Jonathan Saul and Yuka Obayashi, Carolyn Cohn

LONDON/NEW DELHI/TOKYO – Russia has so far managed to deflect much of the effect of sanctions upon its oil trade, but the insurance industry could throw a wrench in the works if Moscow and its clients are unable fill the gap left Western underwriters.

According to industry sources, insurance companies from the United States and Europe, who dominate the international maritime market, have begun to reduce coverage for Russian oil tanksers in order not breach sanctions that were imposed after Moscow invaded Ukraine. Western insurances could drop coverage for non-Russian vessels if they contain Russian crude oil.

The moves by Western insurers could undermine Moscow’s recent success in rerouting supplies of crude from Europe and the United States to Asia, accelerate the decline in its European business and blow a bigger hole in energy markets as restrictions ensnare the world’s second-biggest crude exporter.

According to four industry and shipping sources, the pullback will be felt in June and July when European Union policies that had been withdrawn earlier this month due to tougher restrictions are about expire. Because of Russian-linked business, they declined to identify themselves.

Maria Bertzeletou is an analyst with Signal Maritime Services in Greece, a major manager of oil tankers.

It is impossible to rule out “Turmoil” or a temporary hiatus in marine insurance.

Ships are commercially required to have protection & indemnity (P&I) insurance, which covers third party liability claims including environmental damage and injury. Ships are protected against damage by separate hull- and machine policies.

Although insurance companies located in Russian-oil rich countries might be able or willing to assist, they will likely lose their ability and resources to insure their policy risk by obtaining their insurance from reinsurers.

As the Western companies dominate the marine insurance industry, so is the global reinsurance marketplace. The U.S.-European companies must now heed the wide range of sanctions against Russian banks and shipping interests.

“It will be challenging now to identify a reinsured claim that would not in some way be caught by those sanctions,” said Mike Salthouse, head of claims at North, a member of the International Group, an association of insurers who provide P&I insurance to around 90% of ocean going ships.

GOVERNMENT GUARANTEES

An insurer who writes a policy to insure an oil tanker will likely require a guarantee from the government to protect against potential liability that can run to billions.

Salthouse who also chairs the International Group’s Sanctions Sub-committee, stated that “there are likely Russian insurers that can write third party liability and/or reinsurance programs that could be then backed by a sovereign funds from China or Russia.”

Technically, it is possible. This depends on the political will and which markets Russia will place its cargoes.

According to traders and industry data, Indian and Chinese customers are currently buying oil from Russia that is not available in Western countries. The International Energy Agency reported that Russian oil exports had returned to the pre-invasion level in April.

According to industry sources, Russia has turned to local insurers to cover its financial needs, including Ingosstrakh (Russia’s fourth largest provider of insurance), which is in short supply.

Reuters was unable to determine whether Ingosstrakh’s private owners had received or planned for financial guarantees from the Russian government. Russia’s economy and transport ministries and Ingosstrakh did not respond to requests for comment.

India is a long-standing ally of Moscow. It has recently been buying Russian crude oil. The IEA reports that India has increased its share of Russian oil exports to 10%, from zero in the previous year.

New Delhi believes that insurance is not a barrier for future purchases. According to an official in the senior government department, Ingosstrakh can be held liable for maritime hazards.

“India recognizes the insurance cover including P&I by Ingosstrakh so there will not be any problem as long as the ships meet port entry rules. Since we don’t recognize U.S. sanctions so we will accept Russian ships. “Our liability will only arise after the vessel is discharged,” the anonymous official said.

China, the world’s biggest oil importer, is also ramping up purchases of oil from Russia at bargain prices, according to shipping data and oil traders who spoke to Reuters.

According to industry sources, Chinese insurance companies would need to have a sovereign guarantee if they want to accept business previously covered by Western counterparts.

“It won’t be a commercially viable decision for any Chinese insurer to take over the insurance coverage from the European companies,” said Leonard Li, a partner with management consultancy company Oliver Wyman.

He said that Chinese companies don’t have much knowledge or experience in this industry.

Chinese officials declined to comment on requests.

RONNING SCARED

It is not unusual for countries to assume the responsibility of ensuring that maritime hazards associated with sanctioned goods are covered.

Japan utilized a sovereign responsibility guarantee to bring Iranian oil into Japan in 2012. This was after Western insurers had cut their coverage because of sanctions.

Because of the sensitive subject, the Japanese official who spoke out said that 2012’s legislation only covered Iranian oil imports. Any guarantees for Russia would require new rules to approve.

According to two Japanese officials, the source who was first informed of this discussion said that they weren’t aware of it.

According to a Japanese source, Japanese insurance companies still provide coverage for Russian oil tankers if they’re not connected with any company on the sanctions list.

According to the source, if Western reinsurance firms stopped providing coverage in the UK and elsewhere, Japanese insurers would likely follow suit.

An intricate web of British, EU and U.S. sanctions prohibits Russian-owned flagged vessels from calling ports.

While there’s no prohibition on the insuring of foreign owned vessels that transport Russian oil, this is part of an EU package of new restrictions. It would also include an import embargo.

The insurance sector has been self-sanctioning in advance of future restrictions. Russia’s maritime industry is experiencing the end of many services including ship certification by top foreign providers. This is vital to access ports and secure insurance. Shipping companies are pulling out, and ship engines makers have stopped training their employees.

Ross Denton from Ashurst, the head of international trade, stated that private businesses are growing faster than government governments because of their fear of shareholder activism.