‘Sanctions are coming’: Leading insurer warns shipping’s shadow world is about to get darker

The shipping industry will face increasingly complex sanctions in coming years as governments embrace the strategy as a vital foreign policy tool, according to a senior official at the International Group of P&I Clubs.

The use of shipping sanctions has ramped up dramatically since Russia invaded Ukraine in February 2022, adding to existing measures targeting states including Venezuela, Iran and North Korea.

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The European Union’s import ban on Russian oil and the previously untested price cap scheme has led to an exodus of ships from the 12 International Group members to avoid scrutiny and compliance costs of dealing with G7-linked regulators.

Mark Church, chairman of the International Group’s sanctions committee, said that will continue if the onerous demands in place for the transport of Russian oil continue to expand and shift to other commodities.

The price cap, first introduced in December 2022, is aimed at preventing G7-linked vessels from hauling Russian oil if the sale price goes too high to try to limit the Kremlin’s fossil fuel revenues.

Church said that while using the price cap for other commodities is not currently being discussed, some senior government officials believe the measures targeting oil flows have succeeded.

“There are people who are adamant that it is working, depriving Putin of revenues which would otherwise fund the Ukrainian war,” he said.

“So if you take the view it’s working, then you can’t discount the possibility … it should be replicated in other sectors. Who knows where we’ll be in a year or two with a new administration in the US?”

He said the election of Donald Trump would not change the trend of rising sanctions, citing his “Sanctions are Coming” tweet from 2018 when he warned of tougher measures against the Iranian regime during his first term as president.

But Church said that the consequence of the strategy pursued against Russia is that shadow fleet tankers laden with oil and of unknown insurance status are transiting the English Channel without any link to G7 regulators or fear of enforcement for safety breaches.

That scenario was predicted in January by Mathieu Philippe, the former CEO of Fractal, a specialist operator in the Russian trade, when he told TradeWinds that further crackdowns would leave a lightly regulated “shadow fleet” in total control of the Russian tanker trade.

Fractal was subsequently hit by UK sanctions and went into liquidation.

Church said there was an argument for allowing the International Group to cover vessels that do not comply with the oil price cap since the prime beneficiaries of high-quality coverage are the victims of any spill. But he said that was politically difficult.

Big stick, little carrot

Church said: “What you end up with is a lot of stick and not a lot of carrot [for G7-linked owners].

“If you want those mainstream shipowners to be doing those [Russian] trades then you have to do something to encourage them back into it.

“The International Group does have concerns about the enforceability and the effectiveness of the price cap scheme.

“I think it’s either a debate that hasn’t happened or if it has, then we probably lost it about the extent to which P&I insurance should be a target of sanctions.”

The nature of the measures has meant that the global insurance sector has been at the centre of the strategy as monitor, unwilling enforcer and target, with Russia’s Ingosstrakh blacklisted by the UK in June.

The International Group has criticised the price cap regime and complained in April that frustration with compliance demands led to 800 ships leaving its 12 member clubs.

Global oceangoing tonnage covered by International Group members has reduced from about 90% in 2021 to 87% of the total. The biggest decline has been in tankers, with 81% now under the group umbrella.

Critics of the sanctions regime say that Russia has been able to shrug off the measures because customers of about 70% of the world’s oil supply do not recognise them.

With 10% to 12% of global supply, Russia’s output can easily be absorbed by countries that do not enforce the price cap.

But the popularity of the measures among upper tiers of government has seen the US, EU, UK and other G7 nations joined by Israel, which recently issued its first shipping sanctions with seizure orders targeting the Iranian oil trade.

Ukraine has also distributed lists of ships that have called at its ports occupied by Russian forces and urged port authorities to seize them.

Church said that it would be “really tricky” to encourage vessels back into the International Group fold — especially since there were likely to be more measures in the future that limit their freedom to operate globally.

Rolf Thore Roppestad, the CEO of Gard, told TradeWinds last week that the trend would only reverse when sanctions against Russia are lifted.

And fellow Norwegian Gaute Sivertsen, director of the International Oil Pollution Compensation Funds, the body charged with compensating victims of any spill, said he was concerned that the impact of confrontational global politics could result in a permanent split of the global fleet.

That would mean a significant segment operating with insufficient insurance outside of the global regulatory regime, he said.

Church said that regulators recognised that uninsured vessels were a problem that needed to be dealt with. He said that was one reason why nations had adopted individual tanker designations — to try to keep them outside of any trading system.

“We see sanctions being used as a political tool to show displeasure about what another country is doing in the hope that it will change that country’s behaviour.

“If you look at the number of ships that have been designated by the US over the last decade, the number has just exploded and continues to grow.

“I think what we’re going to see is an increased burden, increased compliance, more sanctions and more enforcement because it’s clear that it remains in the minds of governments all around the world a really valuable foreign policy tool.

“And I can’t see anything that’s going to change that.”