Without insurance Russia will be unable to get much of its oil to end customers.

Without insurance Russia will be unable to get much of its oil to end customers.Credit:Pool Sputnik Kremlin

While its exports have shrunk by about 800,000 barrels a day since the invasion and China and India are paying it about $US35 a barrel less than the global price,their buying has enabled Russia to sustain production at around 10.2 million barrels a day. Its energy sales,and particularly its oil sales,have provided an economic lifeline amidthe plethora of financial and trade sanctions.

The EU ban on seaborne oil will force Russia to find buyers for another 1.6 million barrels a day by the end of the year.

Germany and Poland,which buy the overwhelming majority of the oil that is piped into Europe (and which hasn’t yet been sanctioned),have vowed to end those purchases by year-end so the volume of oil looking for new markets next year could be up to 2.3 million barrels a day,or 90 per cent of Russia’s current sales into Europe.

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The European Commission’s president,Ursula von der Leyen,acknowledged that Russia would probably find other buyers for the oil and Russian authorities were quick to agree with her.

Perhaps they were too quick because,even as the EU members were wrangling over the detail of the ban on oil,the UK and EU were agreeing to a ban on insuring ships carrying Russian oil that will jeopardise,or at least severely complicate,Russia’s ability to get the displaced oil into other markets.

Oil is shipped around the world in giant tankers that can cost as much as $US160 million (smaller long-range tankers start at about $US60 million) and which carry as much as two million barrels of oil,worth nearly a quarter of a billion dollars at current prices,each voyage.

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More than half those ships carry European flags (the majority Greek-flagged) but,even more significantly,their insurance cover is provided almost entirely by UK,European and US insurers and their reinsurers.

Lloyds of London dominates the provision of insurance cover for damage to the ships while protection and indemnity insurance,covering third-party liabilities (think oil spills and the like),is provided largely by a group of UK and European insurers. They insure about 95 per cent of the global tanker fleet.

The US has,with the Europeans,a major share of the global reinsurance market that enables the primary insurers to cap their exposures.

Few,if any,tanker owners or commodity traders or their financiers will want to take the risk of shipping oil without coverage.

Few,if any,tanker owners or commodity traders or their financiers will want to take the risk of shipping oil without coverage.Credit:Bloomberg

Without insurance Russia will be unable to get much of its oil to end customers. Few,if any,tanker owners or commodity traders or their financiers will want to take the risk of shipping oil without coverage.

Russia could write its own insurance coverage,backed by sovereign guarantees,but it would still need access to the global tanker fleet if it is to redirect the volumes it will lose from the EU ban.

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There are also other obstacles to diverting its exports to new markets.

While China and India have been happily buying Russian oil at heavily discounted prices and have suitable refining capacity to handle its flagship Urals crude,there is a limit to how much they require. Other Asian markets don’t have the capacity to handle Urals’ high-sulphur content.

Thus,there is a limited market for that Russian oil that makes it unlikely that it will be able to simply sell all its oil elsewhere. It’s also probably the case that the Middle Eastern producers who dominate Asian markets are unlikely to sacrifice a big slice of their own volumes to make way for more Russian crude.

The insurance ban is clever because it will have a chilling and global effect on the logistics under-pinning Russia’s seaborne energy exports. It’s not costless (it will cost the insurance sector) but it is relatively cheap way of creating a leveraged impact on Russia’s economy and amplifying the effects of the EU’s ban on imports.

Apart from the loss of income for insurers (the tanker fleet will inevitably reorganise to carry the same volumes on different routes as the world will still need similar volumes of oil) there will be some flow-on effects to the rest of the world.

There is a limited market for that Russian oil that makes it unlikely that it will be able to simply sell all its oil elsewhere.

If the combination of the EU ban and the withdrawal of insurance act as intended,a major supply of oil – Russia produces about 10 per cent of the world’s oil – will be frozen out of the market. That means oil prices,already high,will remain high indefinitely. The current price is about $US122 a barrel.

In turn,that will continue to feed into inflation rates around the world that are already at levels not experienced for decades and,in response to those rates,force interest rates to go higher for longer.

None of the sanctions the West has imposed on Russia in response to its invasion of Ukraine are without significant cost to the West and particularly to Europe,whichis heavily dependent on Russian oil and gas. There is a global price attached to the sanctions.

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Neither the EU ban nor the planned withdrawal of insurance will have an immediate impact on Russia,although there could be a larger element of self-sanctioning by insurers and ship owners and traders and their financiers before the insurance agreement comes into effect,with the EU ban,towards the end of this year.

That six-month period of grace allows the tanker fleet,its insurers and the wider market for oil time to plan,not just how to implement the bans,but for a market without a very material proportion of Russia’s production.

It also provides a window for circumstances and the course of the war in Ukraine to change.

The responsibility for the types of change that would see the sanctions withdrawn would be very one-sided and rest mainly with Russia,which would be looking at the sanctions now piling up – the EU’s latest are its sixth package of sanctions and it is working on a seventh – and would realise that from the end of this year they will really start to bite as the squeeze on its primary source of income tightens significantly.

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