The EU's embargo on 90 percent of all its oil imports from Russia by the end of the year made most headlines last week after the bloc reached a watered-down deal to ban most of Russia's oil. But the much bigger blow to Russian oil exports that will have dramatic consequences on the global oil tanker market and oil prices comes from provision number two in the latest sanctions package—EU operators will be prohibited from insuring and financing the marine transportation of Russian oil to third countries.
With the UK set to join the insurance ban after the UK and the European Union agreeing to jointly shut off Russia's access to oil cargo insurance, Russia will be effectively shut out of more than 90% of the global oil shipment insurance market.
The insurance ban is a much bigger deal than the actual EU embargo on Russian oil imports, as it would cripple Russia's ability to export crude anywhere in the world, analysts say. Russian exports from its Arctic oil projects will be especially hit because of the higher risk of liabilities, they note.
Moscow struck a defiant tone, and Dmitry Medvedev, a former president and now deputy chairman of the Security Council of Russia, said earlier this week that Russian tankers that cannot get insurance would be provided with state assurance under Russia's trade agreements with other countries.
For some buyers, this may not be enough. For most ports in the world, this certainly will not be enough because most of the ports do not allow tankers to dock unless they have full insurance coverage, including insurance from the UK-based International Group of P&I Clubs, which handles 95% of the tanker insurance market and consists mostly of UK, U.S., and European insurers.
New York-based ship broker and energy consultancy Poten & Partners says the ban would effectively remove many tankers out of the market for shipping Russian crude, leaving Russia and its willing customers China and India scrambling to find state-controlled vessels and forms of guarantees to move the oil from Russia to China and India.
"Finding these vessels and arranging insurance for them outside the EU and UK markets could be very challenging," Poten & Partners said last week, as carried by maritime news outlet Splash.
Erik Broekhuizen, head of tanker research at Poten & Partners, told NPR last week that the insurance ban is "a huge deal" in the EU's sanctions package to first ban Russian seaborne imports and then ban insurance coverage on Russian oil.
"It's the one-two punch. It's the second one that could be a knockout blow," Broekhuizen said.
The insurance ban is also a huge blow to Russia's Arctic oil projects, with Gazprom Neft and Lukoil exporting crude from three projects currently, and the biggest oil producer Rosneft looking to develop the huge Vostok Oil project. Without insurance, or insufficient insurance on the Arctic oil routes eastward to China, a tanker carrying oil in Arctic waters and ice is a disaster waiting to happen, Malte Humpert of High North News writes.
China and India are Russia's chance to divert some of the exports that would have gone to its-soon-to-be-former-top-market Europe, but the EU-UK ban on insurance could limit the amount of crude Russia could send to Asia, analysts say.
"The EU is not simply saying, OK, we're not going to take the barrels, but we're fine somebody else taking it and hence we don't have any major market disruption. The EU is actually moving to take those barrels off the market, not just move them around. And that is important," Helima Croft, head of commodity strategy at RBC Capital Markets, told NPR.
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The EU's import and insurance ban will lead to higher shipping and insurance costs on top of removing part of Russia's oil off the market. As a result, oil prices will remain elevated in the near term.
By Tsvetana Paraskova for Oilprice.com
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