The latest round of sanctions targeting marine protection and indemnity insurers will deal a devastating blow to Moscow.
Post Date – 12:30 AM, Saturday – 12/17/22
Under the new sanctions, European P&I clubs can no longer insure ships carrying Russian oil at prices above $60 a barrel.
robert hush
Hyderabad: The EU and US are now targeting the Maritime Protection and Indemnity (P&I) insurance club to limit Russia’s shipping capacity and cap its oil prices, which means we are finally starting to see some sensible sanctions against foolish wars.
The P&I Club is a marine insurance group specializing in open-ended, high-risk claims. P&I insurance is a requirement on all heavy cargo and container ships. Under the new sanctions, European P&I clubs can no longer insure ships carrying Russian oil at prices above $60 a barrel.
Governments and the private sector have been imposing sporadic sanctions on Moscow since February 2022, including luxury goods targeting oligarchs and Russian President Vladimir Putin’s inner circle. Yachts and jets have strong symbolism, but sanctioning them serves no real purpose.
Russia subsequently lost access to the global SWIFT payment system. Russia’s currency has stabilized somewhat only after some trade deals with India and China were struck.
Targeted sanctions were subsequently imposed on Russian companies and individuals. Between February 2022 and June 2022, some 537 companies, 276 legal entities, 1,637 organizations and 3,369 people faced some kind of mandatory economic measure.
Capacity
However, only 113 of the 3,300 Russian vessels at sea are officially sanctioned. Taking a relaxed approach to Russian maritime capabilities is a mistake for the administration of US President Joe Biden and its European counterparts. Ships can smuggle all kinds of trouble, even in legitimate cargo.
Bananas, for example, are sourced locally from cocaine-producing countries, and since the fruit expires quickly, customs officials want to get the goods across the border as quickly as possible. Eight tons of cocaine worth more than $207 million were recently found in banana shipments to Belgium. If Russia needs something illegal in its war on Ukraine, it will likely get there by sea.
Coercive economic measures were imposed on only 3 percent of Russia’s entire merchant fleet in the first months of the war, sanctions that were at best reckless and at worst harmful. Within days of sanctions being imposed on the 113 Russian-flagged vessels, 18 of them switched to “flags of convenience” by registering vessels in the Marshall Islands and St. Kitts.
This is nothing new for the merchant marine. Ship owners regularly register their ships in countries where taxes are few and poor labor conditions are ignored, in exchange for a fee to register the ship under their flag. This is why countries like Panama, Liberia, and the Marshall Islands ship far more goods than countries like the US and Canada. Most of the world’s cargo and crude oil is shipped under flags of convenience, making targeted sanctions on national vessels difficult and often futile.
shipping shadow
Direct sanctions on a handful of Russian ships have only encouraged their own-flagged vessels to move deeper into the shadows and join their partners under a flag of convenience. Should sanctions be imposed on Liberia and the Marshall Islands?
Doing so would ground hundreds of millions of tons of seaborne cargo. The global economy can’t handle this and a lot of scrutiny is required to enforce these measures against guilty ships. That’s why the latest round of sanctions targeting marine P&I insurers is smart.
P&I insurance is required for each ship entering the port to unload cargo. This insurance covers the worst catastrophes such as loss of life, marina damage and oil spills. Insured ships pay risk-sharing clubs that can quickly transfer hundreds of millions of dollars to any country to cover the cost of a disaster. P&I claims are low thanks to modern technology, stable tugboats and good port pilots.
Still, every boat must have it, and insurance requires a lot of collective money. If a sanctioned vessel is within the club, everyone in the club is at risk. Clubs can also identify fake ships that may be hiding in their ranks. Data showing the flag and ownership history of any vessel is available everywhere. This allows clubs to eject problematic vessels immediately.
past success
In 2012, the EU denied P&I insurance to Iran, effectively blocking Iran’s global energy exports within hours. In 2017, I published research suggesting that almost all of Kim Jong-un’s most difficult cargoes were procured by sea, and recommended targeted sanctions on P&I clubs that owned North Korean vessels.
Within days of the US and EU imposing such sanctions, North Korean activity came to a halt. The regime ends up engaging in high-risk, low-reward sea-to-sea transfers to make ends meet.
Now that similar sanctions have been imposed on Russia, all 3,300 known Russian vessels will be grounded. Some are jamming traffic around the Turkish Bosphorus and floating around the Russian port city of Vladivostok doing nothing.
Putin is scrambling to buy a “shadow fleet” of around 100 scrapped old oil tankers in an attempt to get Russian oil to market. That’s not enough to prop up the Russian economy, but it could tap into the smuggling market involving ports that ignore P&I insurance.
Maintaining a price ceiling of $60 for Russian oil is risky. Enticing Putin to sell oil for less than $60 would facilitate clandestine oil smuggling. However, a blanket P&I ban on all vessels believed to be Russian would be devastating for Moscow.
Like how tax evasion broke Al Capone, it may be this insurance requirement that has dealt Putin a devastating economic blow. It shows why governments and the private sector need to think more intelligently about sanctions. Don’t sanction the target. sanction the environment in which they operate.
(The author is an associate professor of international development studies at Dalhousie University, Canada. theconversation.com)
