President Donald Trump had pledged to find a solution to the conflict between Russia and Ukraine within 100 days. The deadline has passed, but negotiations have still not been concluded. Nevertheless, the resumption of dialogue between the United States and Russia is a major political change that could lead to a normalization of bilateral relations and the lifting of US sanctions against Russia, particularly in the energy sector. At the same time, the European Union is preparing a 17th package of sanctions targeting Russian gas and the clandestine fleet in an attempt to prevent the circumvention of oil price caps. In this changing and uncertain context, it is important to take stock and try to assess the measures already taken in order to correct any shortcomings. Sanctions must solve problems, not create new ones.
In 2022, in order to weaken Russia economically and hinder its military campaign, the United States, the other G7 members and the European Union decided to cap the price of Russian oil at $60 a barrel. The idea was that, since it was impossible to prevent other countries, notably India and China, from importing Russian oil, capping the price per barrel would at least have the advantage of reducing the profit from sales.
It’s important to understand that the G7 coalition which introduced the price cap deliberately chose not to embargo Russian oil. As Russia is the world’s second largest crude exporter after Saudi Arabia, its withdrawal from the market would have led to shortages and sharp price rises, with the likely consequence of a global economic crisis.
To be effective, this capping measure was accompanied by a ban on shipping companies based in signatory countries carrying cargoes of oil sold at more than $60 a barrel. To complete the package, the G7 coalition introduced a further ban on companies from signatory countries providing insurance or reinsurance services to tankers carrying oil sold at over $60. As insurance is theoretically compulsory for maritime transport, this should have enabled the sanction to be widely applied. As it turned out, however, this mechanism, devised by bureaucrats too far removed from the realities of world trade, didn’t work.
To get around the price cap, Russia has resorted to what some media have called a “phantom fleet” or “dark fleet”, terms without precise definitions. According to a report published on May 30, 2024 by Lloyd’s List Intelligence, this “phantom fleet” comprises some 600 unidentified vessels carrying almost 1.7 million barrels of oil a day sold above the $60 price. As for the major Western marine insurers, they preferred to withdraw from a market that had become uncertain and even dangerous. Indeed, it is difficult to know whether or not a ship belongs to the “phantom fleet”, not only because there is no legal definition of the term, but also because ships frequently change names and are registered by shell companies. It is also difficult to know whether the oil transported is sold at a price that complies with the cap, as the selling price is protected by business secrecy (it is known only to oil traders; neither shipowners nor insurers have access to it).
Although it was not intended to do so, the oil price cap mechanism had the effect of prompting the major Western insurers to withdraw from the transportation of Russian hydrocarbon-based marine cargoes. Their withdrawal was initially compensated for by the major Russian insurers, but they were soon sanctioned, without slowing down the Russian oil trade. As the major Western and Russian insurers disappeared from the market, they were replaced by new companies with little or no capital, and some tankers are now sailing without insurance! In view of this situation, it would appear that the mechanism put in place by the G7 coalition needs to be rethought.
Indeed, in order to achieve the G7 coalition’s goal of reducing Russia’s revenues from foreign oil sales while maintaining stable world oil market prices, Russian sea cargoes must not only continue to be transported – albeit at reduced prices – but also in compliance with international maritime requirements, which requires access to well-capitalized insurance. Without the participation of the world’s marine insurers, the policy of capping oil prices cannot be effectively implemented. Without reputable insurers, whether Western or Russian, to enforce the rules, carriers will simply continue to turn to unscrupulous operators or not insure at all. The result is an increase in risks of all kinds (more risks of oil spills and environmental disasters, more risks of collisions and navigational errors), without these being covered.
The major insurers are the guarantors of the safety of the world’s maritime trade. They play a key role in ensuring that ships operate safely, are seaworthy and remain properly insured. Forcing them out of the market either directly (by sanctioning them) or indirectly (by threatening them with heavy fines) removes a vital safeguard for the maritime industry. The absence of major Western and Russian insurers from the P&I insurance market means only one thing: the lowering of international safety standards. Since 2022, the disorganization of the shipping market has only increased.
The G7 coalition’s hasty actions run counter to the stated aims of capping oil prices, since not only do they fail to prevent Russian oil sales above $60 a barrel, but they also create uncertainty in the global shipping, financial and insurance markets, and increase the risks to people and the environment. As the European Union works on new sanctions expected by the end of May, let’s hope that its decision-makers will be able to increase their effectiveness and correct their shortcomings.
