John Whelan: Imminent EU ban on Russian oil shipments could cause havoc on world markets

Major shipping firms say the sanctions, without a cap below which Russian oil can be insured for shipping to non-EU countries, could paralyse global trade

An oil rig near Usinsk, 1,500km north east of Moscow. The ban on all oil imports by sea from Russia comes into effect just four weeks from now. File picture

Four weeks from now, the long-awaited EU ban on all oil imports by sea from Russia comes into effect, which means the one million barrels a day currently imported to the European Union will come to a shuddering halt.

The ban could potentially cause havoc on world oil markets, and potentially push up oil prices and threaten to stoke a new round of price inflation.

On the one hand, a total ban on oil imports from Russia on December 5 is good news for those who wish to punish Russian president Vladimir Putin, and stop the flow of funds that support his war effort in Ukraine.

However, many EU countries will be hit hard if Russian oil imports are cut to zero in the coming weeks.

Crucially, when agreement was struck on the sanctions in June, the EU also stipulated that no EU shipping service provider, including all marine insurance brokers, could be involved in the transport of Russian oil cargoes to non-EU nations.

The far-reaching sanctions will hit the all-important British marine insurance providers on which Ireland and the rest of the European Union rely: Without insurance cover, ship owners cannot move cargoes.

The sanctions have alarmed US officials, who fear that a sudden drop in Russian exports due to a lack of tanker insurance will push up global crude oil prices and therefore feed into domestic consumer prices. That would not be a welcome outcome for US president Joe Biden or any European government.

The US and other G7 countries introduced an oil price cap plan to provide a relief valve, that avoids the sanctions, if Russian oil was sold below a specified price cap.

The plan, it was believed, would keep sufficient oil flowing and deprive the Russian regime from tapping the super profits they are making from global oil prices, but without creating any instant shortages.

However, the plan will only work if the European Union amends its own sanctions to include a price cap for Russian oil sold to non-EU nations.

In early October, the European Union adopted a new round of sanctions that established a legal basis for the cap, but the unanimous approval of EU members is required.

Some EU nations may still oppose the plan.

Malta, Greece, and Cyprus, whose tanker fleets transport most Russian oil, initially objected to the potential fallout on their shipping industries.

Many of the major shipping companies have said the sanctions, without an oil cap below which Russian oil can be insured for shipping to non-EU countries, could paralyse world trade.

Ireland's exports could be hit

Needless to say, such an outcome would hit Ireland’s global exports, which are already under the threat of recession.

The London marine insurance industry has also doubled down on the issue, stating that insurance for Russian cargoes transported to non-EU buyers after December 5 will be hit hard until the European Council votes to approve its own cap.

China has been a major buyer of Russian oil since the war began, and may provide an outlet for lost exports to the EU.

But Russia will find it difficult to find sufficient insured ships to meet any sudden increase in demand from Asia after the EU sanctions deadline.

Also, many Chinese owned shipping fleets have stopped trading in Russian crude oil in case of falling foul of US regulators and damaging their US trade. China state-owned companies have indicated that they have largely stopped buying Russian crude.

From December onwards, the sanctions against Russia may finally start biting by drastically hitting the income the country receives from the millions of barrels of oil it exports daily by sea to global markets.

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However, the pain inflicted in terms of another surge in oil prices and knock on into consumer prices may be too hard for many countries to accept.

Regrettably, many industry analysts believe Russia will find ways to get around the plan, with early reports of ships changing their countries of origin and trading entities being moved beyond the EU and G7 to order to evade the sanctions.

• John Whelan is an expert on Irish and international trade