Knock-on effects of the Black Sea conflict
As tensions rise between Russia and Ukraine there are potentially troubling implications for shipping. While the focus is currently on the land border, soon eyes will likely turn to the sea and the potential for maritime aggression. What will it mean for seafarers, trade and ships?
THE RUSSIAN LAKE
The Black Sea is a critical trade crossroads and a vital transit corridor for goods and energy on the global market. Given the current regional security situation, any escalation would likely see Russia seek to choke regional ports and sea lanes, crippling commercial routes.
This is not a new problem, shipping traffic to and from Ukraine’s ports have long been seen as a point of potential vulnerability. Indeed, when Russia annexed Crimea in 2014, it took control of the Ukrainian exclusive marine economic zone around Crimea and built the “Crimea Bridge” spanning the Kerch Strait, denying navigational access to Panamax Class vessels to the ports of Mariupol and Berdyansk.
Already there are actions to undermine the economic viability of Ukraine, such as live-fire exercises in the Black Sea. All part of a strategy to enable Russia to slow maritime trade and impede exports, which ultimately has an impact on international
In assessing the maritime security implications, Russia’s naval superiority will almost inevitably mean control of maritime traffic in the affected sea area. It is also possible that sea mines will be deployed, and so civilian shipping will be at risk of collateral damage. While the use of cyber-attacks and jamming or spoofing of AIS/GPS by Russia is also likely. Shipping is particularly sensitive and vulnerable to these kinds of attacks, and the safety of navigation will be compromised in such an event.
USE OF BLOCKADES
If the situation worsens, Russia will seek to deny Ukraine’s industrial exports, and ultimately its earnings. The use of blockades is an inevitable extension of such conflict, as a blockading power seeks to cut off maritime transport from and to the
Such a step would have massive implications for not only Ukraine but for shipping too. Blockades inevitably impact and restrict the trading of neutrals and so commercial shipping of whatever flag could find itself at risk of being stopped and
inspected. While there is an obvious risk of aggression too, whether intended or accidental.
The recent Russian live-fire maritime exercises were seen by Ukraine as an unofficial “blockade” and drew condemnation from the Ukrainian Navy. They claimed Russia’s actions posed a threat to Ukraine’s sovereign rights in the exclusive
maritime economic zone and are a violation of the UN Convention on the Law of the Sea (UNCLOS).
To counter these actions, Ukraine has established a sea corridor to allow vessels safe passage. The corridor in the Gulf of Odessa has a confirmed depth of 15-22.5 metres and has been used successfully by bulk carriers to access local ports.
Though again, the impact of potential cyber attacks on vessels or navigation aids would have to be factored into decisions on safe navigation.
THE WAR RISK EFFECT
For the shipping industry, such threats, concerns and uncertainty make for an extremely challenging operational environment. From an insurance perspective, this comes in the form of a change in risk status as the Lloyd’s Market Association Joint War Committee (JWC) has placed the Russian and Ukrainian parts of the Black Sea and the Sea of Azov in its top-risk category (JWLA-028). https://www.lmalloyds.com/lma/jointwar
The decision is a precautionary measure, and the JWC stressed that while no maritime incidents have yet occurred, they feel the possibility of a miscalculation is clear, and so underwriters will need notification, and any shipping company now
wanting a vessel to trade in those parts of the Black Sea will need explicit agreement from insurers to enter the newly listed area. A permission that will come with an additional premium to be paid. Or perhaps, if the situation escalates further, then a
refusal to grant cover altogether.
The new risk categorisation sees the dynamics of business change, with knock-on effects all along the commercial chain. Charterers may even find owners less amenable to port calls in Ukraine. Owners may pull their vessels from the open Black
Sea market altogether, meaning far fewer ships to choose from if any. In addition, crew qualify for additional compensation and may also have a right to refuse sailing and be repatriated at the company’s expense. Making trading there more difficult and potentially more expensive. Or if too few seafarers agree, it could mean ships being unable to sail.
The issue of insurance is an important one, so when intending to transit through a war risk area, ship owners have a tough choice to make. Do they take out extra insurance cover to mitigate the risk, cover the risk through their own in-house insurance pool or take the risk themselves? Many do tend to take extra cover, which in addition to allowing vessels cover in areas of war, it will also compensate the owner for the total loss of the ship if he has been deprived of the ship by the intervention of foreign state power.
War risk clauses also generally give the owners the freedom to refuse transit through any area which the Master or owners reasonably consider will expose the vessel to war risks, and in certain circumstances to discharge any cargo on board at a safe
alternative place of their choice.
An issue that is likely to be of significance in the Russia/Ukraine conflict is that of cyber risk. Indeed, the definition of “war” can vary significantly between clauses, and there may be exclusions in place. War risk insurance does not usually cover loss as a result of discharge of a nuclear device, bio-chemical or electromagnetic weapon, however, the issue of cyberattack is a thorny issue. The LMA has been drafting clauses, and there are clear exclusions. However, there are complications in determining whether a cyberattack constitutes a war risk or not. Cue confusion and concern from shipowners. Could this yet be more reason that owners may want to keep vessels clear?
RISK V REWARD
If ships do avoid the area, there will be serious potential impacts to trade, with large scale exports such as steel, coal, fuel and petroleum products, chemicals, machinery and transport equipment and grains like barley, corn and wheat all impacted. In
wider markets there are likely to be shortages and price rises.
While losing access to the Black Sea would have devastating consequences for the Ukrainian economy. For shipping companies, balancing the risks of keeping tonnage north of the Turkish Straits, or agreeing to pass through into the Black Sea, there are a number of challenging decisions to be made, and it could see vessels pulled, or older tonnage used. If ships do vacate the Black Sea or avoid it altogether, then several important non-Ukrainian ports could also be heavily impacted. Those such as Constanza (Romania), Varna and Burgas (Bulgaria), Batumi (Georgia). As well as key rivers such as the Danube, Dnieper, and Dniester.
This would also have a significant and wider impact on shipping, freight rates, and commodity prices too. Cargoes would have to be sourced elsewhere, thus more cargo miles, meaning more ships having to sail further for longer, with potentially
time spent waiting. A war, or even the threat of one, heavily skews the shipping market with knock-on effects and reverberations felt far and wide.
Geollect has been keeping our followers up to date and our finger on the pulse of developments in Ukraine by providing daily briefings from our intelligence team, all of which are available on our Linkedin page https://www.linkedin.com/company/geollect.
We will continue to monitor and provide narrative to the situation as it continues to evolve. To discuss your requirements, or to dive deeper into the current Black Sea situation and the wider shipping or political landscape, contact get in touch with us via firstname.lastname@example.org