More than 750 Western companies have left Russia since it invaded Ukraine. Some had no choice because their sectors fall under Western sanctions. Others have voluntarily gone and been hailed for standing for democracy. Their departure may have another, less exalted reason: Russia is becoming uninsured.
Insurance is necessary for globalization: It captures the risk of operating in unstable environments, enabling companies to do business in a wider range of locations. Certain forms of insurance – such as cargo and liability – are mandatory for companies based in the West. Other forms of insurance are voluntary but essential to operations in less stable nations. Political risk insurance protects policyholders against various risks ranging from expropriation of assets to civil unrest. Such protection has enabled countless Western companies to establish themselves in Russia and continue to operate there, even as Vladimir Putin’s regime became more capricious. Without insurance, it is likely that some Western companies would have left the country after the Russian authorities’ raid in 2011 on BP’s office in Moscow.
Now, however, insurance coverage is declining. “The political risk insurance market is essentially closed to Russia and to Belarus and Ukraine,” said Laura Burns, a political risk expert at insurance broker Willis Towers Watson.,
say. “Because of the sanctions, there is really no new investment in Russia anyway. But if a company wanted to insure their existing investment, it would not be able to get political risk insurance at the moment.” This is hardly surprising. Political risk insurance companies protect companies from a range of disasters, including economic turmoil and government interference. As Russia is now, it would simply be too risky to offer political risk insurance to new customers.
Sanctions against Russia further increase the risk. “Western sanctions are extremely extensive,” said Neil Roberts, head of shipping and aviation at the insurance industry body Lloyd’s Market Association. “The problem for insurers is that there is a lack of harmony in countries’ sanctions, so insurers must err on the side of caution.” This means that one chooses not to sign policies with a new customer, even when operating in a sector that is not subject to sanctions, such as grain. If the policyholder turns out to be affiliated with a company that is under sanction, the insurance company may attract the attention of the U.S. Treasury Department for control of foreign assets, which could mean severe fines or even jail time for executives.
Insurance companies can not break existing contracts for no reason. But when policies in Russia expire – for most types of compulsory insurance they run for six or 12 months – many insurance companies will refuse to renew. Freight insurance companies have already begun to suspend coverage in Russia and Ukraine. Political-risk insurance is generally taken out for several years, but when a company’s mandatory coverage expires, it can still not operate in Russia.
There are Russian providers of compulsory insurance such as cargo, liability and real estate, but some of these are subject to sanctions and others are at least largely unknown by Western companies.
Expect Western corporate emigration from Russia to accelerate as these contracts expire. But it is not easy to wind up complex business operations, and many companies are likely to stay until their insurance ends, hoping to save as much as they can. Mr. Putin and Russian prosecutors have warned that the Russian government could seize the assets of outgoing Western companies. Some Western companies have legitimate reasons to stay in Russia because they supply essential goods or medical equipment. But they face the same insurance dilemma as all other Western companies. When the coverage expires, whether the companies have settled their financial transactions or not, they will have to leave.
“Some companies have already said they want to quit, but you have to look at the mechanics,” says Ms. Burns. “Who are they going to sell to? And if they manage to sell, can they get the proceeds out of the country, given that they only get rubles? It’s like ‘Hotel California.'”
Ms. Braw is a fellow at the American Enterprise Institute.
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