Insurers still unclear how G-7 sanctions on Russian crude oil shipments will work
Just six weeks before European Union sanctions on Russian oil come into effect, insurers are still unsure exactly how they will work.
At the heart of the uncertainty is an ongoing lack of detail about US-led plans, endorsed by other members of the Group of Seven, to curb the price of Russian oil exports. That mechanism could override planned EU restrictions – which will come into effect on December 5 – blocking access to financial services, including insurance, which are vital to the global transportation of crude oil.
An important cog in cargo insurance is the International Group of P&I Clubs, which covers 90% of the world’s ships against risks, including spills. Many of the group’s clubs are based in London but either have European entities or have access to European reinsurance, meaning they rely heavily on EU regulations.
Below is a Q&A with Mike Salthouse, Chairman of the Sanctions Committee of the International Group of P&I Clubs and Global Claims Director at North of England P&I.
Ask: What will Russia’s crude oil cargo insurance look like after December 5, when the next set of EU sanctions come into full effect?
Answers: We don’t quite know yet. The Russian oil price cap is a G-7 initiative aligned with an existing EU service ban. Until details of the price cap are known and the G-7 (particularly the US and UK) publish their own legislation, it is not possible to answer this question.
Ask: Can you imagine a scenario where the UK does not reflect EU insurance sanctions and parts of Russian oil are then only covered by UK companies?
Answers: Not really. The US and UK are doing everything they can to say that the aim is to ensure that their legislation is aligned as much as possible with that of the EU. That said, the legal and interpretive systems are different, and gaps between the different laws or guidelines could potentially present the possibility that an activity that is legal in one jurisdiction may be illegal in another.
This is more of a theoretical possibility than a practical one. In reality, the reliance on cross-border reinsurance programs and banks makes the execution of an insurance contract, for example legal in the UK but illegal in the EU, practically very difficult.
Ask: Under the latest EU sanctions, third-country vessels carrying oil above the limit could be permanently barred from receiving EU services, including insurance. Is that enforceable? Is there a precedent for permanent bans?
Answers: This is a new provision. It’s hard to see how it will work in practice. I presume the ships may be designated and/or subject to an asset freeze, in which case it is unlikely that EU or G-7 financial services and other EU based entities would be able to do business with them or get them involved.
Ask: Are there other specific insurance issues for members of the International Group?
Answers: We are concerned about the potential for a lack of harmonization between the main sanctioning authorities, as described above.
With regard to the price cap, we are also concerned that a large number of non-compliant freight may be sent. Where a shipowner or insurer has checked the attestation, but a vessel is encountered during the voyage with a non-compliant cargo on board, this is unlikely to constitute a breach of sanctions, but will result in a cancellation of cover and a refusal by banks to do business with the (innocent) ship.
This could result in ships stranded without insurance or bank support and unable to unload the non-compliant cargo. This is a real concern and one that states should consider.
Ask: Do you think the fleet of Russia-willing, non-EU covered tankers will completely fill the void of ships unwilling to engage in Russian trade because of the EU’s measures?
Answers: We just don’t know.
–With the help of Alberto Nardelli.
Photo: Rosneft PJSC’s drilling operations in the Samotlor oil field near Nizhnevartovsk, Russia, on March 21, 2017. Photo credit: Andrey Rudakov/Bloomberg
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