The war has caused widespread disruption to global shipping, and is likely to exacerbate ongoing supply chain disruption, port congestion and crew crises caused by the Covid-19 pandemic.
The shipping industry has been affected on multiple fronts, with the loss of life and vessels in the Black Sea, disruption to trade with Russia and Ukraine, and the growing burden of sanctions. The industry also faces challenges to day-to-day operations, with knock-on effects for crew, the cost and availability of bunker fuel, and the growing threat posed by cyber risk.
“Despite the tragic situation in Ukraine, and the threat to seafarers caught up in the conflict, the direct impact on shipping from the war in Ukraine has so far been largely contained to the Black Sea,” says Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS. “However, the war is creating an additional burden on the maritime industry, which is already dealing with ongoing supply chain disruption, port congestion and a crew crisis caused by the pandemic.”
The International Monetary Fund (IMF) [1] warned that the war in Ukraine will exacerbate already high shipping costs this year, and could keep them – and their inflationary effects – higher for longer. The cost of shipping a container on the world’s transoceanic trade routes increased seven-fold in the 18 months following March 2020, while the cost of shipping bulk commodities spiked even more.
“Trade with Russia and Ukraine will suffer, adding to already strained global supply chains. Longer term, sanctions and a reduction in trade with Russia, could result in the redrawing of some supply chains and trade routes, but this all takes time and comes at a cost,” says Khanna.
The biggest impact of the war so far has been on vessels operating in the Black Sea and/ or trading with Russia. Ukraine’s major ports, including that of Odessa, were closed due to the conflict and a Russian naval blockade of Ukraine. The country ships over 70% of its exports, including 99% [2] of its corn exports. Hundreds of vessels were trapped in ports or at anchor while thousands of Russian and Ukrainian crews faced an uncertain future, unable to leave vessels or return home.
Russian vessels were also banned from entering UK and EU ports, and have been detained due to suspected sanctions breaches: in February 2022, French warships detained Russian roll-on/roll-off cargo ship Baltic Leader en route to St Petersburg while more than a dozen Russian-owned superyachts have been seized.
The Russian fleet has also been denied access to vital maritime services. A number of ports have withdrawn bunkering services for Russian-owned or flagged vessels, while engine manufacturers, maintenance companies, classification societies and insurers have said they will no longer serve Russian vessels.
The conflict is also having a knock-on effect for shipping outside the conflict zone. US and EU sanctions, in particular, pose a significant compliance challenge for shipping companies and insurers. Many western companies have voluntarily opted to cease trade with Russia, creating a complex and uncertain legal situation for contracts, including insurance.
A prolonged conflict is also likely to have deeper economic and political consequences, potentially reshaping global trade in energy and other commodities. An expanded ban on Russian oil could push up the cost and availability of bunker fuel and potentially push shipowners to use alternative fuels.
“We have already seen requests from ship owners who are considering using non-compliant bunker fuel that has a lower explosive temperature,” says Justus Heinrich, Global Product Leader Marine Hull at AGCS. “Longer term, we may see a shortage of bunker fuel with more and more vessels having to turn to non-compliant or substandard fuels, which could result in machinery breakdown claims in the future.”
A large part of the shipping sector will in some way be touched by the conflict, says Khanna. “In addition to the physical threats to shipping in and around the Black Sea from mines and rocket attacks, which is affecting trade, the availability and cost of bunker fuel, and the safety and welfare of crew, many container companies have already pulled out of Russia while the tanker sector faces huge restrictions and disruption, as do bulk and general cargo operators shipping Russian coal, wood and grain.”
Coinciding with Covid-19 outbreaks in China, the war in Ukraine is compounding ongoing supply/ demand pressures for shipping, which have resulted in port congestion, higher freight fees and longer transit times. According to Clarksons Research [3] container and car carrier congestion at ports is trending towards previous highs, while the impacts of the war are likely to create further inefficiencies across the maritime transport system.
Vessels and crew trapped in a war zone
As of the beginning of April 2022, numerous merchant vessels were trapped in Ukrainian ports along the Black Sea and the Sea of Azov, while vessels in the wider region were at risk from sea mines, rocket attacks and the threat of detention.
At the start of the conflict approximately 2,000 seafarers were stranded aboard 94 vessels in Ukranian ports, according to the International Maritime Organization (IMO) [4].
