Maritime Transport Insurance Problem in the Black Sea

The insurance ban of the West… The European Union brings a new one to the sanctions it imposes on Russia. EU officials aim to ban Russia’s access to the global oil market and the revenue it generates due to its invasion of Ukraine. Shipowners and traders need insurance against tanker damage, oil spills and other hazards. If the ships carrying oil are not insured against these dangers, it will not be possible to transport oil.

The votes of all EU member states are required for this bill to be implemented. We see that Greece, Malta and Cyprus, the leading countries of maritime, also express their concerns about the insurance ban at every opportunity.

Oil exports… The insurance ban is part of the sixth set of restrictions prepared by the EU authorities against Russia. The embargo in Europe would cut Russia off from what has historically been the largest export market for its oil. As European companies insure much of the world’s oil trade, insurance sanctions will hamper exports to buyers in Asia and elsewhere.

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

Brent – ​​WTI oil prices… Source: Bloomberg

The problem of tanker insurance in a war environment… In war situations, international oil shipments can become very risky. If one of the warring parties is a serious oil exporter, oil facilities or tankers may be targeted for economic damage in the later stages of the war. The most serious example of this is the crisis in the Iran-Iraq War. Countries attacked oil tankers during the war to lock down each other’s economies, and oil tankers of some neutral countries (eg the Turkish ship Atlas-1) were also damaged. In an attempt to force the Iranians to agree to a ceasefire, which included withdrawal from the occupied territories, Iraq launched an air war against Iran’s oil exports. In addition to hitting Iranian ships, Iraqi warplanes also struck oil fields, pumping stations and other offshore targets.

This resulted in a 50% increase in war risk insurance premiums for ships sailing in the Gulf. The escalation of the US military presence in the Gulf also threatened to escalate into a war between Iran and the US, which could involve the Soviet Union. The Reagan administration used the protective service of the US Navy to hoist the US flag on tankers with reflag to lure Arab states into open military alliances with Washington against Tehran and Moscow. The exorbitant rise in insurance costs led Iran and Iraq to lower oil prices to remedy the situation.

Black Sea Crude Oil Export Terminals.. Three terminals process approximately 1.8 million barrels of crude oil exports per day. Source: Bloomberg

The situation of Russian oil exports… As a similar situation; The cost of insuring merchant ships bound for ports in the Black Sea has spiraled out of control, making it a major potential barrier to the movement of Russian cargoes from the region. Insurers charge 10% of the value of a ship’s hull – basically the value of the ship as an asset – for the additional war risk premium. This means that the insurance now likely exceeds the cost of chartering the vessel. A $50 million, five-year-old tanker carrying standard 1 million barrels of Russian cargo would need $5 million in insurance premiums alone—about $1.5 million over the cost of hiring the carrier. Before the war there was almost zero cost.

Few countries will go to oil trade with Russia if the bans get wider. Russia is exporting below market prices, so they will have to make further reductions in the price of the oil they sell in order to exist in the oil market as war costs increase. The sanctions could also push Russian oil into a shadow market facilitated by lesser known traders and shipowners willing to operate without insurance. Such a market has allowed Iran and Venezuela to continue to export oil in recent years, even though the core crude is subject to US sanctions. For Russia, uninsured oil shipments may be more difficult than for Iran. The ships, which leave the country’s ports on the Baltic Sea, sail close to the Danish coast on their way to the North Sea. Authorities in Denmark may be reluctant to allow such vessels to pass near the coastline.

Conclusion? The insurers’ primary concern is damage to ships through missile attack or possible mines. At least five ships were blown up when war broke out. A month later, a mine was discovered around Turkey’s Bosporus, a vital sea corridor for any ship entering or leaving the Black Sea. The resulting situation for Belarus, Russia and Ukraine caused insurance costs to jump, both in correlation with oil costs and in the form of additional risk premiums, with the risk posed to Black Sea and Baltic Sea shipments. If the West locks insurers, the situation in Russia will be even worse, and Russia, which has been completely excluded from payment systems, will have to turn to self-insurance or alternative systems such as China. However, as oil exports will be significantly reduced anyway, Russia will also begin to produce less oil. The insurance crisis is a situation that will occur not by increasing costs, but by cutting them off completely, and this of course may set the stage for the global energy crisis.

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