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Insurers withdraw war risk cover for Russia and Ukraine business – Industry roundup: 29-30 December

Insurers end war-risk cover for Russia and Ukraine shipping

Ship insurers are withdrawing war-risk coverage across Russia, Ukraine and Belarus from the start of 2023, leaving cargo and freight companies liable for major losses linked to the conflict that began last February.

Twelve of the 13 Protection and Indemnity (P&I) clubs, which cover 90% of the world’s ocean-going ships including those from the UK and the US, said they would no longer be able to provide coverage to clients as reinsurers are applying an exclusion clause on Russia and Ukraine business at the 1 January renewals forcing P&I insurers to limit their fixed premium war risk cover.

In a notice to its members last week UK P&I club announced: “Due to the impact of losses from the Russian/Ukrainian situation affecting the availability of global insurance and reinsurance capacity, the club’s reinsurers are no longer able to secure reinsurance for war risk exposure to Russian, Ukrainian or Belarus territorial risks.”

Most ships buy P&I cover from the 13 clubs, which are mutuals owned by the shipping companies whose fleets they cover, to protect against risks such as collisions, property damage, pollution, environmental damage and removal of wrecks. The fixed premium business of the clubs — which mainly involves charterers’ liability cover and small specialist ships — is heavily reinsured in the London market.

The move effectively imposes further sanctions on Russia by limiting its shipping capacity in addition to the cap recently imposed on the price of its oil. P&I insurance is a requirement for all heavy cargo and container vessels. The new sanctions mean that European P&I clubs can no longer offer insurance to a vessel carrying Russian oil at a price higher than US$60 a barrel.

A similar tactic was employed a decade ago. In 2012, the European Union (EU) made P&I insurance unavailable to Iran, effectively halting global Iranian energy exports within hours. It was repeated in 2017 when, in response to North Korea’s Kim Jong-un developing nuclear weapons, the US and the EU imposed targeted sanctions against P&I clubs with North Korean vessels in their ranks.

With similar sanctions being introduced against Russia, activity by the fleet of 3,300 known Russian ships is grinding to a halt. Some are reported to be impeding traffic around Turkey’s Bosporus Strait and floating idly around Russia’s port city of Vladivostok.

President Putin is reportedly scrambling to purchase a “shadow fleet” of about 100 vintage end-of-life tankers to try to get Russian oil to market, which will not be enough to prevent a deep impact on the Russian economy but could expose inroads to smuggling markets involving ports that overlook P&I insurance.

The move has also seen Japan’s government urging insurers to take on additional risks to continue providing marine war insurance for shipments of liquified natural gas (LNG) across Russian waters.

The request reportedly includes gas from the Sakhalin-2 project, which is based on an island off the east coast of Russia, near Japan. The project, which is part-owned by Russia’s state-owned Gazprom and Japanese trading houses, accounts for 9% of Japan’s LNG imports.

Hong Kong lifts most anti- Covid-19 measures

Hong Kong is lifting most of its stringent anti- Covid-19 restrictions from today (29 December), city leader John Lee announced, meaning that arrivals are no longer required to submit to mandatory PCR tests and the city’s vaccine pass is also being scrapped.

Lee told a media briefing that most measures would be cancelled from Thursday, apart from the wearing of masks, which remains compulsory. The city has reached a relatively high vaccination rate which builds an anti-epidemic barrier,” he claimed.

“Hong Kong has a sufficient amount of medicine to fight Covid-19, and healthcare workers have gained rich experience in facing the pandemic,” Lee added. His government now plans to reopen the borders with mainland China by 15 January and is working with authorities over the border to ensure an orderly re-opening.

He said the authorities have been preparing for the scrapping of all restrictions. “The time is appropriate for us to do this, having prepared for six months to do this,” said Lee. "The whole society is preparing for this. We are doing all this according to our local epidemic situation.”

Hong Kong's vaccine pass requirement imposed last February, which was mandatory for people to access most venues in Hong Kong, will end from today. Social distancing rules such as a cap on gatherings of more than 12 people in public are also lifted with immediate effect.

Since early 2020 the city has for nearly three years largely followed China's lead in tackling coronavirus, with both places being the last strongholds in maintaining a zero-Covid policy. Restrictions on travel between Hong Kong and the mainland were imposed and the reopening was postponed several times due to outbreaks in Hong Kong or the mainland.

The removal of the curbs is likely to result in an increase of travellers to the former British colony who have previously avoided it due to strict restrictions. International passengers arriving in Hong Kong in recent weeks are no longer subject to Covid-related movement controls or barred from certain venues.

