EU's Russian ships insurance ban to distort commodities trade: sources

The European Union's ban on insurance and reinsurance of Russian ships is expected to further complicate trade in dry bulk and liquid commodities with Russia, making them more expensive, delaying scrapping of old ships, pushing up global freight and encouraging private deals with owners ready to call on sanctioned ports, according to trading, insurance and shipping executives.

The views from the shipping market follow a recent remark from Ursula von der Leyen, president of the European Commission, saying that there is a ban on insurance and reinsurance of Russian ships by EU companies.

The remark raised concerns in the commodities markets amid a lack of clarity whether the ban would cover ships transporting Russian oil or other commodities.

There is a built-in clause in all protection and indemnity, or P&I insurance agreements, that any voyage of a ship to a sanctioned location under UN, EU, UK and US laws will automatically make it ineligible for the cover, a maritime insurance executive said in Singapore.

Since the Ukraine war began, several insurance companies were already staying away from providing insurance cover to ships wherein Russian entities had made investment or non-Russian vessels were carrying Russian cargoes.

The cautious approach was due to payment issues as several of the banks through which insurance premiums exchanged hands had already been brought under the ambit of Western sanctions, the executive said.

Now, with the latest explicit sanctions against insurance of Russian ships, those carrying cargoes to and from Russia will do so at their own risk and invite stringent penalties if their voyages are detected, he said.

Those ships which undertake voyages to and from Russia will not get any insurance cover of Western P&I clubs but can still manage to do trade based on national clubs and sovereign guarantee provided by countries willing to trade with it, a chartering executive with a global commodities trading company said.

He pointed to the model of trade adopted with Iran when half a dozen countries including India, Japan and Taiwan were initially exempted from the Western sanctions against Iran. A similar approach is possible as several countries from Hungary to India are still willing to trade with Russia, he said.

Japan, which has already announced its ban on Russian coal and oil imports in phases, is closely monitoring the EU's ban on insurance and reinsurance of Russian ships, a Japanese government source said.

In the face of the EU sanctions against Iran, Japan introduced a law in 2012 to compensate protection and indemnity cover per tanker carrying Iranian oil -- a scheme that remains operational to date. Japan suspended its Iranian oil imports in May 2019 after the US declined to extend its 180-day sanctions waiver beyond early May on Iranian oil imports.

War premium

Sources with a few tankers' charterers in Asia said a small part of the global tankers and dry bulk fleet has already started to specialize in trading in Russian oil, coal, grains and refined products, notwithstanding the financial roadblocks.

In the early days of the war, the insurance cover for these ships became exorbitantly expensive as it involved a war risk premium but it was offset by the discount at which the cargoes were offered by the Russians. This premia, which was initially 1% of the value of the ship's hull, increased 10 times within weeks of the war, making a ship's insurance more expensive the cost of chartering it.

Now this insurance will not be available at all even at a hefty premium, so cheaper local insurance will be used as a substitute, hoping all the time that an untoward incident does not happen during the course of the voyage, a VLCC broker said.

As was the case with Iran, older ships, which would have otherwise been scrapped, will instead try to participate in Russia-origin or Russia-bound trade, said a source with a clean tankers' owner.

This will delay scrappings and expand fleet size in the medium term but in turn tighten short term supply for loading cargoes elsewhere and push up freight, the source said.

The global VLCC fleet now comprises more than 850 ships, which can each carry two million barrels of oil each and just three of them were demolished in the first four months of this year. In terms of million deadweight, the fleet has expanded by over 50% during the last eight years. Many such old ships, both tankers and dry bulk, will explore business opportunities in Russian commodities, brokers in Asia said.