Insurance agencies would love to know who blew up Nord Stream
Analysis by Foreign Policy

WORLD  21 March 2023 - 06:00

The Foreign Policy magazine has published an article arguing that an era of gray zone warfare and sabotage creates tough financial questions. Caliber.Az reprints the article.

The 2020’s most fascinating whodunit is playing out on computer screens around the world: Government investigators, hobby sleuths, and curious members of the public are trying to establish who sabotaged the Nord Stream 1 and Nord Stream 2 gas pipelines last Sept. 26. But while most of us are simply eager to know who the culprit is, it’s a far more consequential matter for the private sector.

Western European companies invested billions of dollars in the pipelines. Whether their insurance will cover the losses caused by the sabotage depends on who perpetrated it. And as the global geopolitical standoff intensifies, companies face many more enormous losses, hunts for the perpetrator, and disputes about whether the harm was an act of war.

Was the culprit a commando traveling from Germany’s Rostock Port toward the Nord Stream pipelines on a rented yacht 20 days before the blast, leaving explosive residue behind in the vessel? Were the passengers linked to the blasts that disabled the pipelines a short time later? Or should we instead focus our attention on the oil tanker Minerva Julie, which hovered above the blast sites while traveling between Rotterdam, Netherlands, and St. Petersburg, Russia, in the weeks before the blasts? Were both involved? If so, were they connected to the government of Russia or another country?

Authorities in Sweden and Denmark, in whose exclusive economic zones the blasts occurred, are investigating as are German federal police agencies. But so, too, are Russian authorities (conclusion: Britain’s Royal Navy did it), open-source intelligence specialists, journalist Seymour Hersh (conclusion: America did it), and countless would-be sleuths with no particular skills but enormous curiosity.

For the pipelines’ owners though, the investigations are about hard cash and clear evidence, not speculative theories: Four Western European energy companies own 49 percent of Nord Stream 1, whose construction cost 7.4 billion euros ($7.9 billion). Germany’s E.ON and Wintershall Dea own 15.5 percent each, and France’s Engie and the Dutch firm Gasunie own 9 percent each. Russia’s Gazprom owns the rest, and it also owns Nord Stream 2—but the Western European group provided 50 percent of Nord Stream 2’s $10.3 billion financing. With the pipelines unusable, the companies are trying to recover at least some of the billions of dollars involved

But who pays? “That’s the question,” said Neil Roberts, secretary of the maritime insurance industry’s Joint War Committee. “It’s not unheard of for pipelines to be blown up. The Caño Limón-Coveñas pipeline in Colombia was targeted weekly by insurgent groups in the late ’90s through the 2000s and is still being hit regularly.” Most pipelines, though, go overground, whereas Nord Stream is located at the bottom of the Baltic Sea. Who pays? “We’ve got various Russian entities, Western companies, Western insurers, possibly other insurers,” Roberts said. “It’s a mess. The rules that apply to peacetime don’t apply anymore.”

That’s exactly the problem facing not just Nord Stream’s European co-owners and their insurers but all manner of companies stuck in the middle as the world’s geopolitical standoffs intensify. Only Nord Stream’s participants and their insurers know exactly what deals the pipelines have, but it’s safe to say that owners and their insurers will take different views of whether the sabotage is covered or not.

“It’s assumed they have property insurance, which is the meat and potatoes of corporate insurance,” Laura Burns, a senior executive looking after political-risk insurance for global insurance brokers Willis Towers Watson (WTW), told Foreign Policy. “The question is whether they also have terrorism insurance that can be extended to cover political violence or political-risk insurance that also covers political violence and government actions. There’s a place in the market that covers war, but you’ve got to buy that policy.” (Full disclosure: I serve as an occasional advisor to WTW.)

Most property insurance policies have a war exclusion, and that’s why the perpetrator’s identity matters so much. If it were a state or if a state backed the sabotage, then insurers could argue the sabotage was an act of war and decline to make payouts unless the companies have separate war insurance. But then again, with no war going on directly involving the countries where the Nord Stream leaks occurred (Sweden’s and Denmark’s exclusive economic zones), can an attack be treated as a stand-alone act of war? And if not, should it be considered an act of terrorism? Sabotage?

These are the Gordian knots facing multinational companies and their insurers—not just in the Baltic Sea but around the new world of gray zone warfare. In January, Irish firm Zephyrus Capital Aviation Partners 1D sued its two insurers over a plane it owned that has been seized by Russian authorities. After the West imposed sanctions on Russia that prevent Western firms from servicing aircraft leased by Russian firms, Russia seized more than 400 Western-owned planes leased by Russian companies. Zephyrus, which lost an aircraft this way, argues that because its insurance includes an “all-risks policy” and a “war and allied risks” section that includes war and nationalization, the seizure of its aircraft is covered.

Last year, Merck—which had been damaged by Russia’s 2017 NotPetya attack, won a similar case against its insurer, Ace American, which had argued that NotPetya constituted an act of war and was thus exempt from the Big Pharma giant’s all-risk insurance policy. (Merck lacked separate insurance covering war.) Massive amounts of money are at stake: When New Jersey Superior Court ruled that NotPetya was not an act of war, it meant Ace American was responsible for the $1.4 billion in losses NotPetya had caused Merck.

The same goes for the owners of aircraft seized by Russia and for Australian winemakers who lost 97 percent of their exports to their main export market—China—after Beijing imposed punitive tariffs in response to Australia calling for an independent COVID-19 investigation. It goes for the Taiwanese companies whose exports China blocked to avenge then-U.S. House Speaker Nancy Pelosi’s visit to the island last August, and for the Lithuanian companies whose Chinese exports Beijing blocked in 2021 when Lithuania invited Taiwan to open a representative office in Vilnius.

Harming companies is not war—but is it a contemporary equivalent of war? That’s why it matters who placed the explosives on the bottom of the Baltic Sea. If it were a state or someone acting on behalf of a state, then insurers could argue it was an act of war. That could make matters very expensive for Nord Stream’s owners. “That’s why it matters so much what kind of insurance these companies have bought,” Burns said.

But will the Swedish and Danish authorities conducting the official investigations into Nord Stream deliver a verdict? It seems unlikely. Depending on the findings, the investigation’s result could destabilize the Baltic Sea—the little ocean that a decade ago was so peaceful it seemed a natural home for two marquee pipelines—even more.

An era of confrontation without formal conflict is a mess—especially legally. In the unlikely event that the perpetrator is identified beyond reasonable doubt, the companies involved and their insurers will still need to settle the definition of war—a question that has puzzled philosophers and strategists for millennia. This may need to be hashed out in future courts. At the moment, war is defined by New Jersey Superior Court.

Caliber.Az