(Bloomberg) -- One of the energy market’s open questions since Russia’s invasion of Ukraine has been who’s insuring the tankers moving Moscow’s petroleum against the risk of a catastrophic oil spill.
The answer is that while some are still covered by the western businesses they’ve always used, owners are increasingly turning to Russian providers backstopped by a heavily sanctioned, state-backed reinsurer. In some cases, there are insurers in locations including Cameroon and Kyrgyzstan.
The shift in coverage has created uncertainty about how swift and comprehensive payouts might be if something serious were to go wrong. The sensitive nature of the topic was highlighted on Oct. 17 when UK authorities said they will start challenging tankers suspected of having “dubious” insurance when passing through the English Channel.
The findings, revealed in data gathered by Estonia this summer alongside research by Bloomberg and investigative journalism nonprofit Danwatch, offer the most detailed insight yet into the environmental risks European countries are running because of sanctions that they themselves imposed on Moscow. They reveal a blowback effect caused by forcing vast numbers of ships to operate in the shadows.
“Those suffering loss – fishermen, the tourist industry for example — may experience delays in receiving compensation or may not receive compensation at all,” said Mike Salthouse, head of external affairs at NorthStandard, one of the world’s top marine insurers.
Western Firms
Before the war, the vast majority of insurance of Russian oil tanker shipments was provided by western firms that are part of the International Group of Protection & Indemnity Clubs.
They would then buy large amounts of reinsurance to cover themselves against a worst-case spill, insisting that ships follow the highest possible safety standards to keep industry risks as low as possible.
Those firms remain in the trade but have been joined by a growing band of new entrants, particularly Russian firms, according to research by Bloomberg and Danwatch.
Estonian authorities examined the insurance papers of about 150 oil tankers ferrying Russian petroleum in July and August. Their findings showed that 20% to 25% had coverage from Russian firms.
While that would imply an overwhelming share of western cover, that’s unlikely to be the case in practice as Estonia couldn’t insist on seeing the cover of every ship, and those with more opaque cover may not have cooperated or crossed waters out of its reach. Based on shipments observed by Bloomberg, Estonia’s probe identified the insurers of about 40% of the passing fleet.
Russian Reinsurance
Alongside Estonia’s data, Bloomberg and Danwatch reviewed documents from tankers observed moving Russian oil, scoured insurer websites and industry databases, and spoke to people with detailed knowledge of the country’s oil transportation and insurance practices.
Significantly, Russian National Reinsurance Co., or RNRC, backstops three Moscow-based firms that provide a chunk of insurance for tankers moving the country’s oil against spills and collisions through the Danish and Turkish straits. Estonian authorities also found that a Cameroonian insurer and a Kyrgyz firm covered at least two tankers each.
The Danish straits handle about half a trillion dollars in trade a year and roughly 7% of the world’s seaborne oil, according to data from Clarkson Research Services Ltd.
Denmark’s Business Minister Morten Bodskov, who oversees the maritime activity, said by email that the country’s government is “deeply concerned” about the “dubious insurances” of ships passing through the straits.
Danish authorities are in ongoing dialog and working to address the challenge with other countries, he said.
“It’s an international problem that requires international solutions, and it’s important that all new measures can be implemented in practice and are legally sound,” Bodskov said, adding that the specific work is confidential.
Insurers in G-7 countries can only cover Russian oil if they have written assurances that the cargoes are purchased below certain prices imposed by the Group of Seven nations and their allies. For crude oil that is $60 a barrel.
That opened a window — and a need — for more coverage from Russia and elsewhere.
New Entrants
While Ingosstrakh was already well known in the international tanker world before the war, its role has expanded for tankers moving oil from Russia’s western ports, industry officials say. The other two, AlfaStrakhovanie and Sogaz, were largely unheard of in the global tanker market before the conflict.
The fact those firms ultimately have reinsurance from RNRC, which comes under the central bank, could effectively put Russia itself on the hook to make a payment whole. That calls into question what would happen if something serious happened on the coast of a country that Moscow deemed “unfriendly.” RNRC and the central bank didn’t respond to emailed requests for comment.
AlfaStrakhovanie and Sogaz also didn’t respond to emails seeking comment sent in mid-September and mid-October.
For its part, Ingosstrakh said in an emailed response to questions it is a well-capitalized firm that’s very able to meet claims — and could even do so if a reinsurer were to fail to fulfill its commitments.
Ingosstrakh said that it hasn’t sought to expand its footprint in marine insurance since the war, and that it has actively removed or refused cover for more than 100 vessels between 2023 and 2024 because they didn’t meet its standards.
