The US is leading a G-7 effort to have its cake and eat it too. A proposed “price cap” on Russian oil shipments is designed to keep Russian revenues low while simultaneously taming Western inflation rates.
At the heart of this move is a grim recognition: that if the price of oil, which has nearly doubled since January 2020, is to be controlled, countries like India and China have to be permitted to keep buying Russian oil. But unfettered sales of oil, especially given today’s high prices, will also fund the Russian war against Ukraine.
The price cap, as outlined by the Treasury secretary Janet Yellen, would work by allowing insurers to insure only oil shipments purchased below an as-yet-undetermined price. It’s an indirect yet effective way of fixing the price of Russian oil, because all oil shipments need to be insured—and because one London group insures nearly 95% of the world’s cargo shipments by tonnage. Under the plan, China and India can buy Russian oil only if they buy it at a discounted price; if insurers covered any Russian oil sold above the cap, they’d face sanctions themselves. Over the weekend, the US moved a step closer to implementing its plan, by persuading its G-7 partners of its potential to tame inflation in their own backyards.
The heart of the world’s marine insurance industry lies in the UK. One crucial kind of insurance, covering liabilities for every shipment, indemnifies against incidents such as injury or loss of life to the crew, cargo damage, pollution, and wreck removal. The London-based International Group of Protection & Indemnity Clubs (IGPIC), made up of 13 mutual underwriting associations, covers 95% of all shipments.
As a loose association of “clubs,” the IGPIC came into being in 1899, when six not-for-profit mutual insurance associations banded together. The clubs still cover shipowners independently, and compete with each other. But they also cooperate by pooling their claims. Any liability that exceeds $10 million, for instance, is shared between the 13 clubs.
For a shipowner, the cost of insuring a tanker of oil can run into hundreds of thousands of dollars, and it is very vulnerable to political pressures. In 2019, after six tankers were attacked in the Middle East, underwriters charged up to $325,000 to insure an oil shipment valued at $130 million—a huge leap from before the attacks, when the cover could cost $1,000 or less.
IGPIC’s dominance of its market makes it a uniquely effective weapon in enforcing sanctions. Every time the West imposed sanctions on Iran, for instance, IGPIC and other insurers faced sanctions themselves if they covered cargoes of Iranian oil. Deprived of IGPIC’s services, shipping firms have scrabbled to find other solutions to cover oil shipments. In 2012, Japan used a sovereign liability guarantee scheme to cover the Iranian oil it imported. This time, similarly, “there are probably insurers in Russia that are capable of writing third party liability and reinsurance programmes that could then be backed by a sovereign fund from China or Russia or a combination of both,” Mike Salthouse, who heads claims at one of the IGPIC’s member clubs, told Reuters in May. “It depends on what the political will is and what markets Russia will focus its cargoes on.”