As of April 20, 2022, 84 merchant ships remained with nearly 500 seafarers on board. An estimated 1,500 seafarers have so far been repatriated with manning levels reduced, local ship keepers employed to replace crew, while some ships are in cold lay-up with no crew on board. For those that remain, the (IMO) [5] called for the urgent establishment of a blue safe maritime corridor to allow the evacuation of seafarers and ships from the high-risk and affected areas in the Black Sea and the Sea of Azov. However, it is uncertain whether it will be safe for vessels to leave
NATO [6] issued a warning in April 2022 that the ongoing risk of collateral damage or direct hits on merchant shipping in the Black Sea was high, while harassment and diversion of shipping in the area cannot be ruled out. It also said drifting mines in the Northwest, West, and Southwest areas of the Black Sea posed a threat to shipping.
At least eight merchant vessels were attacked in Ukrainian ports and the Black Sea during the first month of the conflict. Three cargo ships — Japanese-owned Namura Queen, Lord Nelson and Helt — were attacked in the Black Sea, according to Panama’s Maritime Authority [7] . The Helt sank off the coast of Odessa having likely struck a mine, killing two crew.
The sinking came shortly after a Bangladeshi cargo ship [8] was attacked in the Ukrainian port of Olivia, killing one of its crew members. The Moldovan-flagged chemical tanker, the Millennial Spirit, and the Turkish-owned bulk carrier Yasa Jupiter were also attacked, while the Malta-owned Dominica-flagged cargo ship Azburg sunk in April after it was hit in the Ukrainian port of Mariupol.
There is a risk the conflict could spill over. Stray sea mines have already been detected in Turkish and Romanian waters, whilst Ukrainian and Russian assets could conceivably be targeted outside the war zone.
In April 2022, the London market’s Joint War Committee extended its high-risk advisory to include all of Russia’s waters. Vessels entering high-risk areas must notify their insurers and pay an additional premium for war coverage. Following the invasion on February 24, insurers designated Ukrainian and Russian waters around the Black Sea and Sea of Azov as high-risk areas, as well as waters close to Romania and Georgia.
Potential marine claims and coverage issues
Marine insurance losses from the war in Ukraine are currently limited, although the conflict is likely to create uncertainty and legal questions for affected hull and cargo policies.
Certain claims have to be denied under sanctions and war clauses
The insurance industry is likely to see a number of claims under war policies from vessels damaged or lost to sea mines, rocket attacks and bombings in the conflict zone in the Black Sea and Sea of Azov. Insurers may also face claims under marine war policies from vessels and cargo blocked or trapped in Ukrainian ports and coastal waters by the Russian blockade.
More uncertain is the potential for non-war claims in hull and cargo insurance from vessels caught up in the conflict, explains Justus Heinrich, Global Product Leader Marine Hull at AGCS. “We can predict the various scenarios under war cover, but it is much harder to predict how non-war losses could develop for vessels trapped in Ukrainian ports and the Black Sea. There are potential issues around safe navigation, crew, maintenance and salvage for these ships if they are unable to leave.”
Marine insurance policies typically exclude the seizure of ships or physical damage caused by war or hostile actions, such as damage from sea mines or attacks on vessels. However, most prudent ship owners will purchase additional war insurance, which will cover such losses for an additional premium, and for a limited period of time, typically seven days. Insurers are also not able to pay claims that are covered by sanctions.
Cover for non-war related damage or machinery breakdown may still be available where insurers are not able to cancel hull and cargo policies for affected ships.
Shipping trapped or blocked in the Black Sea is a particular challenge. Even if safe passage is afforded out of the conflict zone, vessels may not feel confident in using maritime safe corridors or running the risk of sea mines. However, the longer vessels are trapped, maintenance and crew welfare will be harder to sustain. Some crews have reportedly abandoned their ships in Ukraine due to security worries.
Given the legal and reputational risks, many companies (including insurers) have pulled back from trade with Russia. However, insurers will be required to honor valid contracts until renewal, but certain claims have to be denied under sanctions and war clauses, says Heinrich.
Cargo in storage or in transit may be damaged or abandoned due to the conflict or if a vessel is trapped in port. Trapped vessels or ships affected by sanctions may suffer machinery breakdown or damage by fire, collision or grounding.
Claims that arise under hull and cargo policies that are not directly related to the war could be difficult to resolve, involving complex legal questions and policy interpretation, explains Heinrich. For example, sanctions may prohibit a portion, but not all of an insurance claim. Claims involving trapped vessels could fall under hull insurance or war insurance, depending on the circumstance.
