The insurance industry has a key role in stifling Russia’s oil revenues when the EU’s adopted sanctions come into force on 5 December. From that day on, imports of Russian crude oil to Europe are banned. But it will also be forbidden for EU and UK companies to insure ships carrying crude oil from Russia to anywhere in the world – unless they can prove that the buyer has not paid more than a certain price for the oil.

Western countries will set the price cap, which was adopted by EU government leaders in Prague on 6 October. It waters down a June decision to flatly forbid European insurance of ships transporting Russian oil. This change, which follows an earlier u-turn on coal shipments, could result in European insurers continuing to play a role in funding Russia’s war machine. European insurers were initially banned from insuring coal shipments from Russia internationally but in September the EU removed the ban on third country trades in order “to combat food and energy insecurity around the world”.

Between the Ukraine invasion starting on 24 February and 31 August, shipping firms from Europe exported Russian oil, gas and coal on a grand scale. Investigate Europe and Reporters United analysis in September revealed that European-linked vessels with 101 million deadweight tonnes (DWT) capacity completed more than 1500 journeys internationally from ports in Russia.

Such exports are possible thanks to a web of mostly European insurance companies. In total, vessels with 184 million DWT exported fossil fuels from Russia during the period. An insurer is named for 2583 of the 3176 journeys (155 million DWT). The 13 members of the powerful International Group of P&I Clubs (IGP&I) – insurers for 90% of global seaborne cargo – account for nearly all of the coverage.

European firms in the UK, Norway, Sweden and Luxembourg enabled 2269 (88%) of the shipments where an insurer is named.

New analysis from Investigate Europe and Reporters United estimates that 49.3% of these trips could still go ahead after the EU sanctions come into force. This is because half of the 2269 European-insured shipments, which cover coal and gas cargo as well as oil, were destined for third country ports. In addition, 50% of European-insured crude oil shipments could also persist as these too were destined for countries not covered by the upcoming sanctions. The new condition is that European insurers and vessel owners can export to non-EU countries but will have to prove that their clients have purchased crude oil within the price cap.

The stated purpose of the EU ban on insuring Russian oil shipments was to “make it particularly difficult for Russia to continue exporting its crude oil and petroleum products to the rest of the world, since EU operators are important providers of such services”.

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Insurance is key

For most shipping companies, it is out of the question to run without insurance that covers damage to people, the environment and property.

“Sailing uninsured can have major consequences for the surrounding community, including the crew on board the ships. So it is very important that liability insurance companies act in line with adopted sanctions,” Hilde Søbstad Løvskar, chief legal officer at the Norwegian insurer Skuld, told Investigate Europe over email.

Norway plays a major role in the sector. The analysis estimates that more than 20% of 2583 fossil fuel shipments leaving Russia between 24 February to 31 August (where an insurer is listed) were covered by Skuld, Gard or Hydor.

Oil price through the roof?

The point of the EU’s insurance ban is to hit Russian oil exports, oil revenues and thus its war machine in Ukraine. EU imports of Russian coal have been banned since August while crude oil imports are prohibited from 5 December. The now added price cap comes with the realisation that this measure could backfire with unforeseen consequences.

Russia has supplied 12% of the oil on the world market. If there is less of it, oil prices could go through the roof, oil analysts have warned. If Russia should retaliate against the sanctions by cutting oil production itself, the price could, in a worst case scenario, reach $380 a barrel, JP Morgan analysts assessed this summer. That would be a new world record, dwarfing the peak of around $147 a barrel in 2008.

This was why the US government proposed a measure that will not halt Russian oil exports, only make them less profitable: a maximum price for Russian oil that all customers will be required to stay within. In a G7 meeting in early September, the finance ministers of highly industrialised Western countries agreed to develop such a model, and that the exact price cap would be negotiated between the countries that implemented it.

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“One of the most complex sanctions ever”

The price cap is a strong state intervention in the market, meant to ensure a predictable supply of Russian oil by ship to the world market and dampen the price pressure on energy. But at the same time, Russian oil revenues are meant to shrink, according to guidelines from the US Treasury that Investigate Europe have seen.

The scheme will require all actors in the transport chain to obtain documentation that the oil they help to transport or insure has been purchased within the permitted price. But the US Treasury document also outlines ways to defraud such a system.

“The price cap is one of the most complex sanctions ever attempted,” said Mai Rosner, a campaigner at environmental NGO Global Witness. “And it will fail if the EU relies on the honesty of insurers and shipping firms instead of investing in enforcement.” 

Loopholes

Loopholes still exist, though. Russia may still sell oil at higher prices to countries that don’t follow these sanctions, if the oil is transported on ships that are not insured in Europe. 

Firms not bound by sanctions could take the place of European insurers. “There is talk that there could be some Asian entities, perhaps even Chinese insurance providers, to step in, in the absence of EU providers,” a maritime analyst told rating agency S&P Global. 

China and India have bought more oil than before from Russia after the invasion of Ukraine at discounted prices. “I think that they should”, said EU Energy commissioner Kadri Simson when asked if the EU expects the two countries to support the proposed price cap.

Once the EU halts all Russian crude oil imports from 5 December, Russia will have to find new buyers. Helge André Martinsen, oil analyst at DNB Markets in Norway, thinks those buyers will primarily be in Asia. “We think this will be challenging for Russia, and that Russian oil production will fall when the EU embargo takes effect,” he told Investigate Europe over email.

Oil will flow wherever there is someone willing to pay money, according to Adnan Vatansever, from the Russia Institute at King’s College London. “For oil, Russia’s task is easier,” he told Investigate Europe. “Because it has a massive surplus capacity in terms of its  export infrastructure and so rerouting the oil for Russia is not really a  difficult task.”

He believes the success of sanctions will depend on what happens to global oil prices and whether developing nations support the price cap plans or continue to purchase at higher rates. “The goal of the  price cap sanction is not to curb Russian oil exports but to curb Russian oil incomes,” the author of Oil in Putin’s Russia said. “If Russian quantities remain the same but they earn significantly less, that is actually the desired outcome.”

Russia’s counter measure: cut the flow

Russian authorities have warned they will not sell oil to countries that impose price caps. Hours after the EU decision to impose such a maximum price, Russia and Saudi Arabia took measures in the organisation of oil-exporting countries, OPEC. They agreed to cut oil production by 2 million barrels a day in the coming 14 months.

Saudi Arabia denied that it was colluding with Russia to drive prices higher and cause energy poverty in the West. The West is often driven by “wealth arrogance”, Saudi Energy Minister Abdulaziz bin Salman al Saud told a press conference. Energy poverty applies first and foremost to countries in Africa and Asia, he said, according to the Chinese state news agency Xinhua. “It’s like [you can’t] get your Ferrari to be electrified, when the poor guy barely has to cut trees and make his food with burning woods.”

Details on the scale of the price cap are still to be released, while how exactly the EU enforces the measure remains to be seen. Questions on how they will work for insurers are too difficult to answer, says IGP&I’s sanctions expert David Bolomini. In an email to Investigate Europe, he emphasised they had not seen the rules for the price cap, and thus could not assess the consequences, neither practically nor legally. “We do not speculate or second guess outcomes of what is essentially an instrument of foreign policy,” he said.

Helena Wittlich from Tagesspiegel, our media partner in Germany, and Nikolas Leontopoulos (Reporters United) contributed to this story.