American researcher: China is preparing for an economic war with the West
The centerpiece of the G7 price ceiling for Russian oil, which was revealed early last month, is the conditional ban on obtaining the services of world-class Western insurance and reinsurance companies.
The price cap restricts the buying or selling of any seaborne Russian crude at an artificially low price of $60 a barrel.
American researcher Christopher Vassallo at the Institute for Asia Society Policy and the Belfer Center at Harvard University says, in an analysis published by the National Interest magazine, that the insurance ban that prevents companies within the European Union and the Group of Seven from providing insurance and reinsurance services within the European Union and the Group of Seven to Russian oil suppliers that sold above the specified price cap, it’s the mechanism that imposes the $60 cap.
So far, banning insurance has proven to be an effective means of enforcing price cap compliance.
Companies in the Group of Seven control 90% of marine insurance and reinsurance.
Chinese ship-owners, which have imported a large share of Russian crude since the outbreak of the Russia-Ukraine war, still rely on Western insurance companies to protect their vessels.
Although capping the price of oil will help China secure its access to Russian oil at reasonable prices in the short term, any prospect of a Western insurance embargo directed against China rather than Russia in any future confrontation over Taiwan is likely to cause troubles for Beijing.
Some of the steps Beijing has taken this year, nominally in the face of turmoil surrounding the Ukraine war but aimed effectively at reducing Beijing’s exposure to actions by Western insurers, seem to reflect such concern.
Vassallo noted that bans on the provision of insurance services have a long history.
During the War of the Spanish Succession in the 18th century, Britain was a dominant maritime power with the largest marine insurers in the world. But putting Britain in this way sometimes led to harmful results: British insurers found that they covered the cost of the damage that British frigates and armed ships inflicted on enemy ships.
After the war, British policy makers began to ask whether they could prevent companies in London from insuring enemy commercial shipments, thereby ensuring their own sea power and a strong British insurance sector.
Although opponents warned that such a move would jeopardize Britain’s status as the world’s largest insurer, it soon became clear that no foreign insurer could rival the credibility, reputation, and low prices of British companies.
Underlining their confidence, British policymakers placed insurance restrictions on French and American trade during future wars.
In the War of 1812 for example, the embargo was so effective that insurance costs increased to more than 80% of the value of the cargo itself.
The British Navy realized that to disrupt enemy industry, Britain needed only to block the financing required for the shipment of strategic goods.
US officials have settled on a similar logic for now: to use the West’s dominant position in the global insurance sector as a weapon to constrain the enemy’s supply lines.
These officials may soon discover multiple uses for insurance bans, perhaps more useful than simply imposing a price ceiling.
Any insurance ban could practically help impose a complete blockade on strategic goods in times of crisis.
The insurance weapon joins a group of US economic sanctions that Beijing must prepare to avoid in any confrontation over Taiwan.
Beijing has long expressed concern about the ability of the US Navy to block marine imports in the Strait of Malacca (including 80% of the oil that China imports).
China must now assume that the G-7 is ready to reinforce any future blockade with financial restrictions such as the insurance ban.
However, like many US sanctions, Chinese countermeasures are beginning to dilute the power of any future security weapon.
In 2022, Beijing took two steps to secure sea shipments of Russian wheat and energy: it is seeking to search for an alternative and insurance companies not affiliated with the Group of Seven, and owning a larger tanker fleet.
While these maneuvers are useful in avoiding the requirements associated with US-led sanctions against Russia, they also serve to bolster China’s defenses against the insurance weapon.
Beijing increased its dealings with non-Western insurance companies to cover Russian oil shipments at a lower cost.
Chinese companies importing Russian oil are also seeking to search for reinsurance in regions other than Europe and the United States.
Beijing has also accelerated its longstanding approach of having a domestic tanker fleet whose movement and cargo could be controlled by Chinese planners.
A shipping publication reported in August that an unidentified Chinese company had spent $376 million to purchase unmarked tankers, which were used to mask the true origins of sanctioned cargo by ship-to-ship in the mid-Atlantic.
In this way, the Chinese ships, by supporting the Russian cargoes, were able to obtain insurance services and other marine services without being subjected to penalties.
Lloyd’s said that this method could be expanded to include 400 carriers.
Researcher Christopher Vassallo concluded that it’s likely that, in the event of a crisis, Beijing will expect Washington to use the insurance weapon.
In turn, US Geo-economics strategists should expect China to mobilize its large domestic tanker fleet, relying almost entirely on non-G7 insurers.
By taking these steps before a potential crisis over Taiwan erupts, China is already mitigating any future impact of the insurance weapon, and Beijing’s willingness to take these steps proactively demonstrates its commitment to outmaneuvering one of the latest Western sanctions mechanisms.