Russia sanctions prove challenging for marine insurers

Marine insurers are struggling to interpret the ambiguous detail behind the European Union’s sixth package of sanctions targeting Russia and have warned that pending UK legislation may yet complicate matters further.

According to the legal framework released last week, EU countries will phase out imports of seaborne Russian crude over a six-month period and prohibit insurance and reinsurance of maritime transport of crude and petroleum products to third countries.

However, because the EU legislation is not immediate and contains several staging points with multiple caveats allowing continuation in given circumstances, the porous nature of the rules is proving difficult for insurers who demand legal clarity. 

There are also concerns over how the UK plans to treat the issue of EU states as "third countries". 

It is widely expected the UK, home to the world’s largest shipping insurance market, will follow the bloc's move with its own insurance bans, however no details have yet been shared by the UK Treasury with the industry. 

The UK is a third country from an EU perspective, and it remains unclear whether the UK would treat supplies to the EU differently to supplies to other countries, especially as the EU is treating the UK as a third country. That means EU insurers, including the subsidiaries of UK insurers, cannot insure transportation of spot cargoes coming to the UK, and likely vice versa.

The lack of details has posed a series of difficult legal scenarios for the insurance sector to consider. It is not clear, for example, how the Luxembourg-based insuring subsidiary of a protection and indemnity (P&I) club headquartered in the UK would respond to questions about cover from a Greek member asked to carry a spot cargo from Russia to the UK during the wind-down period.

Even if the UK is able to iron out any inconsistencies, the loose wording of the EU’s current guidance has left insurers scratching their heads trying to work out how to apply the EU legislation. 

Phrases such as “as soon as possible”, “should be possible” and “exceptional temporary derogation” contrasts with the insurance sector’s requirement for legal black and white.

Even if the UK is able to iron out any inconsistencies, the loose wording of the EU’s current guidance has left insurers scratching their heads trying to work out how to apply the EU legislation

The EU guidance details an eight-month transition in relation to the transport of crude oil and more than 80 different petroleum products. There are five wind-down dates, the latest being December 31, 2024 for Bulgaria, with at least 11 other caveats on top. 

Specific exemptions such as those detailed under Article ‘3m’ allow for one-off transactions for near term delivery – the implication being that these are for delivery into the EU.

However, Article 3n does not, so any insurer of a vessel carrying crude or petroleum products to a third country must check there is a pre-existing contract in place, and not just rely on what could be called the spot cargo exemption. 

Lawyers still in the process of interpreting the EU guidance also argue that the notification framework is very unclear in its existing format. The responsibility lies with member states to notify the commission, but there is no guidance on who tells the member state and which one if there is a nexus to multiple different member states. What happens if a commercial party fails to inform a member state is not yet clear. 

Given the extensive nature of caveats and clauses, implementation of the sanctions is likely to prove difficult. According to guidance note 19 in the EU legislation, states could theoretically declare a temporary derogation. 

The clause states: “If the supply of crude oil by pipeline from Russia to a landlocked member state is interrupted for reasons beyond the control of that member state, the import of seaborne crude oil from Russia into that member state should be allowed, by way of an exceptional temporary derogation, until the supply by pipeline is resumed or until the council decides that the prohibition on the import of crude oil delivered by pipeline is to apply with regard to that member state.”

“The implementation of ‘19’ is likely to be particularly challenging in practice as it’s entirely subjective,” explained one senior insurance expert.

Despite the lack of clarity, assuming that the UK eventually prohibits the insurance and reinsurance of Russian oil shipments to third countries, lawyers and insurers agree the combination of jurisdictional approaches will likely prevent many mainstream tanker owners from lifting Russian cargoes. 

According to broker BRS, however, it will not completely choke off Russian exports. 

As Lloyd’s List reported this week, alternative, albeit smaller, insurance markets, notably in China and Russia, will remain open.

“Although this will discourage mainstream tanker owners from lifting cargoes, it will not likely discourage ‘niche’ tanker owners whose vessels are already involved in the transport of illicit Iranian and Venezuelan oil,” BRS said in its latest research note. “Since the sanctions package was finalised, we are already hearing of significant insurance issues.”

Western companies are reluctant to insure voyages passing via the Black Sea. Meanwhile, because of the restrictions placed on the Russian banking sector, companies are reluctant to insure tankers loading from the Caspian Pipeline Consortium (CPC) terminal close to the Russian port of Novorossiysk. 

Although CPC blend is composed of 90% Kazakhstani crude and thus not embargoed, if there was an accident at the terminal, it would be difficult to compensate Russian entities without falling foul of sanctions. 

This article first appeared in Lloyd's List, a sister publication of Insurance Day