Insurance Jottings
Two Articles on Nord Stream
- US Warns of Sanctions on European Firms and Insurers Over Russia’s Nord Stream
12 January 2021
The US State Department has told European companies which it suspects are helping to build Russia’s Nord Stream 2 gas pipeline that they face the risk of sanctions as the outgoing Trump administration prepares a final round of punitive measures against the project, two sources said on the 12th January.
“We are trying to inform companies of the risk and urge them to pull out before it’s too late,” a US government source said on condition of anonymity.
The US source said the State Department is expected to issue a report very soon on companies it believes are helping the Russia-to-Germany pipeline.
Companies which could be in the report include ones providing insurance, helping to lay the undersea pipeline, or verify the project’s construction equipment, the source said.
The companies could be at risk of US sanctions under existing law if they do not stop work.
Zurich Insurance Group could be listed in the report, the source said. The company did not immediately respond to a request for comment. (Zurich has since issued a statement: “Zurich has a comprehensive compliance framework in place and is committed to fully comply with any applicable sanctions regulations. We do not comment on specific customer relationships.”)
Nord Stream 2 did not immediately respond to a request for comment.
The US$11 billion pipeline, one of Russia’s most important projects in Europe, has sparked tensions between Washington and Moscow.
The Trump administration opposes Nord Stream 2, which would deprive Ukraine of lucrative transit fees, saying it would increase Russia’s economic and political leverage over Europe.
The administration has also pushed exports of US liquefied natural gas to Europe, a fuel which competes with pipelined gas from Russia.
The Kremlin says Nord Stream 2, led by state energy company Gazprom, is a commercial project.
Germany, Europe’s biggest economy, also says the pipeline is simply commercial. It needs gas as it shuts coal and nuclear plants on environmental and safety concerns.
US President-elect Joe Biden opposed the project when he was vice president under Barack Obama. It is uncertain whether he would be willing to compromise on the project after the 20th January when he takes over.
Gazprom halted Nord Stream 2 construction for a year after US sanctions in December 2019. But work has resumed as Gazprom hopes to complete the Nord Stream 2 pipeline under the Baltic Sea to double the existing line’s capacity.
The project is 90% complete with only a 62-mile (100-km) stretch in deep waters off Denmark left to complete.
Gazprom’s Western partners in the project are Germany’s Uniper, BASF’s Wintershall Dea, Anglo-Dutch oil major Shell, Austria’s OMV and Engie.
A US based industry source who has seen the State Department communications said European companies, including German ones, received the inquiries from the Trump administration over the past several months, dating back to October, about their activities relating to Nord Stream 2.
The State Department asked the companies in October if they were involved with Nord Stream 2 and whether any work continued after the 15th July and the value of any services or support.
On that date, US Secretary of State Mike Pompeo warned investors in Russia’s Nord Stream 2 and TurkStream pipelines they could face sanctions under the Countering America’s Adversaries Through Sanctions Act of 2017.
On the 1st January, the State Department reached out again with an urgent request, the industry source said, asking to set up a call that weekend with the Bureau of Energy Resources to discuss the details of the companies’ wind down activities.
The State Department did not immediately respond to a request for comment.
- Standard Club News: US passes additional legislation targeting the Nord Stream 2 and TurkStream 2 pipeline projects
14 January 2021
In December 2019 the US enacted Protecting Europe’s Energy Security Act (PEESA) as part of the National Defense Authorization Act (NDAA), which mandates the imposition of sanctions against foreign vessels engaged in the Russian Nord Stream 2 (NS2) and TurkStream 2 (TS2) pipeline construction projects. When completed, those projects will transport natural gas from Russia to Europe.
In 2020 the Protecting Europe’s Energy Security Clarification Act (PEESCA) was introduced to expand the proposed sanctions under PEESA to include vessels engaged in ‘pipe-laying activities’ in respect of the construction of NS2 or TS2 which includes site preparation, trenching, surveying and rock dumping.
It also proposed that sanctions should be imposed on foreign persons who are determined to have knowingly provided underwriting, insurance or reinsurance services necessary for the completion of these projects. In September 2020 the club issued a circular (linked in the attachment box) which advised members that P&I cover may be excluded if vessels are involved in any activities related to the NS2 or TS2 projects which are unlawful and/or placed the club at risk of breaching sanctions.
In January 2021 PEESCA entered into force in the US (under section 1242 of the NDAA 2021) following a vote by Congress to overrule President Trump’s veto of the legislation. It includes a government consultation requirement which means that before imposing sanctions under PEESCA, the US State Department shall consult with the governments of Norway, Switzerland, the UK and EU member states with respect to the imposition of such sanctions. Further details are provided in the client alert provided by Freehills Hogan & Mahar LLP which is available here.
