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It’s not yet time for Plan B on Russia shipping sanctions

The situation in Ukraine faces a probable turning point. The outcome will be settled mainly on the battlefield. But also beyond the front line

Our industry is providing a second front without the shooting. Let the vice tighten slowly but surely

THE spectacular Ukrainian drone strikes on the Kremlin and the more affluent enclaves of Moscow, and the militia incursions into two Russian border regions, would have been important for their symbolism alone.

But there is another layer to them than simply that. Military experts regard these actions as “shaping operations”, taking out command and logistics centres ahead of an impending counter-offensive.

Meanwhile, Kyiv’s strength has been materially augmented and hardened by the arrival of US-made F-16 fighter aircraft, which offer both defence and attack capabilities.

The invasion, then, faces a probable turning point. The outcome will be settled mainly on the battlefield. But not only on the battlefield.

Sanctions — in which tanker operators and marine insurers are playing a central role — hold an important auxiliary function. Think of them as the moral equivalent of a second front without the shooting.

But the key question is whether they are working. On that, there has been debate in industry circles this week.

The price cap of $60 a barrel on Russian crude and $100 a barrel on refined products is designed to ramp up pressure on Vladimir Putin without upsetting the world economy. Six months in, its success in the first of those aims has been modest.

As Lloyd’s List reported on Thursday, tankers beneficially owned in Greece are still lifting what approximates to half of Russian Baltic and Black Sea cargoes, while two thirds of vessels engaged in the trade get P&I cover from International Group clubs.

This is before we get to the activities of the dark fleet; the prospect of a major spill involving a vessel without requisite liability insurance is probably a matter of when rather than if.

Arguably, the price cap has not been properly tested. Urals crude tends to trade at a steep discount to Brent anyway, and has been priced below the $60 a barrel mark since the sanctions kicked in.

Indeed, the differentials between the two grades has created steep arbitrages, with traders and shipowners prepared to work the market making huge profits.

Neil Roberts, the influential head of marine at the Lloyd’s Market Association, is among those highlighting the evident limitations of diplomacy to date.

“If the aim of sanctions is to make a state alter course, the test of success would be to ask whether the target country has changed its actions,” he wrote in a post on LinkedIn on Wednesday.

His point, of course, is that Russia has not changed its actions. The lesson, according to Roberts, is that we now need a Plan B. He makes a strong case; but is he right?

Clearly there are wide-ranging limitations to what sanctions can be expected to achieve, as ample historical experience illustrates.

The fall of Apartheid South Africa is the paradigm case of what can happen when things go well.

But the demise of white supremacism there was largely the consequence of four decades of civil disobedience and armed struggle, led by the African National Congress in its better days.

Nor did sanctions alone topple Saddam Hussein. That took boots on the ground. The fallout from an ill-conceived and ill-fated invasion has exacted a heavy toll across the entire Middle East for the past 20 years, and could continue to so for 20 years or more to come.

North Korea and Venezuela are weathering restrictions directed against them. The Boycott, Divestment, Sanctions campaign aimed at Israel has picked up limited traction beyond university campuses and the Roger Waters’ fanbase.

Supporters of ongoing sanctions against Russia make more nuanced points. Properly designed, they can work as a stick wielded in the cause of behavioural change rather than regime change, with lifting them the potential carrot.

First, sanctions send a message of unity. Given that direct Nato military engagement remains unthinkable, count that as mission accomplished. 

Second, this was never a matter of precipitating the immediate economic collapse in Russia. That was never going to be possible in the case of the ninth-largest economy in the world.

Yet the Russian economy did fall into recession in the past year. The 3%-4% erosion of GDP was less than the West had been hoping for, but a hit in the order of $70bn is not nothing.

The intention was to make things harder, financially and technologically, for Russia to wage war against Ukraine. That, too, has arguably been realised.

Sanctions are necessarily a long-term tool. Their effect will always be slow, cumulative and gradual, and not visible overnight.

At some point, they will force the Russian government to make difficult choices, perhaps at the risk of social instability.

The third and final objective is the slow asphyxiation of Russia’s energy sector, via restrictions on the ability of domestic energy firms to secure financing and technology from other countries.

Given Russia’s pressing need to develop new fields in the Arctic — a strategic project that is contingent on collaboration and technology — sanctions will make headway on this score too.

What we need, in other words, is not so much Plan B but a more realistic framing of the Plan A, combined with more rigorous enforcement. Let the vice tighten slowly but surely.

The key takeaway for shipping is this: The nature of this risk is long haul, and compliance will take on increasing complexity.

We don’t know how this ends. But keep an eye on the progress of the coming Ukrainian fightback.

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