Christopher Vassallo
The lynchpin of the G7 countries’ price cap on Russian oil, unveiled in early December, is its conditional prohibition on access to world-class Western insurance and reinsurance firms. The price cap restricts the purchase or sale of Russian seaborne crude above an artificially low price of $60 per barrel. An insurance ban, which prohibits companies within the European Union and the G7 from providing insurance and reinsurance to suppliers of Russian crude sold above the cap, is the mechanism that enforces the $60 threshold. Proof of the insurance ban’s viability as a sanctions tool is of more significance to the future of geoeconomic statecraft than the price cap it is being used to enforce.
So far, the insurance ban has proved an effective means of imposing compliance with the cap, locking in a price differential between Russia’s Siberian Ural crude and North Sea Brent crude, the global benchmark. Companies in G7 nations control 90 percent of maritime insurance and reinsurance. Chinese shipowners, who have been importing an elevated share of Russian crude since the outbreak of the Russo-Ukrainian War, still rely on Western insurance providers to protect their vessels.
While the price cap will help China secure Russian oil at favorable rates in the short term, the prospect of a Western insurance ban, directed at China rather than Russia in a future confrontation over Taiwan, is likely to trouble Beijing. Some of the moves Beijing has undertaken this year—nominally in response to the turbulence surrounding the war in Ukraine but effectively intended to reduce China’s exposure to Western insurers—appear to reflect such a concern.
Prohibitions on the provision of insurance have a long history. During the eighteenth-century War of Spanish Succession, Britain was a dominant naval power and the world’s foremost marine insurer. But Britain’s status as both sometimes led to perverse outcomes: British insurers found themselves covering the damage British frigates and privateers inflicted on enemy ships. After the war, British policymakers began to wonder whether they could forbid firms in London from insuring enemy commercial cargo and thus combine their naval might and their powerful insurance industry. While opponents warned that such a move would compromise London’s status as the world’s premier insurer, it soon became clear that no foreign provider could match the reliability, honest reputation, and low rates of British firms. With their confidence assured, British policymakers designed insurance restrictions that targeted French and American commerce in future wars. In the War of 1812, for example, prohibitions were so effective that insurance costs exceeded 80 percent of the value of the cargo itself. Uniting maritime might and financial power allowed Britain to impose strategic blockades on the cheap. The British Admiralty learned that to impede enemy industry, Britain just needed to choke off the financing required to ship strategic commodities.
American officials have settled on a similar logic today: weaponizing the West’s dominant position in the global insurance industry to constrain enemy supply lines. These officials may soon discover manifold uses for the insurance ban, more useful than just the enforcement of a price cap. Instead, an insurance ban could feasibly help enforce a full blockade of strategic commodities in times of crisis. The “insurance weapon” joins an array of American economic sanctions that Beijing must be prepared to parry in a confrontation over Taiwan. Beijing has long fretted about the U.S. Navy’s ability to impose a blockade on seaborne imports in the Strait of Malacca (including 80 percent of China’s imported oil). Beijing must now assume the G7’s willingness to augment a future blockade with financial restrictions like an insurance ban.
However, like many American sanctions, Chinese countermeasures are beginning to dilute the potency of a future insurance weapon. Beijing has taken two steps this year to secure seaborne shipments of Russian wheat and energy: seeking alternative, non-G7 insurance and acquiring a larger tanker fleet. While useful for evading reporting requirements associated with U.S.-led sanctions against Russia, both these maneuvers also serve to proactively shore up Beijing’s defenses against the insurance weapon.
In 2022, Beijing increased its exposure to non-Western insurance to cover shipments of Russian oil at lower risk. Chinese importers of Russian oil, including COSCO, China’s largest shipping company, are looking beyond Europe and America for reinsurance. Were today’s insurance weapon directed at China, Beijing would have to concentrate oil shipment risk in smaller, non-Western reinsurance firms, of which there are few of adequate size. Only three of the twenty largest reinsurance firms in the world are not based in a G7 nation. China Re, the largest non-G7 reinsurer, is only about a fifth of the size of Munich Re, the world’s largest. China Re’s continued expansion will be imperative for Beijing.
Beijing has also accelerated its longtime pursuit of a domestic tanker fleet whose movement and cargo can be controlled by Chinese planners. Recently, Chinese firms have deployed nebulous tactics to augment the size of this fleet. In August, Lloyd’s List, an industry publication, reported that one anonymous Chinese shipowner spent $376 million to purchase unmarked tankers, which have since been used to obscure the true origins of sanctioned cargo via “ship-to-ship transfers” in the mid-Atlantic. By consolidating Russian cargo in this way, Chinese ships have been able to secure insurance and other maritime services without exposure to sanctions. Lloyd’s notes that this practice could expand to 400 tankers.
In a crisis, Beijing likely expects Washington to use the insurance weapon. In turn, American geoeconomic strategists must expect Beijing to muster its substantial domestic tanker fleet and rely almost entirely on non-G7 insurers. By taking these steps in advance of a potential Taiwan crisis, Beijing is already diluting the future impact of the insurance weapon. Beijing’s willingness to preemptively undertake these moves demonstrates its commitment to besting one of the West’s most novel sanctions tools.
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