Russian companies face escalating insurance costs as Western sanctions prompt foreign insurers to withdraw from the market on concerns that further measures could follow and undermine economic growth.
Russian president Vladimir Putin faced heavy criticism at this month’s G20 summit, where Western leaders accused him of continuing to destabilise Ukraine in violation of a September peace agreement.
Existing sanctions, along with a declining oil price, have already pushed Russia closer to recession. The rouble (RUB) is around 30% lower than a year ago and lending costs have risen steeply for companies, regardless of whether they are on sanctions lists. Reports suggest that several foreign insurers have concluded that it is no longer worth the risk of offering their services.
“There is a concern that further sanctions could be imposed (and) there is uncertainty about where they might be imposed,” Andrew van den Born, head of political and trade credit risks at insurance broker Willis, told one news agency.
“If (insurance companies) were to write credit risk for Russia – even if the companies are not sanctioned – and they were to default, they would have a difficult conversation as to why they chose to write the risk.”
Russian companies are likely to be hit in several ways. Firstly, domestic insurers will struggle to find foreign reinsurers to share the cost of insuring Russian projects in sectors such as energy and shipping. This, in turn, will put increased financial pressure on those projects to find far more money for coverage.
Secondly, in the credit market, Western bankers will be reluctant to lend to Russian companies because those firms now cannot get insurance against the risk of defaulting on their loans.
“While certain Russian entities can insure a certain amount of risk in the Russian market, they need to get reinsurance from the world market and that is an area where difficulties are created currently for Russian companies,” said Michael Kingston of law firm DWF who works with insurance companies on Arctic operations.
One industry source quoted estimated Russian insurance business worth at least US$3bn – including oil and gas assets – was shared out through reinsurers via specialist provider Lloyd’s of London alone, and this was in danger of drying up. However, a Lloyd’s market spokesman said merely that the 326-year old insurance market complied with all international sanctions and declined further comments.
Participants in the global credit risk market are based worldwide in financial centres such as London, New York, Bermuda and Singapore and may be exposed to up to US$15bn of Russian loans, van den Born said.
Peter Jenkins, co-head of political and credit risk at Brit – one of several specialist underwriters with a presence in the Lloyd’s of London market – said: “I would suspect for many (credit risk) players, Russian-related income will have represented between 10% and 25% of their income.”
Moscow is already under pressure to secure financing for critical oil and gas projects including in the remote parts of the Arctic, as Western lenders pull out. Russian insurers could follow the example set by sanctioned oil firms like Novatek, which are talking to Chinese lenders in an attempt to fund future projects.