Boom time for UK insurers of Russian oil shipments despite sanctions

Calls for revamp of current sanctions policy, as restrictions 'not having the desired effect'

An oil tanker near the port city of Nakhodka, Russia. It has been claimed that G7-imposed sanctions on Russian oil exports are not working in the manner intended. Reuters
Powered by automated translation

A small group of UK-based insurance firms has underwritten more than $100 billion in Russian oil exports, triggering calls from a former British cabinet minister for an overhaul of the entire system of western sanctions.

Under the terms of the sanctions, vessels carrying Russian oil products can be insured by firms in the G7 and EU only if the crude was sold for less than the price cap of $60 a barrel.

British Conservative MP Alun Cairns, who sits on the Nato Parliamentary Assembly, feels the whole system of the price cap and sanctions pertaining to Russian oil needs revisiting. While British insurers may not technically be at fault, the shipments are being facilitated through the City of London.

"Our policy object was to damage the Russian economy through damaging their oil exports," the former secretary of state for Wales told The National. "It's not having the desired effect, so let's revisit it.

"When the sanctions were introduced there was an understanding that they would facilitate a level of embargo against Russian oil and gas. That was the understanding in the way the policy was sold by the European Union, the UK, the US and others.

"If that isn't the case, then clearly we need to revisit the policy. But my understanding is that there was a wish to undermine the trading of Russian oil and gas and insurance is a key tool in that."

Nearly 18 months since the G7 imposed sanctions on Moscow after Russia's invasion of Ukraine, Russian oil cargo and the ships that carry it continue to be insured by companies in the UK, according to a report by the independent Finland-based Centre for Research on Energy and Clean Air (Crea).

Number-crunching by Crea – which monitors Russian fossil-fuel exports and analyses the impact of sanctions – has found that between March 2022, just after the invasion, and November last year €120.6 billion ($129.9 billion) of Russian oil shipments was insured by UK companies.

Since the price cap of $60 a barrel for Russian oil exports was introduced by the G7 in December 2022, €46.4 billion of Russian oil has been transported on tankers using UK protection and indemnity (P&I) insurance.

Due diligence

But it is important to note that UK insurers are not breaking any laws or breaching the conditions of any sanctions, providing the Russian oil was not sold above the $60 price cap.

More than 90 per cent of the world's shipping is insured by P&I clubs, which are independent, non-profit mutual insurance associations, providing cover for shipowners against third-party liabilities arising out of the use and operation of vessels.

The West of England P&I Club covered the highest value of Russian oil products at €20.1 billion, followed by NorthStandard at €17 billion, according to figures collated by Crea. North and Standard merged to become NorthStandard in February last year.

"We do, though, support our shipowner members who wish to engage in the lawful carriage of Russian oil under the EU/G7 Russian Oil Price Cap Scheme," Mike Salthouse at NorthStandard told The National.

"It is incredibly important vessels that lawfully carry oil have the third-party liability insurance provided by the P&I clubs to compensate those that suffer loss as a result of a maritime accident – loss of life, injury, pollution, damage to property and wreck removal.

"All cargoes on vessels insured with an IG club will be in possession of valid attestations from the contractual parties in the chain and have been subject to due diligence and KYC [know your customer]."

However, a senior EU official told the Financial Times in November that the previous month almost none of the Russian oil exports by sea were executed at less than $60 a barrel.

According to Crea, this provides strong evidence that many sales of Russian oil were carried out above the price cap on ships insured in the UK.

"The attestation documents would therefore be fraudulently produced and those producing the documents must have lied about the oil being paid below the cap so that they could attain UK maritime insurance," Isaac Levi, Europe-Russia policy & energy analysis team lead at Crea told The National.

But the insurers dispute any suggestions of wrongdoing on their part, simply because under the terms of the P&I contracts, if the paperwork does not reflect the true picture of a cargo, the insurance is immediately rendered invalid.

"If it transpires that an attestation is inaccurate or there is any other sanctionable activity then insurance cover for the voyage concerned ceases automatically and in its entirety," the insurer West P&I said.

"It is therefore incorrect to suggest that the West provides cover for any tanker carrying above-cap-price cargo; that is not the case and there is no cover whatsoever for any such activities."

The system itself is far from perfect. The sanctions merely require insurers to ask shipowners to sign paperwork promising they will follow the price-cap rules.

“When we have enough evidence to suspect something is not right, we cancel,” said Daniel Tadros, chief operating officer of American Club, a P&I company based in New York.

“Bottom line is the US government and the world governments don’t want to disrupt and cause this world to go into a tremendous energy crisis.”

That's the dilemma for the G7 and the EU. The overall aim of sanctions is to put pressure on the Russian economy through its oil exports. But if those are squeezed too much, the danger of another energy crisis for western Europe and the rest of the world is heightened.

'Loopholes in the system'

Mr Cairns makes the comparison with the American-led sanctions against Iranian, which he says US Department of Defence officials told him took seven years to get right.

"I've no doubt about the information they [the P&I Clubs] are sharing but that may highlight that there are loopholes in the system," he told The National.

"If we go back to the Iranian model, those countries that were facilitating the export of Iranian oil would have also been legitimate at the time and that's why the loopholes were closed over a period of seven years.

"I want us to learn the lessons from the action that was taken then."

Because the vast majority of the marine insurance Russia needs to cover its oil exports stems from the sanction-levering G7 countries, and most of that within the UK, the system itself can be used to toughen the stance against Russia, Crea says.

Mr Levi feels more monitoring of insurers is needed to ensure compliance, to the extent that shipowners should have to provide the clubs with bank statements proving an oil cargo was purchased below the cap.

"The UK Office of Financial Sanctions Implementation must investigate UK entities and insurance firms that have provided services to facilitate the maritime transportation of Russian oil above the oil price cap," he told The National.

"Penalties must be implemented on firms that violate sanctions and facilitate Russia to increase their oil export earnings, above the price cap, which are then used to fuel the war on Ukraine."

At the moment, if vessels break the price cap rules they can be banned from using maritime services within the EU for 90 days and the UK has the ability to levy fines of about £1 million, which according to Mr Levi are "weak punishments for tankers carrying crude oil that is often valued at more than £100 million".

Clamping down on insurers and meting out harsher penalties for transgressions while tightening compliance are all options, Mr Cairns said, in what for policymakers is a "dynamic environment".

"The restrictions we've introduced are not having the desired effect, therefore we should be reviewing the policy to see what else we can do," he said.

"It could mean restricting the underwriting; it could be reviewing the price cap; it could be extending the embargo; it could be challenging India and other nations that are receiving it.

"But the point I'm making is, it's not working as it is."

Updated: February 10, 2024, 7:00 AM