EU Considers Insurance Ban for Ships Carrying Russian Oil

EU officials have proposed a ban on insuring ships that carry Russian oil, a move aimed at blocking Russia’s access to global oil markets and the revenue that has fueled its military invasion of Ukraine.

“In effect, it would be a very strong hindrance to export Russian crude,” said

Lars Barstad,

chief executive of

Frontline Ltd.

, which owns one of the world’s biggest tanker fleets.

Mr. Barstad said his ships don’t carry oil if Frontline can’t insure the vessels against hazards such as environmental damage.

Oil and gas revenues accounted for 45% of Russia’s federal government budget in 2021, according to the International Energy Agency. Russian crude has continued to flow, though with increasing difficulties, since Moscow invaded Ukraine.

The insurance ban is part of a sixth batch of restrictions EU officials are preparing against Russia, including an embargo on importing the country’s oil within the bloc by year-end.

The embargo within Europe would cut Russia off from what has historically been the biggest export market for its oil. Sanctions on insurance would hamper exports to buyers in Asia and elsewhere because European companies insure most of the world’s oil trade.

The tactic was used effectively by Europe a decade ago to curtail Iranian oil exports as part of efforts to force Tehran to negotiate on its nuclear program.

The insurance proposal has been subject to hard negotiations among the EU member states, all of which must sign off on it to proceed.

The European Union proposed a ban on Russian crude within six months; Moscow and Kyiv accused each other of breaking a cease-fire in Mariupol. Photo: Julien Warnand/Shutterstock

Greece, Cyprus and Malta, big shipping nations, have raised concerns. A number of Greek shipowners have contracts with major oil companies like

Chevron Corp.

and Shell PLC to move Russian crude to clients in China and India.

In a bow to their concerns, the European Commission, which offered a new draft of the sanctions proposals Friday, suggested extending the period before which the measure would take effect from one month to three months.

Diplomats say Brussels and the bloc’s bigger members, like Germany, have also promised to use Group of Seven discussions to seek commitments from the likes of Japan, Canada and the U.S. so as not to undercut Greek, Cypriot and Maltese shipping firms.

Germany holds the presidency of the G-7 this year. That could be enough to win backing for the insurance ban, diplomats say.

Shipowners and traders take out insurance policies to protect against massive potential costs stemming from tanker damage, oil spills and other hazards. One bucket is hull and machinery insurance, which covers physical damage to ships and is typically bought in the Lloyd’s of London market.

Protection and indemnity, meanwhile, covers against liability from third parties, as in the cases of collision or pollution. The International Group of P&I Clubs, which comprises member clubs in the U.K., Norway, the EU and elsewhere, provides P&I insurance to about 95% by tonnage of the global tanker fleet.

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“The Clubs will always comply with prohibitions on the provision of insurance and reinsurance whether in the context of Russia, Iran or other countries on which trade, financing and other restrictions have been imposed,” said its chief executive, Nick Shaw. Shipowners will need to look elsewhere for their third-party liability insurance arrangements where such prohibitions are in place, he added.

If the P&I Clubs don’t provide insurance, “the biggest impediment to a top-class tanker owner continuing to trade its vessel on the spot market might be the credibility and reliability of insurance” bought elsewhere, said Mike Salthouse, global director at the North of England Protecting and Indemnity Association Ltd., one of the IG’s member clubs.

Russia’s state-aligned giant,

Rosneft Oil Co.

, has struggled to find buyers for huge amounts of crude in recent weeks. Sanctions on trading with the company, due to take effect May 15, are pushing some big traders to retreat from exporting Russian oil. Russia’s flagship Urals grade of crude trades at steep discounts.

Sanctions on insurance would add another hurdle to Russian producers seeking to tap foreign demand for their crude.

The sanctions would push Russian oil further into a shadow market facilitated by lesser-known traders and shipowners willing to operate without insurance, according to Mr. Barstad of Frontline. Such a market has enabled Iran and Venezuela to keep exporting oil in recent years, even though the underlying crude is subject to U.S. sanctions.

For Russia, shipping uninsured oil might be more difficult than in the case of Iran. Vessels leaving the country’s ports in the Baltic Sea sail close to the coast of Denmark en route to the North Sea. The authorities in Denmark could be reluctant to allow such ships to pass near its coastline, analysts and shipowners said.

Other insurers might fill some of the void. As long as Turkey opts out of the sanctions, insurers operating there will be able to provide cover for Russian exports, said Andreas Krebs, an international insurance broker at GrECo International Holding AG in Vienna. He expects such cover to be provided by Middle Eastern and Gulf-based insurance companies.

Still, Russian companies “will not be able to sell all the crude they are currently producing,” said

Hugo De Stoop,

chief executive of

Euronav

NV, another tanker owner that recently agreed to merge with Frontline.

Shipowners and traders already face added insurance costs to doing business in some Russian ports in the form of war risk premiums. That product, which protects ships for trips taken throughout a year, typically costs 0.04% of a ship’s value, said Marcus Baker, global head of marine and cargo at the insurance broker Marsh Inc., a unit of

Marsh McLennan

Cos.

Shipowners trading in the Black Sea recently have paid more than 5% of the ship’s value per single trip, Mr. Baker said.

To be sure, there are other markets Russia can tap, such as China and India, industry participants say, though it is unclear how much appetite there will be for the country’s commodities.

“Will the EU ban on European insurers prevent Russian oil cargoes from coming out of Russia? Probably not, if there’s a political will elsewhere to import those cargoes,” said Mr. Salthouse.

Write to Julie Steinberg at [email protected], Laurence Norman at [email protected] and Joe Wallace at [email protected]

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