Earlier this month Boris Johnson, the British prime minister, grabbed headlines by travelling to Kyiv to demonstrate his solidarity with Volodymyr Zelenskiy, the Ukrainian president.
It was eye-catching, tub-thumping stuff. But if Johnson wants to support Ukraine against Russia’s invasion, he should make a symbolic visit somewhere closer to home – the headquarters of Lloyd’s, the world’s largest insurance marketplace, in the City of London.
Thus far, the insurance industry has attracted little public scrutiny compared with banks in relation to the West’s sanctions against Russia. No wonder: most politicians (and voters) have only limited awareness of the sector’s complex but crucial role in finance and trade.
But the industry matters deeply now. If the British government, along with its EU and US counterparts, were to demand that insurance companies stop protecting tankers carrying Russian oil, it would be another potent weapon in western efforts to squeeze Moscow.
To understand why this matters, consider current oil flows. In recent weeks, rising outrage about Russian aggression has prompted some western companies, such as Shell, to self-sanction by (belatedly) refusing to touch Russian oil. The Biden administration has also imposed an oil embargo, albeit one that has mostly symbolic value.
But that has not stopped exports. “The movement of Russian crude by tanker ship was just over three million barrels per day (bpd) in February and March, but more than four million bpd in the first 17 days of April,” as Anette Hosoi and Simon Johnson, two economists, note in a recent paper.
This is partly because the EU has not imposed an oil and gas embargo, prompting Josep Borrell, EU foreign policy chief, to lament in early April that “since the start of the war, we’ve given [Russian president Vladimir Putin] €35 billion, compared to the €1 billion we’ve given Ukraine to arm itself”.
The reality is that unless Russia's energy exports are reduced, Putin's coffers will remain reasonably full
But non-western countries such as China and India are also gobbling up the black stuff, at an accelerating rate. “India has been ramping up its imports massively – there has been a fivefold increase [since the invasion],” says Florian Thaler, co-founder of OilX, an oil analytics company. This helps explain the unexpected rebound in the rouble: funds are flooding into Moscow’s coffers, as the oil price rises.
One way to counter this would be to introduce an EU embargo. That might yet happen, although it remains highly contentious. However, it would not stop non-EU countries from accelerating their own purchases, since “China and India are not easily deterred” by western appeals, as Thaler notes.
That might change if sanctions were placed on the trading companies that handle oil or the banks that finance these trades. However, another option is to look at tankers.
Right now they carry about three-quarters of all Russian oil exports, according to Thaler – and almost all the oil that flows to India. Even China is heavily reliant on tankers, notwithstanding two pipeline links to Russia.
More than half of recent oil shipments from Russia have been carried on tankers belonging to companies headquartered in Greece, according to data compiled by the Institute of International Finance. Most of the rest carry Russian, Chinese, Scandinavian and Singaporean flags.
Insurance companies say they cannot legally withdraw existing contracts without a direct government order, and complain that the current situation is dangerously muddled
This means that one way for the West to reduce the tanker flow would be to ban EU ships from touching Russian crude. Another more effective tactic that would hit non-EU vessels would be for the British government to prevent the Lloyds Marine and Aviation syndicates from insuring fleets that carry Russian oil; and for the UK, EU and US to ban the provision of property and indemnity insurance, via mutual industry clubs.
This would not halt all traffic, since “there is always an element of sails without insurance”, Neil Roberts head of marine and aviation at the Lloyds Markets Association told British politicians last week. The tale of Iran shows how inventive traders can exploit loopholes. But most nation states will not deal with uninsured fleets, and it would be tough for shipping groups to find alternative coverage quickly.
As Roberts notes, 95 per cent of the global fleet uses P&I insurance, and London provides 80 per cent of war coverage.
So will this tool be deployed? It is not clear. Self-sanctioning is already occurring with new insurance contracts. But the insurance companies say they cannot legally withdraw existing contracts without a direct government order, and complain that the current situation is dangerously muddled.
“I draw a parallel with Italy in 1935 [after the invasion of Abyssinia], when there were sanctions put on an aggressor state, but there was confusion as to whether or not they would put sanctions on oil, and they therefore failed,” Roberts told the UK parliament.
Moreover, insurance executives are quietly lobbying against any draconian move since they fear it would damage the status of the City. Maybe so.
But the reality is that unless Russia’s energy exports are reduced, Putin’s coffers will remain reasonably full. And while an EU embargo would hurt (if it ever materialised), it would not be comprehensive. For that reason, it is time for western leaders like Johnson to look hard at those insurance weapons – even if Lloyds and P&I contracts are not as telegenic as a walkabout with Zelenskiy in Kyiv. – Copyright The Financial Times Limited 2022