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Achilles heel of Russian oil: Insurance



(Reuters) – Russia has so far deviated greatly from the impact of sanctions on its oil trade, but the insurance industry is threatening to start work unless Moscow and its customers can close a gap left by Western insurers.

Insurance companies from Europe and the United States, which dominate the international naval market, are reducing coverage for Russian oil tankers, industry sources say, to avoid violating sanctions imposed in the wake of Moscow’s invasion of Ukraine. Even non-Russian ships are now at risk of being released by Western insurance companies if they carry Russian crude oil.

Western insurance companies’ actions could undermine Moscow’s recent success in diverting crude oil supplies from Europe and the US to Asia, accelerating the decline in its European operations and blowing a bigger hole in energy markets as restrictions capture the world̵

7;s second largest crude oil exporter.

The decline is expected to hit in June and July, when policies withdrawn this month in anticipation of tougher EU restrictions cease completely, four shipping and industry sources told Reuters. They declined to be named because of the sensitivity in discussing Russian-linked business.

“There is ongoing pressure for international marine insurance companies not to cover shipping companies around the world to transport Russian oil,” said Maria Bertzeletou, an analyst at Signal Maritime Services headquartered in Greece, a leading oil tanker leader.

“Torbulence or a short stay on marine insurance can not be ruled out.”

Ships are commercially obligated to have protection and indemnity insurance, which covers claims for damages from third parties, including environmental damage and damage. Separate hull and engine policies cover vessels against physical damage.

While insurance companies based in countries that are large buyers of Russian oil may enter, their ability to cover potentially huge insurance risks by obtaining their own insurance from reinsurers also appears to be affected.

Just as the marine insurance market is dominated by Western companies, the global reinsurance market is dominated by US and European companies, which now have to comply with a wide range of sanctions against Russian maritime interests and banks.

“It will be challenging now to identify a reinsured claim that would in no way be caught by these sanctions,” said Mike Salthouse, claims manager at North, a member of International Group, an association of insurance companies that provide P&I insurance to about 90 % of ocean – going vessels.

Without reinsurance, an insurer writing a policy for an oil tanker would probably need a government guarantee to cover potential debts amounting to billions of dollars.

“There are probably insurance companies in Russia that can write liability and reinsurance programs for third parties that can then be backed by a sovereign fund from China or Russia or a combination of both,” says Salthouse, who is also chairman of International. The group’s sanctions committee.

– It is technically possible. It depends on what the political will is and which markets Russia will focus its loads on. “

At the moment, customers in India and China are picking up loads of Russian oil that are avoided in the West, and cheaper because of it, according to industry data and traders. Russian oil exports were back to average before the April invasion, according to a report this month from the International Energy Agency.

In the absence of Western insurance companies, Russia is turning to local insurance companies including the country’s number 4 supplier, Ingosstrakh, according to three industry sources.

Reuters could not determine whether the Russian government or any other sovereign state had given or planned to provide privately owned Ingosstrakh with any financial guarantees. Russia’s Ministry of Economy and Transport and Ingosstrakh did not respond to requests for comment.

India, a longtime ally of Moscow, has taken up Russian crude oil. Its share of Russian oil exports has jumped to 10% from zero since the beginning of this year, according to the IEA.

New Delhi does not see insurance as an obstacle to future purchases because Ingosstrakh is responsible for any dangers that arise at sea, according to a senior government official.

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

But Chinese insurance companies that want to take deals that were previously covered by their Western counterparts would probably need a sovereign guarantee, according to the three industry sources.

“It will not be a commercially viable decision for any Chinese insurer to take over insurance coverage from European companies,” said Leonard Li, a partner with management consulting firm Oliver Wyman.

“Chinese companies do not have much experience or knowledge of this sector,” he added.

Chinese government officials did not respond to requests for comment.

Japanese insurance companies still provide protection for tankers carrying Russian oil as long as they are not linked to companies on sanctions lists, said a Japanese industry source familiar with the situation.

The source added that if the UK and other Western reinsurance companies stopped offering protection, insurance companies in Japan would probably do the same.

A complex patchwork of US, EU and British sanctions has banned Russian-owned or flagged ships from calling at ports or entering into new trade contracts, raising capital or securing new insurance coverage from companies operating in these jurisdictions.

There is no ban on insuring foreign-owned vessels carrying Russian oil, but it is being considered as part of a new EU package of restrictions, which would also include an embargo on imports of Russian oil.

Meanwhile, the insurance industry is self-sanctioning in the face of possible future restrictions and Russia’s shipping sector sees the closure of several services, including ship certification of leading foreign suppliers – crucial to gaining access to ports and secure insurance – shipping companies pull out and ship engine manufacturers discontinue training on their equipment.

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


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