Russian oil as a “military cargo”: will Ukraine sink our tankers?

Alexey Gromov, Principal Director on Energy Studies of the Institute for Energy and Finance, gave an interview to Novye Izvestia on the possible consequences of Russia's withdrawal from the grain deal for the Russian oil exports security from the Black Sea ports.

Alexey Gromov explained whether the operation of oil loading terminals in Novorossiysk and Tuapse, through which Russian oil and oil from Kazakhstan "flows" for export, will be paralyzed.

- Russia's withdrawal from the grain deal, of course, boomeranged on oil and gas exporters. But let's be honest: now most of the oil cargo that is shipped by Russia from the Baltic and the Black Sea is insured by Russian insurance companies. This is what concerns cargo insurance. Tanker insurance depends on the country of origin of the vessel. And there can be both European and Russian, or third-country insurance.

Now the cost of insurance from Russian insurers is three to four times lower than the cost of insurance offered by Western insurance companies. This is precisely due to the fact that foreigners pay much more attention to the so-called military risk.

- Have Western insurance companies already reacted after Kiev's statement?

- I think they will refuse to insure this kind of transportation at all. Precisely because of the fact that military risks will begin to increase significantly. I think that Russian insurance of such cargoes will have no alternative option.

And here the fundamental question is whether the government and regulatory authorities will not interfere in this process so that the cost does not affect the competitiveness of Russian oil exports.

I am more than confident that the cost of insurance will increase, but the scale of growth will depend on the consensus that will be found between Russian insurers and the authorities of our country. And, I repeat, there will be practically no alternative to Russian insurance in this situation.

Will shipowners agree to work in conditions when their vessels have already been declared military targets?

- Everything here will depend on the position of insurance companies.

- How much the oil transshipment from the southern ports be reduced?

-Russia has announced that it has been reducing oil exports by 500,000 barrels per day since August as part of an agreement with OPEC+.

And the reduction may not occur evenly across all areas of Russian exports. It may well be that Russia, for example, will decide to minimize oil shipments for export in the ports of the Azov-Black Sea basin due to the presence of military risks.

-Are our exporters willing to risk a "manual" fleet?

- When there are threats that Russian ships may become targets of attacks by the same drones from Ukraine, this, of course, creates additional risks.

There is a shadow fleet ready to take risks for this, and Russian insurers ready to offer insurance premiums at reasonable prices, taking into account the fact that the state will not stand aside if insurers begin to go beyond the reasonable.

Well, all the same, of course, it will be regulated manually, as well as all situations related to geopolitical conflicts.

Through thorns to India

As you know, India and China have now become the key buyers of Russian oil, accounting for over 90% of Russian exports. As Sergey Kondratiev, the head of the Economic Department of the Institute for Energy and Finance, reminds, before the start of the SVO and the sanctions imposed against Russia, India accounted for less than 1% of Russian oil exports.

Sergey Kondratiev previously explained how the Russian tanker freight market for crude oil transportation is currently organized.

The revenue of Russian exporters selling oil in new markets at a discount is declining, and costs are rising. Including due to a sharp increase in freight rates. A unique case was recorded not only in Russian, but also in world practice — the freight exceeded half the oil cost on FOB.

"The sharp increase in freight rates was due to the embargo imposed by the EU countries on oil imports from Russia in December 2022 and the "price cap", due to which the supply of tankers decreased, and the "sanctions premiums" increased. However, as in 2022, the market quickly adapted to the new conditions: already in March, rates began to decline. Now the cost of transporting Russian oil to Western India from Novorossiysk is $6.8–7/bbl, from the Baltic ports — $9.5–10/bbl. June was the first month in 2023 when freight rates, even on ultra—long routes, were below the psychologically important level of $13.5/bbl ($100/t): from the Baltic to Northern China - $13.2/bbl, or $96/t. Of course, it is difficult to talk about "low" rates now, so far the Russian market has returned to the levels of September–October last year," Sergey Kondratiev says.

In 2022, Russia's revenues from the export of oil and petroleum products ranged from $ 22-19 billion per month and began to decline by the end of the year. In June 2023, this figure almost halved to $11.8 billion.