Renewals could also prove complicated for vessels affected by the conflict. For example, vessels trapped in the Black Sea may need to continue to pay an additional premium to war insurers to maintain cover, which could become uneconomical if the conflict is prolonged. Trapped vessels may also need to renew their hull insurance to maintain cover.
“We have identified vessels that are affected by the conflict and are keeping an eye on the status of these ships,” says Heinrich.
Conflict may exacerbate crew shortage
The Ukraine invasion also has ramifications for the global maritime workforce, which is already facing shortages as it comes out of the pandemic.
Around 2,000 seafarers were thought to be stuck on vessels in Ukrainian ports following the outbreak of the Ukraine invasion. Trapped crews face the constant threat of attack, with little access to food or medical supplies. Tragically, a number of crew have already been killed in attacks.
A significant proportion of the world’s 1.89 million seafarers originate from Russia and Ukraine: according to the International Chamber of Shipping (ICS) [9], Russian seafarers account for just over 10% of the shipping’s total workforce, while a further 4% are from Ukraine.
With many direct flights to Russia suspended, and with fewer vessels calling at Russian and Ukrainian ports, seafarers from these countries may struggle to return home at the end of the current contracts.
“Seafarers in the Black Sea are in a perilous situation, stuck on board vessels or in ports with dwindling supplies and under fire. This is yet another blow for the industry and global supply chains. Crew levels have not yet returned to normal levels, and now many Russian and Ukrainian seafarers may be unable to return home or rejoin ships,” says Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS.
Regular crew changes are required across the world to ensure the flow of seafarers is maintained. Last year, the ICS and shipping trade association BIMCO [10] warned there could be a “serious shortage” of officers within five years if action is not taken to increase training and recruitment levels. The report predicted that there will be a need for an additional 89,510 officers by 2026, yet there was a shortfall of 26,240 certified officers in 2021.
Evolving sanctions regime increases compliance burden
The range of sanctions against Russian interests presents a sizable compliance challenge.
Western countries have introduced a raft of sanctions against Russian companies, banks and individuals, since the invasion of Ukraine. To varying degrees, the US, EU and Australia have banned imports of Russian oil, gas and coal while the EU also placed sanctions on Russian iron, steel, coal, cement, timber and luxury goods. In Asia, Japan stopped exports of luxury cars and other items to Russia while Singapore implemented export controls on technology and military exports to Russia.
The reputational risk and threat of further sanctions has led many companies and shipping groups to review their appetite for trade with Russia. However, supply chains in a number of industries, including automotive, electronics and agriculture, are reliant on raw materials and components from Ukraine and Russia, while some sanction regimes exempt certain products. Many companies have entered into contracts with Russian companies that they are unable to cancel.
Violating sanctions can result in severe enforcement action, yet compliance is complex and evolving. It can be difficult to establish the ultimate owner of a vessel, cargo, or counterparty. Sanctions also apply to various parts of the transport supply chain, including banking and insurance, as well as maritime support services, which makes compliance even more complex. The UK and EU, for example, banned insurers and reinsurers from underwriting the Russian aviation and space industry.
“The sanctions regime poses a high compliance risk for shipping companies and insurers,” says Justus Heinrich, Global Product Leader Marine Hull at AGCS. This is a dynamic and complex situation, and we have to take each contract on a case-by-case basis. While some Russian entities are sanctioned, there are exemptions and there may be multiple sanctioned parties within the supply chain. There are also challenges around how to manage exposures and services claims in Russia.”
References
[1] International Monetary Fund, How soaring shipping costs raise prices around the world, March 28, 2022
[2] Politico, Ukraine says EU road links won’t make up for loss of Black Sea trade, April 5, 2022
[3] International Union of Marine Insurance, Disruption to global logistics and supply chains remains widespread: Clarksons, March 30, 2022
[4] Reuters, Food supplies running low on foreign ships, March 23, 2022
[5] International Maritime Organization, IMO Council decisions on Black Sea and Sea of Azov situation, March 11, 2022
[6] NATO, Risk of collateral damage in the North Western, Western, and Southwest Black Sea, April 13, 2022
[7] Reuters, Panama say three ships hit by Russian missiles in Black Sea since start of Ukraine invasion, March 17, 2022
[8] Reuters, Two cargo ships hit by blasts around Ukraine, one seafarer killed, March 3, 2022
[9] International Chamber of Shipping, Supply chain issues will be compounded by lack of Ukrainian and Russian seafarers, says global body representing international shipping, March 10, 2022
[10] BIMCO, New BIMCO/ICS Seafarer workforce report warns of serious potential officer shortage