Business groups, diplomats and many residents were critical of Hong Kong's COVID-19 rules, which they said threatened its competitiveness and standing as an international financial centre. The rules have weighed on Hong Kong's economy for nearly three years, accelerating an exodus of businesses, expatriates and local families who have left amid a drive by Beijing to more closely control the former British colony.

Carmakers “tacitly cutting supply chain ties to China”

After two decades in which it has become a global leader in the car parts industry, China may see international motor manufacturers reducing their dependency on its wide network of automotive component suppliers, according to the Financial Times.

The paper reports that several international groups have initiated a low-key but concerted effort to reduce their reliance on parts from China, prompted by the Covid-19 pandemic and geopolitical concerns.

Both European and US carmakers outsourced production of a growing number of components to China in a bid to reduce costs and establish ties to the world’s largest car market. The trend was further encouraged when China became a member of the World Trade Organisation (WTO) in 2001. But a spokesperson at Ford told the FT: “There is a large-scale rethinking of logistics operations across the industry. The supply chain is going to be the focus of this decade.”

The paper reports that the change is being prompted by two major developments. The first has been uncertainties and supply interruptions caused by China’s stringent zero Covid-19 policy, which has often forced factories to shut down at short notice. The second reflects longer-term concerns about a large-scale political decoupling in the event of a breakdown in China’s relations with the international community, which could upset trade in a similar way to the disruptions provoked by Russia’s invasion of Ukraine.

Foreign manufacturers now aim to produce parts and cars inside China exclusively for use within the country, thereby reducing their reliance on Chinese plants for goods sold in the rest of the world while keeping stable supply chains to their own plants in the country.

While the sheer size of China’s market makes it unlikely that international groups will cut ties with the country completely, many expect the flow of components from the country to plants across the world to decline over time.

ECB’s balance sheet moves lower as quantitative tightening kicks in

Newly released data from the European Central Bank (ECB) shows that total assets on its balance sheet have reduced in the past week by €492 billion (US$523 billion) to €7.98 trillion, the lowest since July 2021, and are now down by €850 billion from a peak in June.

The website comments that the ECB had two major types of quantitative easing (QE): it handed cash to banks via free-money loans, and it handed cash to the bond market by purchasing bonds. All this has stopped, and the ECB is now unwinding the policy.

At its October 2022 meeting, the ECB announced Step 1 of quantitative tightening (QT): Unwinding the loans. At its 15 December meeting, it announced Step 2 of QT: shedding bonds it had purchased. “What we’re primarily seeing here on its balance sheet today is the effect of Step 1 of QT – the first big batches of loans got paid back,” comments author Wolf Richter. “This looks like a monetary rug-pull.”

During the pandemic, as part of flooding everything with liquidity, the ECB lent cash to the banks – the Targeted Longer-Term Refinancing Operations (TLTRO III) – which the banks then spread around. From the beginning of the pandemic through July 2021, the ECB handed out €1.6 trillion of those loans, which came with complex incentives to encourage banks to lend them out to businesses and households.

This changed in October, when Step 1 of QT was announced to “help address unexpected and extraordinary inflation increases,” as the ECB said. To do so, it made the terms of these loans unattractive for the banks, as an inducement for them to pay them back. The first payback date was in July, when €74 billion in loans were paid back; the second was November, when €296 billion were paid back.

The third payback date was in mid-December, when the ECB announced that €447 billion in loans would be paid back although the figure has been revised upwards to €498 billion. The total balance of Long-Term Refinancing Loans has now plunged by €896 billion from its June 2021 peak of €2.22 trillion to €1.32 trillion today.

“This is a huge amount of liquidity that vanished since mid-November, €743 billion in two moves, which could have well helped incite the dump in the markets globally since then,” the website notes.

At its 15 December meeting, the ECB announced Step 2 of QT: It would start shedding its bond holdings in March 2023, initially at a rate of €15 billion a month. Details will be announced after the February meeting, it said. The pace of subsequent declines “will be determined over time,” it added. Since then, there have already been comments by ECB heads about accelerating the bond QT.

The ECB ended QE in June 2022, and “securities held for monetary policy purposes” have remained roughly stable since then. On today’s balance sheet, the securities amounted to €4.94 trillion, down by €20 billion from the peak in June:

“When the ECB received the €895 billion from the loan payoffs, it destroyed the money, just like it created the money when it originally made the loans,” comments Richter. “This is a massive amount of liquidity that came out of the financial system over about the past six weeks. Everything in the financial markets is global. And QT is global. And it’s not just the Fed. And it’s just the beginning.”

China’s digital yuan is little used, says ex-PBOC official

China’s central-bank digital currency (CBDC) has been little used so far, claims a former official of the People’s Bank of China (PBOC).

