But a smaller part of the latest sanctions package could prove just as significant. 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 global oil prices even higher.
“Targeting the insurance side of things is the best way to halt Russian crude oil flows rather than just redirecting them,” said Matt Smith, senior oil analyst at Kpler, a market research firm.
The European Union has announced that after a six-month transition period, EU companies will be barred from “insuring and financing the transport” of Russian oil to third countries.
“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 operators are key providers of such services,” the commission, the EU’s executive arm, said in a statement.
The UK is expected to join the EU’s efforts. That would further tighten the vise, as Lloyd’s of London has been at the center of the maritime insurance market for centuries.
So far, Russia has been able to cushion the blow of a drop in exports to Europe by luring other customers with heavy discounts. But if ships don’t get the insurance they need for delivery trips, that becomes much more difficult in the short term.
“The insurance restrictions on Russian ships are hugely important and one of the main reasons why we assume that not all Russian barrels can simply be diverted away from Europe to elsewhere, particularly China and India,” said Shin Kim, head of supply and transport Production analysis at S&P Insights into global commodities. “The ban will make transporting Russian oil even more complicated politically and economically.”
The China and India Factor
The EU ban on Russian crude shipped by sea is being phased in. But European customers have already pulled out to avoid difficult logistics and reputational damage.
Exports to north-west Europe fell to just under 325,000 barrels a day in May from 1.08 million barrels a day in January, according to Kpler data. Western pressure has forced Russia to cut production, which the country’s economy ministry says could fall by as much as 17% this year.
However, a surge in exports to Asia helped offset much of those losses. China and India — which are benefiting from huge price discounts — imported about 938,700 barrels a day in May, according to Kpler data. In January, imports from these two countries were just 170,800 barrels per day.
“Fast-forward three months into the war and Russian crude exports are still going strong,” Smith said. “They just get diverted and find new houses.”
The EU ban on insuring the transport of Russian crude oil is aimed precisely at this problem. If the UK cooperates, it would make it much harder for India to close the gap. The same is true in China, where demand for fuel is expected to rise as coronavirus restrictions are eased in major cities.
The insurance market also includes a network of reinsurers that help pool risks. Many of these companies are based in Europe.
“At least I think it’s going to have a huge impact on the market,” said Leigh Hansson, partner in the global enforcement group at law firm Reed Smith.
Shutting Russia out of other markets would have the desired effect of tightening the screw on Moscow, but it could keep global energy prices higher as Europe and the United States try to rein in rising inflation.
“Yes, Russia will suffer revenue losses, but Europe and the United States are likely to suffer from a significant rise in world oil prices,” wrote Olivier Blanchard, former chief economist at the International Monetary Fund, in an article for the Peterson Institute for International Economics last week.
Insurance as a weapon
Refiners and other importers aren’t the only ones who care about vessels transporting crude oil having acceptable insurance.
“Uninsured or underinsured ships are not allowed to call at major ports or pass through major shipping bottlenecks like 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 also remain wary of violating sanctions, which can result in huge penalties from regulators.
“It’s not just a transaction involving a refiner and a Russian producer,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based research consultancy. “There’s all these other parties that need to be involved.”
Russia has vowed to circumvent the new rules by relying on government guarantees, which could theoretically be used in place of traditional insurance coverage. Reuters has reported that the state-controlled Russian National Reinsurance Company is now the primary reinsurer of Russian ships.
“This problem can be solved,” Dmitry Medvedev, Deputy Chairman of the Russian Security Council, said on his official Telegram channel. “The question of insuring deliveries can be settled by state guarantees within the framework of international agreements with third countries. Russia has always been a responsible and reliable partner and will remain so in the future.”
That means Russian supplies are unlikely to be completely cut off.
“It’s disruptive, but it won’t wipe out all Russian exports,” Bronze said.
But not everyone will see this as an appropriate solution — especially given the question of whether Russia would be able to pay out claims if it needed to while it is subject to harsh sanctions.
“There will be a lot more doubts,” Bronze said. “I think it narrows the circle of countries willing to buy.”
— Clare Sebastian contributed to the coverage.