Are sanctions on Russian oil being relaxed?

As we discussed in a previous tanker opinion, the insurance ban did give the latest EU sanctions package real teeth, since the global marine insurance market is dominated by companies based in the EU and the UK. An insurance ban could impact up to 90% of the world’s oceangoing tonnage, including a significant portion of the global tanker fleet. This would severely restrict Russia’s ability to export its oil.

However, when the EU announced its insurance ban, it expected the UK to follow suit and co-ordinate the efforts to clamp down on the Russian oil trade. This has not happened so far. The British Government has not introduced similar insurance restrictions and without the participation of the UK marine insurance industry, the EU ban may be much less effective. 

Why did the UK not follow the EU, as they previously intended to do? Maybe the UK Government got sidetracked by the political upheaval surrounding the resignation of its prime minister? It is more likely that the UK’s reticence to tighten the sanctions on Russia has to do with a fear of rising oil prices and tightening global energy supplies. The country is already facing high inflation and a deteriorating economic outlook.

The EU itself also tweaked its sanctions to allow European companies to transact with certain Russian state-owned entities, including Rosneft, Russia’s largest oil producer and exporter. The EU will allow European entities to get involved in transporting Russian oil to third countries, “to avoid any negative consequences for global energy security”.

While this seems like a significant reversal, the insurance ban stays in place. To quote the Norwegian P&I Club Skuld, “While a shipowner subject to the jurisdiction of the regulation may be able to lawfully transport the products, an insurer subject to its jurisdiction will not be able to insure that trade. Most of the clubs that comprise the International Group (IG) are subject to the jurisdiction of the EU. All IG Clubs, including those that are domiciled outside the territory of the EU, rely on a reinsurance programme that is heavily dependent on the participation of reinsurers that are domiciled within the EU.”

So, maybe the UK reluctance and the EU relaxation of sanctions will not really impact the effectiveness of the sanctions?

What could change the Russian export landscape is the American idea, pursued through the G7, of a price cap on Russian crude. Under this plan, Russian oil can only be bought at levels slightly above production cost (well below world market prices). Buyers that pay at or below the price cap for Russian oil will be exempt from the insurance ban. The objective is to keep the oil flowing, reduce the upward pressure on oil prices, while at the same time limiting Russia’s oil revenues. For the price cap to be successful, China and India (Russia’s largest clients) have to support it and the Kremlin needs to co-operate as well (ie keep the oil flowing). So far, oil and shipping analysts are skeptical that this plan can be successfully implemented and enforced.

Where does that leave the tanker market? Since the invasion, owners have benefited from higher rates. Recent developments seem to indicate Western countries are willing to compromise to keep the oil flowing. That, in combination with continuing geopolitical tensions, should keep rates elevated.

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