More than half of these ships carry European flags (mostly Greek-flagged), but more importantly, their insurance coverage is provided almost entirely by UK, European and US insurers and their reinsurers. .
Lloyds of London dominates the provision of ship damage insurance coverage, while protection and indemnity insurance, which covers third party liabilities (think oil spills and the like), is largely provided by a group of UK and European insurers. They account for about 95 percent of the world’s oil tanker fleet.
The United States has, along with Europeans, a significant share of the global reinsurance market that allows major insurers to limit their exposures.
Few, if any, oil owners or commodity traders or their financiers will want to run the risk of sending oil without coverage. Credit: Bloomberg
Without insurance, Russia will not be able to get much of its oil from end customers. Few, if any, oil owners or commodity traders or their financiers will want to run the risk of sending oil without coverage.
Russia could take out its own insurance coverage, backed by sovereign guarantees, but would still need access to the world’s oil tanker if it wants to redirect the volumes it will lose with the EU ban.
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There are also other obstacles to diverting their exports to new markets.
While China and India have happily bought Russian oil at very low prices and have adequate refining capacity to manage their iconic Urals crude, there is a limit to how much they need. Other Asian markets do not have the capacity to handle the high sulfur content of the Urals.
Therefore, there is a limited market for this Russian oil which makes it unlikely that it will be able to sell all its oil elsewhere. It is also likely that producers in the Middle East who dominate Asian markets are unlikely to sacrifice much of their own volumes to give way to more Russian crude.
The ban on insurance is smart because it will have a devastating and global effect on the logistics that underpin Russia’s maritime energy exports. It’s not without cost (it will cost the insurance industry), but it is a relatively inexpensive way to create a balanced impact on Russia’s economy and amplify the effects of the EU ban on imports.
Aside from the loss of revenue for insurers (the tanker fleet will inevitably be reorganized to carry the same volumes on different routes, as the world will still need similar volumes of oil), there will be some flow effects to the rest. Of the world.
There is a limited market for this Russian oil which makes it unlikely that it will be able to sell all of its oil elsewhere.
If the combination of the EU ban and the withdrawal of insurance acts as intended, a significant supply of oil (Russia produces about 10 percent of the world’s oil) will be frozen out of the market. This means that oil prices, which are already high, will remain high indefinitely. The current price is about $ 122 a barrel.
In turn, this will continue to fuel inflation rates around the world that are already at levels that had not been experienced for decades and, in response to these rates, will force interest rates to rise for longer.
None of the sanctions that the West has imposed on Russia in response to its invasion of Ukraine has a significant cost to the West and in particular to Europe, which is heavily dependent on Russian oil and gas. There is a global price linked to sanctions.
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Neither the EU ban nor the planned withdrawal of insurance will have an immediate impact on Russia, although there could be a greater element of self-sanction on the part of insurers and shipowners and traders and their financiers before the insurance agreement enters into force with the EU. ban, later this year.
This six-month grace period allows the tanker fleet, its insurers and the wider oil market to be planned, not only for how to implement the bans, but for a market without a very material proportion of Russian production.
It also provides a window into the changing circumstances and course of the war in Ukraine.
Responsibility for exchange rates that would mean withdrawing sanctions would be very one-sided and would fall mainly on Russia, which would watch as sanctions pile up: the latest in the EU is its sixth package of sanctions and is working. a seventh, and would notice that from the end of this year they will start to bite as the pressure on their main source of income tightens significantly.
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