Insurers Still Unclear How G-7 Sanctions on Russian Crude Oil Cargoes Will Work
Just six weeks before European Union sanctions on Russian oil come into effect, insurers are still unclear as to exactly how they will work.
At the heart of the uncertainty is a continued lack of detail surrounding US-led plans, endorsed by other members of the Group of Seven, to cap the price of Russian oil exports. That mechanism could override planned EU curbs — due to come into effect on Dec. 5 — that will bar access to financial services, including insurance, which are vital for the global transport of crude oil.
A key cog in the insurance of cargoes is the International Group of P&I Clubs that covers 90% of the world’s ships from risks including spillages. Many of the group’s clubs are London-based but have European entities or access European reinsurance, meaning they rely heavily on EU regulations.
Below is a Q&A with Mike Salthouse, who chairs the sanctions committee of the International Group of P&I Clubs and is a global director of claims at North of England P&I.
Question: What will the insurance of Russian crude oil cargoes look like after Dec. 5 when the next set of EU sanctions fully come into force?
Answer: We don’t yet properly know. The Russian oil price cap is a G-7 initiative aligned to an existing EU services ban. Until details of the price cap are revealed and the G-7 (and particularly the US and UK) publish their own legislation it is not possible to answer this question.
Question: Can you envisage a scenario where the UK doesn’t mirror EU sanctions related to insurance and swaths of Russian oil are then covered only by UK firms?
Answer: Not really. The US and UK are at pains to say that the intention is to ensure that their legislation is as far as possible aligned with that of the EU. That said the legal and interpretative systems are different and gaps between the different laws or guidance may conceivably allow for the possibility of an activity that is lawful in one jurisdiction being unlawful in another.
This is more of a theoretical possibility than a practical one. In reality reliance on cross-border reinsurance programs and banks make the operation of an insurance contract that is, for example, lawful in the UK but unlawful in the EU practically very difficult.
Question: The latest EU sanctions say ships from a third country transporting oil above the cap could be permanently banned from receiving EU services including insurance. Is that enforceable? Is there a precedent for permanent bans?
Answer: This a new provision. It is difficult to see how it would work in practice. I suppose the vessels could be designated and/or subject to an asset freeze in which case it is unlikely that EU or G-7 based financial service industries and other EU-based entities would feel able to conduct business with them or involving them.
Question: Are there any other specific insurance concerns among International Group members?
Answer: We are concerned about the potential for a lack of harmonization between the main sanctioning authorities as outlined above.
In relation to the price cap we are also concerned that there may be a high volume of non-compliant cargoes shipped. Where a shipowner or insurer has checked the attestation but a vessel is then found mid-voyage with a non-compliant cargo on board, it is unlikely to amount to a breach of sanctions — but it will result in a cancellation of cover and a refusal of banks to do business with the (innocent) ship.
This may lead to vessels becoming stranded without insurance or bank support and unable to discharge the non-compliant cargo. This is a real concern and one that states should consider.
Question: Do you think the fleet of Russia-willing, non-EU covered tankers will fully fill the void of vessels that are not willing to do Russian trade because of the EU’s measures?
Answer: We simply don’t know.
–With assistance from Alberto Nardelli.
Photograph: Rosneft PJSC’s drilling operations at the Samotlor oil field near Nizhnevartovsk, Russia, on March 21, 2017. Photo credit: Andrey Rudakov/Bloomberg