But a smaller part of the latest sanctions package could prove just as important. A ban on insuring ships carrying Russian oil would make it harder for Moscow to divert hundreds of thousands of barrels a day to other buyers in India and China, and that could push world oil prices higher still.
“Aiming for the insurance side is the best option to stop Russian crude flows rather than just redirect them,” said Matt Smith, principal oil analyst at Kpler, a market intelligence firm.
The European Union has announced that EU companies will not be able to “insure and finance the transport” of Russian oil to third countries after a six-month transition period.
“This will make it particularly difficult for Russia to continue exporting its crude oil and petroleum products to the rest of the world, as EU carriers are important providers of such services,” the Commission, the EU’s executive arm, said. it’s a statement.
The UK is expected to join the EU effort. That would tighten the vise even more, as Lloyd’s of London has been at the center of the marine insurance market for centuries.
Until now, Russia has been able to cushion the blow of a drop in exports to Europe by attracting other customers at deep discounts. But if ships can’t get the insurance they need for deliveries, that will be much more difficult in the short term.
“The restrictions on insurance for Russian ships are very important and one of the main reasons we assume that not all Russian barrels can simply be redirected from Europe to other places, in particular China and India,” said Shin Kim, head of supply and production analysis at S&P. Global Commodity Outlook. “The ban will add political and economic complications to the movement of Russian oil.”
The China and India factor
The EU ban on Russian crude shipped by sea is gradually being implemented. But European customers have already pulled out, wanting to avoid difficult logistics and reputational damage.
Exports to northwestern Europe fell from 1.08 million barrels a day in January to just under 325,000 barrels a day in May, according to data from Kpler. Pressure from the West forced Russia to cut its production, which the country’s economy ministry said in April could fall as much as 17% this year.
But a surge in exports to Asia helped offset a large part of those losses. China and India, taking advantage of deep price discounts, imported around 938,700 barrels a day in May, according to Kpler data. In January, imports from those two countries totaled just 170,800 barrels per day.
“Fast forward three months after the start of the war, Russian crude exports are still continuing apace,” Smith said. “They are just being sidetracked and finding new homes.”
The EU ban on insuring the transportation of Russian crude points directly to this problem. If the UK cooperates, it would be much more difficult for India. to take over. The same is true of China, where demand for fuel is expected to rise as coronavirus restrictions in major cities are eased.
The insurance market also includes a network of reinsurers that help pool risk. Many of these companies are based in Europe.
“In the beginning, at least, I think this is going to have a big impact on the market,” said Leigh Hansson, a partner in the global enforcement group at law firm Reed Smith.
Excluding Russia from other markets would have the desired effect of tightening the screw on Moscow, but could further boost global energy prices just as Europe and the United States try to rein in runaway inflation.
“Yes, Russia will suffer a loss of revenue, but Europe and the United States will likely suffer a substantial increase in global oil prices,” Olivier Blanchard, a former chief economist at the International Monetary Fund, wrote last week in an article for the Peterson Institute. of International Economy.
Insurance as a weapon
Refineries and other importers are not the only ones who worry that ships carrying crude have acceptable insurance.
“Uninsured and underinsured vessels would not be allowed to enter any major ports or pass through major shipping chokepoints such as the Bosphorus or the Suez Canal,” wrote Sergei Vakulenko, a Germany-based energy analyst, in a blog post for the Carnegie Endowment. for International Peace.
Financial institutions are also wary of breaching sanctions, which can lead to huge penalties from regulators.
“It’s not just a transaction involving a Russian refiner and producer,” said Richard Bronze, director of geopolitics at Energy Aspects, a London-based research consultancy. “There are all these other parties that have to be involved.”
Russia has promised to get around the new rules by relying on state guarantees that could, in theory, 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 ships.
“This problem has a solution,” said Dmitry Medvedev, deputy chairman of the Russian Security Council, on his official Telegram channel. “The issue of insurance of deliveries can be closed by state guarantees within the framework of international agreements with third countries. Russia has always been a responsible and reliable partner and will continue to be so in the future.”
That means Russian shipments probably won’t be cut off entirely.
“It’s disruptive, but it’s not going to wipe out all Russian exports,” Bronze said.
But not everyone will see this as a suitable solution, especially given questions about whether Russia would be able to pay claims should it need to while under harsh sanctions.
“There are going to be a lot more questions,” Bronze said. “I think it narrows down the pool of countries that are willing to buy.”