According to British and European officials, the UK and EU have agreed on a coordinated ban on insuring ships carrying Russian oil, effectively shutting Moscow out of the vital Lloyd's of London insurance market and severely limiting its ability to export crude.
Blocking Lloyd's members from insuring Russian oil cargoes will add to the pressure on global commodity markets, which have been in turmoil since Moscow's invasion of Ukraine.
The insurance ban is part of a new EU package of sanctions aimed at Russian oil exports. Late Monday, Brussels agreed to a ban on most Russian oil shipments, but the UK's involvement unlocked the insurance ban. This could have far-reaching implications for Moscow's exports, forcing it to seek insurance in smaller, less developed markets.
Insurance has been a major stumbling block in the development of the EU oil ban, with underwriters warning of the wider economic implications of stifling a vital sector of international trade.
Brussels was also concerned that if the EU acted alone on insurance sanctions, more business would flow to London's international market. "There is a level playing field issue if London keeps on providing insurance and then a lot of it goes via Lloyd’s of London," a senior commission official said.
The European Commission's president, Ursula von der Leyen, announced action on shipping on Tuesday, but officials said London's decision to drop its opposition paved the way for the new sanctions.
Officials said that Greece and Cyprus, both of which have significant shipping sectors, only agreed after the UK promised to follow suit.
The UK government refused to comment, but sources familiar with the plans said an announcement prohibiting insurers from covering ships carrying Russian oil would be made soon. "This is something that is happening in a co-ordinated way," one said.
"It is hard to underplay how significant a move this is by the UK and EU," said Helima Croft, head of commodities strategy at RBC Capital Markets. "Taking out insurance will have a huge impact on Russia’s ability to export its oil. It’s one of the toughest sanctions Europe has in its armoury ."
Following moves to cut off aviation and space cover to Russian companies earlier this year, the London insurance market has been bracing for sanctions to be extended to the key marine sector.
According to people familiar with the matter, senior figures in the Lloyd's market have stressed the difficulty of establishing the provenance of oil cargoes on ships to officials in Brussels and Westminster.
They have warned that insurers may refuse to cover any ships leaving a specific port, which could have far-reaching economic consequences. Oil from Kazakhstan, which is not subject to sanctions, is also transported through Russian ports.
According to a senior commission official, the G7 countries are working on an insurance ban. The ban would not go into effect for six months, according to the official. "[Russia] then actually has a big problem shipping the stuff around," the official explained.
According to senior figures in the Lloyd's market, years of complying with sanctions on Iranian oil cargoes have provided a template for compliance. "The only complication is making sure it is Russian oil to begin with. It’s not the easiest job in the world, but neither is it impossible," one said.
After Russia's invasion of Ukraine shook global commodities markets, Brent crude prices have risen nearly 60% this year. Refined products such as gasoline, diesel, and jet fuel have also seen significant price increases as a supply shortage in many major markets is exacerbated by rising demand.
Russia, the world's third-largest crude exporter, has found buyers for its oil in China, India, and Turkey so far. Russian refined product exports, on the other hand, have decreased.
The rise in energy prices has been a major contributor to this year's massive inflationary surge around the world.
By fLEXI tEAM