Members are strongly urged to assess and mitigate the risks of entering into contracts on the NS2 or TS2 construction projects and exercise the fullest possible due diligence to avoid exposure to sanctions and enforcement actions. If members have any queries, they should contact their usual club contact for guidance.
Upstream energy rates soggy in contrast to wider sector momentum
In contrast to downstream and other sections of the energy sector, upstream placements are typically experiencing only soggy rate rises as plentiful capacity continues to absorb demand.
UK Businesses Face Miles of Red Tape with New Brexit Border Rules
While the mile-long lines of trucks have dissipated at ports, UK businesses are waking up to less visible forms of friction at the border with the European Union which may cause more enduring damage.
From health certificates to new taxes and additional paperwork, the cost of moving goods across the English Channel is rising due to Britain’s exit from the EU. Just 6% of firms told the Bank of England they were fully prepared for what was to come, and the headaches are just starting less than two weeks into the new system.
While each one of the new rules marks a minor shift from the border-free trade Britain enjoyed for four decades as a member of the EU, together they add up to a significant constraint. That’s already starting to upend supply lines and limit shipments for companies of all size. Those hit hardest are the UK’s 5.9 million small- and medium-sized businesses, which employ about three-in-five of those working in the private sector.
All told, Brexit may cost British exporters £25 billion (US$34 billion) this year as a result of weak demand and more red tape, shaving 1.1% off gross domestic product, according to a report on the 12th January by the trade insurance company Euler Hermes Group SAS.
“There’s so much complexity,” said Adam Marshall, director general of the British Chambers of Commerce. “It’s like an onion — the more you peel, the more you cry.”
Here are some of the biggest irritations hitting businesses because the UK is no longer a member of EU’s single market and customs union:
Rules of Origin
British firms post Brexit must show where their goods were made — and where the components in those products come from — to determine whether tariffs are levied on goods into the EU. Those regulations don’t exist for trade within the EU, making the old system far simpler. In addition, value-added tax (VAT) is now payable on all imports from the UK into the EU.
Confusion about the rules has already prompted complaints from big-name retailers such as Marks & Spencer Group Plc. Others have suspended sales to the EU. Debenhams temporarily switched off its Irish e-commerce site, while John Lewis Partnership Plc, Asos Plc, and Fortnum & Mason stopped deliveries to Ireland.
“Businesses have been completely blindsided by the ‘rule of origin’ part of the deal, which leaves them at a major competitive disadvantage when selling in the EU,” said Michelle Dale, senior manager at accountancy group UHY Hacker Young. “Unfortunately, not enough was done to prepare them.”
VAT
British exporters must register to pay VAT in EU nations. That is prompting a number of companies to halt their cross-border trade, said Stuart Lisle, chair of the Brexit taskforce at professional services firm BDO LLP.
“If we want to keep selling to customers from any EU state from our stocks in the UK, we must VAT-register in each target country immediately,” said Jennie Potts, co-founder of Mama Bamboo, which sells eco-friendly disposable nappies and wet wipes. “If we don’t, we will trigger immediate liabilities. It’s so irritating. We have to ask is it worth all the time and effort.”
Mr Lisle said many of his clients have not had to face those issues before and that the added costs and complexities “can be very expensive to administer.”
Health Checks
The Brexit deal didn’t align rules for cross-border shipments of phytosanitary products, which cover plants and seeds. Farm goods qualify for zero-tariff, zero-quota terms, but that doesn’t apply to live plants.
For Andrew Skea, director of Potato House in Dundee, Scotland, that effectively means that the EU just isn’t accepting his seed potatoes. The product has been grown in Scotland for over 100 years, and half of Skea’s sales are in the EU.
“Until now the EU has been a domestic market for us,” he said. “Now we’ll need phyto-sanitary certificates, and the paperwork’s going to have to accompany every order.”
Red Tape and Paperwork
In an effort to simplify the forms they must file, some shippers are now refusing to carry loads containing a mix of different products from different companies, according to trade body Scotland Food and Drink. That disproportionately hurts firms shipping in smaller quantities. Another issue is that the terms of the deal were announced only days before the deadline for compliance.
“If you’re only issuing guidance hours before the end of the transition period and businesses are busy dealing with the pandemic, things will start to fall apart — and they are starting to fall apart,” said James Withers, chief executive officer of the trade group. It’s asking the government to request a grace period on enforcement by the EU until July.
Port Delays and Costs
The cost of shipping goods across the border is rising with delays at ports and some trucking firms reluctant to deal with the hassle.
