an announcement was coming soon.
Subterfuge
But there are still ways around a ban.
While the insurance industry will take a conservative view, Baker said, it'll also have to navigate a "minefield" to figure out where the oil sloshing around in a tanker has actually come from.
Some shipping companies have already been working around existing restrictions by switching cargoes at sea or relabelling oil as sourced outside Russia — "Kazakh," for instance.
And there are other established "subterfuge" techniques that are used for Iranian and Venezuelan oil shipments — including a so-called "ghost armada" of around 200 vessels that moves oil around the world by flying under the radar of the authorities and docking in more lax ports.
There's the additional prospect that state guarantees could be used to keep oil flowing, an idea floated by former Russian President Dmitry Medvedev in his dismissals of an insurance ban.
Chinese and Indian insurers could step in to provide some cover, Baker said. But they may struggle to provide reinsurance compared to European markets.
Ultimately, Russia might not be able to completely replace the global tankers impacted by the restrictions, according to Broekhuizen, the shipping expert.
"Maybe [the Russians] will try to charter in or maintain or get control over more vessels that they will be able to own or operate," he said. "Or maybe, on the receiving end, the Chinese and the Indians will try to dedicate a number of vessels to that trade and say 'okay, those ships will just do Russian crude imports for us'."
But that workaround would be a "significant effort," he added. "I don't expect that to be enough to maintain the full flow of Russian exports."
Price increase?
While an insurance ban is likely to curtail Russia’s ability to redirect its oil sales, the impact may not necessarily be clear-cut: The tight supply of global oil means any further limits on Russian exports could push up the price, which could in theory backfire by hurting Western economies.
That's why some scholars, such as Olivier Blanchard, senior fellow at the Peterson Institute for International Economics, dismiss the insurance-ban idea as counterproductive.
"Yes, Russia will suffer a loss of revenues," he argued in a blog post. "But Europe and the United States will likely suffer from a substantial increase in world oil prices."
America Hernandez and Hanne Cokelaere contributed reporting.
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