According to a report on the Caixin financial news outlet the former official, Xie Ping, expressed disappointment with the result of a trial in select provinces and cities. He told a conference that application of the so-called digital yuan (CNY) needed to be widened.

“The cumulative circulation of the e-CNY in the two years of the trial has been only CNY100 billion (US$14 billion),” he said, a figure that showed “usage has been low, highly inactive.”

“The results are not ideal,” Xie, a former PBOC director-general of research, said at the conference on digital finance held by Tsinghua University, according to Caixin. “What needs to change is the e-CNY acting only as a substitute for cash and only for consumption.

“Cash, bank cards and China’s third-party payment mechanisms have formed a payment market structure that has met needs for daily consumption. The common people are used to it, and changing it is difficult.”

e-CNY business had no synergistic effect and no commercial benefits in banks’ business, he said. Meanwhile, third-party payment systems, such as Alibaba Group’s Alipay, offered a more attractive range of functions, such as investment, insurance and consumer lending.

To address the problem, e-CNY usage could be expanded - for example, by letting individuals buy financial products with it, Xie said. It could also be connected with more payment platforms, to move into more consumption situations.

Afreximbank invests in Caribbean trade finance

The African Export-Import Bank, aka Afreximbank, has allocated US$1.5 billion to help Caribbean countries access its services.

The Cairo, Egypt-based trade finance company, which aims to “finance and promote intra-and extra-African trade”, said the arrangement followed the addition of nine Caribbean countries to its Afreximbank Partnership Agreement at the first Africa-Caribbean Trade and Investment Forum (ACTIF) in September.

The financing will help these countries access funding for tourism, healthcare, renewable energy, shipping, mining, agriculture and agribusiness, air links and aquaculture. Afreximbank will also look for ways to help small businesses in these countries, the company said in a news release. “These key sectors were identified following several Afreximbank-led business development and trade and investment promotion missions to the Caribbean,” the release added.

In September, Afreximbank launched a payment service called AfPAY, designed to facilitate easier transactions among African financial institutions.

“Afreximbank developed the product specifically to address the banking challenges confronting African economies due to the withdrawal of many international banks from the continent — exits attributable to stringent regulatory and compliance requirements as well as costs,” the company said in its announcement.

“Trade is the number one driver of growth, and banks’ inability to participate in trade transactions will lead to reduced growth in our economies and increased poverty.”

Twenty companies respond to Bank of England’s digital wallet challenge

Twenty companies have submitted applications to create a digital wallet for the Bank of England’s central bank digital currency (CBDC) project.

The BoE recently launched a tender for a sample digital wallet project as part of its CBDC initiative. The project, which has a £200,000 (US$242,000) budget and is set to run for five months, attracted 28 applications in total.

The deadline for applications was 23 December, and eight of the initial 28 applicants did not pursue their bid beyond the deadline.

The strong response from a diverse range of companies highlights the interest in the CBDC project and the potential for innovation in the financial sector. The selected company will have the opportunity to contribute to the development of the Bank’s CBDC plans and potentially shape the future of digital currency in the country.

According to its website, the BoE wants to develop a mobile wallet app, merchant website, and a back-end server for the core ledger as part of its CBDC project. The contract for this project is purely to establish a prototype for user experience testing.

Credit Agricole sets up bancassurance partnership with Italy’s Banco BPM

French banking group Crédit Agricole has signed a long-term bancassurance partnership in Italy with Banco BPM for non-life and credit insurance products and services.

Under the partnership, BBPM will bring its banking experience and distribution capabilities across Italy, while Crédit Agricole will provide its expertise in innovative insurance products and services through BBPM’s networks. The agreement will also see Crédit Agricole Assurances (CAA) buy a 65% stake in Banco BPM Assicurazioni, the Italian bank’s non-life insurance company, for €260 million (US$277 million).

The French group is already a major investor in BPM, which is Italy’s third-biggest lender, acquiring a 9.18% stake in the group last April to expand its banking partnership currently focused on consumer finance via the joint-venture Agos.

According to a Reuters report, the latest non-life partnership was finalised after Crédit Agricole outbid French insurer Axa.

Banco BPM CEO Giuseppe Castagna said: “We are extremely satisfied with the agreement reached with Crédit Agricole. The partnership with CAA will allow Banco BPM to leverage on the industrial expertise of the largest European player in the bancassurance sector.”

  • Industry roundup will next appear on 3rd January, when we resume a daily schedule from Monday to Friday. In the meantime, we wish readers a peaceful and prosperous New Year. We look forward to keeping you informed throughout 2023

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