“Things keep getting stuck,” said Oliver Conger, managing director of Rototherm Group, a maker of sensors and now personal protective equipment. “I’m now having to buy up what stock there is in the UK at three times the price.”
Tough new Covid-19 lockdowns which shut non-essential businesses aren’t helping. Four in ten companies said their cash flow deteriorated in the fourth quarter, with the very smallest hit even harder, according to a survey by the British Chambers of Commerce.
“Thousands of small firms need to invest in tech, advice and operational adjustments in order to keep trading across the EU but don’t have the cash needed to do so,” said James Sibley, who follows international affairs at the Federation of Small Business.
Duel Certifications
Products sold in the EU require a CE mark showing they meet health, safety and environmental standards. The UK will develop its own certification, meaning companies selling in both regions need to register for both standards.
“It’s such a ridiculous level of duplication,” Renee Watson, founder of The Curiosity Box, a subscription service that teaches kids about science. With annual sales of £500,000 (US$673,000), the company will have to spend £20,000 on new safety marks to sell in the Netherlands, France and Germany.
Ms Watson identified 26 areas of her business that would be affected by Brexit. “I’ve struggled to allocate that much time.”
Standard Club Article: UK sanctions after Brexit: what has changed?
12 January 2021
From 11pm on 31 December 2020, EU sanctions ceased to apply in the UK. The UK’s sanctions framework is now regulated principally by the Sanctions and Anti-Monetary Laundering Act 2018 (the ‘Sanctions Act’).
Under the Sanctions Act, UK ministers can make regulations to implement UN sanctions and/or to impose sanctions for various defined purposes, such as the protection of international peace and security and the furtherance of the UK government’s foreign policy objectives.
Has anything changed?
Various statutory instruments have already been created under the Sanctions Act, many of which took effect at the end of the Brexit transition period. To date, the instruments predominantly implement UN sanctions into UK law and /or mirror existing EU sanctions.
However, whilst there may be continuity in the policy objectives of such legislation, not all of the UK regulations are identically worded and some are more detailed than their EU counterparts.
Consequently, some sanctions have the potential to apply differently in the UK. For example, under the EU Council Regulation No 833/2014, EU parties are prohibited from engaging in certain activities with any ‘natural or legal person, entity or body in Russia for use in Russia’.
Such activities include the supply of dual-use military goods as well as various technical, broking or financial services in the energy sector. Under the UK’s Russia (Sanctions) (EU Exit) Regulations, similar activity based restrictions apply to any ‘person connected with Russia’. A person ‘connected with Russia’ is defined to include individuals and companies ordinarily resident, domiciled, located or incorporated in Russia. It has been suggested that this definition may introduce restrictions on certain activities with Russian companies in their operations outside of Russia.
Over time, there is likely to be more divergence. In July 2020, the UK enacted the Global Human Rights Sanctions Regulations 2020. Under this legislation, the UK has independently sanctioned at least 68 individuals and entities in connection with human rights abuses.
Designations under this legislation have been made against individuals and entities in Russia, Saudi Arabia, Myanmar, North Korea, Belarus, Venezuela, the Gambia and Pakistan. In December 2020, the EU announced a similar global human rights sanctions regime, but designations under this new EU framework will be independent of the UK’s regime.
Of further is note is that the UK’s Office of Financial Sanctions Implementation has published guidance on sanctions specifically for the maritime sector which may indicate particular scrutiny by the UK on the shipping community. For further information on this guidance, please refer to our alert.
Who do UK sanctions apply to?
UK sanctions apply to the conduct of all UK persons, wherever they are in the world, including branches of UK companies based overseas. UK sanctions also apply to all persons conducting business in the UK, which includes UK-based P&I clubs.
What do I need to do?
Members conducting business with a UK nexus should review their sanctions policies to ensure that the impact of UK sanctions has been properly considered. In particular, such members may need to screen specifically against the UK Sanctions List in addition to other applicable sanctions lists such as the EU Consolidated Financial Sanctions List and the US Specially Designated Nationals and Blocked Persons List.
The UK government’s sanctions list can be found here. Members with a UK nexus who trade in heavily sanctioned jurisdictions, such as Russia, should review the terms of the new legislation and consider whether their activities might be restricted under the UK’s legislation and/or whether they might require a license.
Members should also consider reviewing their contractual sanctions clauses to ensure that, if appropriate, the UK is specifically mentioned as an relevant sanctions regime. By way of reminder, the Standard Club rules define ‘sanctionable conduct’ by reference to sanctions applicable in the EU, UK, USA, the place of incorporation or domicile of the member and/or the ship’s flag.