Threats from Russia could scare insurers and destroy Ukraine’s economy

It seems that almost everyone is looking at satellite photos of the Russian-Ukrainian border. But they would do well to study the insurance tables as well. Business in Ukraine is becoming increasingly difficult to insure. Indeed, subscribers stay away from the country. And without insurance, there is no business. Even without sending a single soldier across the border, Russia could tank Ukraine’s economy.

In London, the Joint War Committee (JWC) meets quarterly. Andrew Moulton is chair of the committee; Neil Roberts is the secretary; and its members include Richard Young and Edward Carpenter. If a crisis erupts, as happens quite frequently, the JWC convenes an extraordinary meeting. As things stand, the committee could convene such a meeting to discuss Ukraine very soon.

Never heard of Moulton or the other members of the JWC? This is because the committee is an insurance group made up of executives from marine insurers and underwriters such as Lloyd’s Market Association, Ascot Underwriting and Beazley Furlonge.

It seems that almost everyone is looking at satellite photos of the Russian-Ukrainian border. But they would do well to study the insurance tables as well. Business in Ukraine is becoming increasingly difficult to insure. Indeed, subscribers stay away from the country. And without insurance, there is no business. Even without sending a single soldier across the border, Russia could tank Ukraine’s economy.

In London, the Joint War Committee (JWC) meets quarterly. Andrew Moulton is chair of the committee; Neil Roberts is the secretary; and its members include Richard Young and Edward Carpenter. If a crisis erupts, as happens quite frequently, the JWC convenes an extraordinary meeting. As things stand, the committee could convene such a meeting to discuss Ukraine very soon.

Never heard of Moulton or the other members of the JWC? This is because the committee is an insurance group made up of executives from marine insurers and underwriters such as Lloyd’s Market Association, Ascot Underwriting and Beazley Furlonge.

And how insurers and underwriters judge a country, region or artery is very important. After Iran’s Islamic Revolutionary Guard Corps Seized Swedish Company Stena Impero tanker in the Strait of Hormuz in July 2019, the JWC added the strait to its list of places at risk, which forced ships still wishing to use the strategic axis to alert their insurers.

Insurers willing to accept the risk unsurprisingly raised premiums. “At the moment, we’re looking at Ukraine,” the committee’s secretary, Roberts, told me last week. “So far, there have been no seizures or attacks on commercial vessels. We are not going to escalate the situation by declaring Ukraine an area of ​​increased risk. But we are certainly keeping an eye on it.

For the JWC, keeping an eye on Ukraine means assessing the risk to civilian vessels in the Black Sea, through which the country receives – and exports – large quantities of goods. Last year, for example, the Black Sea port of Pivdennyi (also known as Yuzhnyi) handled almost 53.5 million tons of goods, including more than 45 million tonnes from or to other countries. While Russia is Ukraine biggest trading partnerfollowed by Germany, Ukraine sells and buys goods from all over the world.

These days, the risks facing cargo ships include not only seizures but also interference with ships’ radar. Such interference, which shows that the ship is in a different location, confuses crews and can cause collisions. Online radars and maps also show the ship in a fake location, which can be useful for a country that wants to wreak havoc.

Such interference is already taking place, and some of it appears to be by Russia. The ships were shown on radar as make mysterious circles off California when they were, in fact, on the other side of the globe. An investigation by Lloyd’s List Intelligence, a maritime intelligence firm, find that the Stena Impero had probably been the victim of Iranian GPS spoofing. And on several occasions, civilian ships traveling in the Black Sea encountered mysterious GPS glitches that showed the ships were in another part of the Black Sea or even on land.

In 2017, for example, the captain of a ship whose GPS suddenly placed him in the wrong part of the Black Sea reported to the US Coast Guard Navigation Center that “all vessels in the area (over 20 vessels) have the same problem”. Analysts concluded the ships may have simply been convenient targets for a Russian GPS spoofing test.

If cargo ships in the Black Sea were targeted for GPS spoofing as part of a Russian campaign against Ukraine, Roberts said, “it could disorient them and cause them to collide. That’s something you can face for a while, but not for long. If the JWC concludes that war is imminent in Ukraine and its adjacent waters, it will quickly convene and place the country in its conflict category, which also includes parts of the Eritrea and Libya.As a result, war-torn parts of these countries are shunned by shipping companies.

Commenting on Ukraine, Roberts said: “Nobody really knows if it’s a bluff, and we’re not here to increase tensions. But if a war breaks out, Ukraine will be moved to the conflict category. This would mean that even companies wishing to move goods to and from ports across the country would struggle to find an insurer – and without insurance, business is far too dangerous. In Western countries, it is also illegal.

Political risk insurers, which insure losses caused by political events, have already made this decision. When Laura Burns, senior vice president of insurance brokerage WTW, and her team recently surveyed the 60 insurers that have shown willingness in recent years to insure business operations in Ukraine, they found that only three were now willing to take the risk. And even they are circumspect. “They’re going to look at the nationality of the company,” Burns told me. “Is it American? German? Russian? And they will look at what kind of equipment the company should smuggle out of the country in the event of violence. Insurers also look at the types of assets the company has in the country and whether they are at risk of confiscation or looting in the event of war.

Over the past few years, insurance rates for Ukraine – with the exception of Donbass, whose insurers unsurprisingly stay away – have skyrocketed. As recently as 2016, a company with, say, $10 million in exposure would pay an annual insurance premium of $55,000. Today, the bounty is $250,000. “And that’s if you can get insurance,” Burns noted.

When it comes to disputes, insurance companies are the canaries in the coal mine. Because they pay if a business falls victim to violence or other mishaps, they are extremely alert to the risks on the horizon. This, however, creates a front-page news syndrome, Burns said. “As an underwriter, are you going to take risks to defend a position when the front page suggests a loss is imminent? Will you reach out to insure headline-grabbing risk? Of course people don’t want to jeopardize their jobs,” she said.

Indeed, as they tend to do, underwriters are already looking beyond the horizon to discern how Russia’s aggression might affect other countries. This means that political risk insurance premiums for a country like Moldova could soon increase. “We tell our clients to go to a market when there are no clouds,” Burns said. She reflected on the 1990s and the first 15 years of this century. “Companies have gone out all over the world. Now they have chess pieces in all those places and realize that the risk levels aren’t what they once were – in fact, the risk levels are in some cases drastically different. We are no longer in the era of Pax Americana.

We are certainly not. Bodies such as the JWC and the insurers that decide what to insure and what to charge are private sector businesses and have no obligation to underwrite risky business in a world that is becoming more turbulent even though it remains highly globalized. Unfortunately for Ukraine, this means that Russia can bring Ukrainian affairs to its knees without moving a single soldier across the border.

Christi C. Elwood