The Moscow-based company said RNRC represented only part of a broader reinsurance portfolio but declined to elaborate, citing commercial sensitivities.
More widely, it said that sanctions such as those imposed on it by the UK only add to environmental risks. That’s because the measures force even more vessels to use inadequate insurance, it said.
Payment Questions
Russian officials have already told the International Maritime Organization that western sanctions — not Moscow — are responsible for the creation of the shadow fleet.
The question mark, though, is whether a big reinsurance payout — to what the Kremlin views as an “unfriendly” state — could become a political issue. The state-backed reinsurer RNRC is under sanctions from the US, UK and EU.
For Craig Kennedy, an associate at the Davis Center at Harvard University who’s followed the Russian energy industry for decades, there are precedents from other industries for how the Kremlin might act if there were to be a large reinsurance claim that RNRC needed to help meet.
Kennedy pointed to Russia blaming western sanctions for not being able to deliver piped gas supplies — and its insistence that Europeans pay for gas in rubles, as examples of how Moscow might respond.
“If the Russians don’t want to pay, they probably won’t,” he said.
Indian Buying
To help work around the west’s price cap, Moscow turned to a large fleet of ships and service providers that operate without the involvement of western firms and therefore are unbound by the cap.
Ingosstrakh, for example, is the main provider of insurance against spills for tankers hauling the nation’s crude to India for cargoes exceeding the west’s price cap, according to a person with knowledge of the matter.
To be clear, Ingosstrakh is not based in the G-7 and therefore doesn’t have to obey the cap. Rather, it has said it won’t deal with entities that do break rules.
Ingosstrakh said that it would be incorrect to suggest the firm is intentionally insuring above-cap cargoes and questioned whether any one individual would be able to obtain such information.
It has long pointed out that it goes to great lengths to comply with all applicable rules.
Poor Condition
Bloomberg and Danwatch have reported extensively on the ageing tankers moving Russian oil through Denmark and how they are are increasingly refusing to use specialist pilots to guide them through the straits.
The expert navigators have also rung alarm bells about the deteriorating condition of many of the tankers that they do still guide through.
The pilots don’t connect any one insurer to the substandard tankers and there is no suggestion that any of the Russian firms are tolerating substandard shipping. The pilots also said vessels controlled by state-owned shipping giant Sovcomflot, many of which are covered by Ingosstrakh, tend to have high safety standards.
The International Maritime Organization, the UN’s shipping agency, referred questions about the impact of sanctions on Russian insurance to guidance it issued two months after the invasion of Ukraine began.
That guidance said so-called port states that ships might visit ought to check with the nations where the vessels are registered — so-called flag states — if their insurance was valid.
Two months after the IMO’s guidance, RNRC was sanctioned by the US Treasury. It was then designated by the European Union in Feb. 2023. In November of last year, UK authorities targeted it too.
Once they leave the Danish straits, tankers often sail across the North Sea, through the English Channel between the UK and France, onward past Portugal, and then through the Strait of Gibraltar and waters near Spain, underscoring the range of countries potentially affected.
Turkish Straits
Ingosstrakh and Sogaz are also the largest providers to offer insurance for tankers sailing through Turkey’s Bosphorus and Dardanelles straits hauling oil loaded from Russia’s Black Sea port of Novorossiysk, according to a person with direct knowledge of the matter.
In the case of Turkey, authorities have more oversight of the flow of cargoes through their waters. Vessels generally only transit during the day and the use of expert local pilots is mandatory, limiting the risks. They have to submit proof of valid insurance.
A Turkish official, speaking on condition of anonymity, said they were confident of a payout in the event of an accident, not least because the country hasn’t lined up against Moscow since its war in Ukraine, and because payments could be made in lira.
Russian insurers would also have to weigh the reputational damage of failing to pay, especially in a friendly country like Turkey, said Bugra Perdar, a managing partner at Istanbul-based Nereus Law who advises clients on maritime insurance.
The break with longstanding insurance arrangements is part of a shift in a much bigger maritime ecosystem that, for decades, has largely worked together to improve safety standards and limit the recurrence of major spills like those from the Erika or the Prestige tankers at the turn of the millennium.
The war — and a wider sanctions environment against nations including Iran and Venezuela — has thrust hundreds of tankers into a parallel operating environment that so far hasn’t been tested by a major spill.
“It’s a tangled web unfortunately and it relies and has relied on everyone following the same rules,” said Neil Roberts who chairs the policy forum of the International Union of Maritime Insurance. “Now we’ve got people that are not following the same rules, and the system hasn’t adjusted to cope with that.”
--With assistance from Julian Lee, Sanne Wass, Rakesh Sharma and Prejula Prem.
©2024 Bloomberg L.P.