It comes as no surprise that the war on Ukraine is unraveling the fabric of the global supply chain. It is causing a cascading effect on the world, which is already distraught from the pandemic, climate change, and geopolitical tensions. The throttling of exports from Russia and Ukraine is driving up prices and leading to fear of food and energy security in prosperous European nations and poor developing nations alike. The immense human suffering continues as the power play of securing new independent supply lines remains at the fore. All the while, sanctions choke even those who are issuing them.
Casualties of the War
At least 8 civilian merchant vessels were attacked in the first month of the conflict. Many ships have been hit by missiles or have struck stray mines. Ships have been caught in the crossfire, and across these events, sailors have died. Russian forces have blocked access to the Sea of Azov, a crucial access point to Ukraine, along with parts of the Black sea that are now reported to be too dangerous to cross . There is also the risk of mines adrift in the sea. The Turkish Navy has already detected and defused several naval mines in the Black Sea. NATO issued a warning in April 2022 stating the high risk of collateral damage to ships in the Black Sea area and the possible risk of harassment and diversion of vessels also being a possibility .
There are seafarers trapped in the Black Sea, unable to leave, stuck on board with supplies dwindling. On April 20th, 2022, 84 merchant ships were still stuck in Ukrainian ports with around 500 crew onboard . IMO is calling for establishing a blue safe maritime corridor for the evacuation of these sailors from the Black Sea and the Sea of Azov.
Ripples in the Maritime World at Large
Shipping giants Maersk, CMA CGM, and MSC suspended all bookings to Russia except the goods marked as essential such as food, medical equipment, and humanitarian supplies over its invasion of Ukraine. Other companies are following suit. As vessels shun these waters due to fear of sanctions, the stigma of having Russian associations, or safety reasons in general, a few unpleasant side effects arise that are difficult to mitigate.
Crude Oil Carrier Prices Increased
One side effect is the price rise of crude oil and gas. Russian oil now has an asterisk next to its name. The number of tankers effectively has become lower due to the soft boycott of Russian vessels, and vessels are taking circuitous routes to avoid sanctions and fulfill new demands. Fuel is becoming a scarce resource and therefore is becoming expensive. Crude prices have increased by 60 %, and gas prices have increased by a factor of 2. Justus Heinrich, Global Product leader at Marine Hull AGCS, states that they have already begun seeing requests from shipowners considering sub-par or non-compliant bunker fuels with a lower combustion temperature. This would lead to more complaints of engine and machinery breakdowns in the future.
Poten & Partners’ Head of Business Intelligence, Jason Feer, has stated that the demand for LNG is soaring, and the avoidance of Russian LNG is causing the price of LNG to rise to record highs. The average spot rate for Asia, around $ 49,000 / day, has increased to $ 85,000 per day for 160,000 cubic meters of LNG. There has also been a substantial rise in the number of long-term charters. But the fact is that long-term charters are also crumbling in the face of overwhelming demand .
Italy’s EniSpA and the trading house Gunvor Group were chosen by Pakistan in 2017 for supplying LNG long-term. But these companies have defaulted on their deliveries. More than 12 shipments have been canceled from October 2021 to June 2022. At the same time when the prices of LNG spiked in Europe. These companies have cited a lack of LNG for their inability to supply, but they continue to supply LNG in Europe. According to Bloomberg calculations, the cost to Pakistan for an LNG delivery equivalent to a million BTUs in May was around $ 12, the same traded in Europe for approximately $ 30. This means that the companies could still make a tidy profit even after paying the negotiated 30 % penalty for defaulting to Pakistan. To avoid blackouts during Eid, Pakistan had to pay nearly $ 100 million to procure a single LNG shipment.
The cost of LNG has risen over 1,000 % in the last two years, and the situation in Pakistan does not bode well for other developing nations. Sri Lanka has turned to Russia for its fuel requirements, and Pakistan, too, is exploring long-term contracts with Russian LNG suppliers. Myanmar also recently bought the nation’s most expensive LNG to keep the grid running. Europe is siphoning LNG from the world, which may cause the developing countries to double down on burning fossil fuels and abandon their climate commitments in desperation .
Increased Insurance Premiums
Another side effect is the increase in insurance premiums as insurance companies factor in the heightened risk. Traveling to regions with disputes costs more, and there are especially high rates for the coverage of the Black Sea and the Sea of Azov. Insurance plans that cost $ 80,000 to $ 120,000 are now from $ 400,000 to $ 600,000 stated Yiorgos Gourdomichalis; a shipowner. Plain marine insurance policies are not likely to cover the nuanced damage such as those caused by explosives, war, or hostile action. Additional war insurance provides such coverage for an increased fee and is a possible solution. The insurance will get factored into the commodities that will arrive from Ukraine, increasing the price.
With the latest sanctions, EU operators are also banned from insuring and financing Russian transport to other countries. Reducing the number of usable LNG vessels will only increase fuel prices even further.
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Crew Scarcity in Coming Years
Security threats such as these are causing sailors to abandon their posts. Flights to Russia are under suspension, and increasingly fewer ships call on Ukrainian ports, making it difficult for Russian or Ukrainian sailors to return home. There is also the fact that Ukrainian sailors are conscripted into the military and hence cannot sail. The removal of Russian and Ukrainian sailors from the total pool of sailors reduces it by 14.5%. This would lead to problems with a shortage of sailors in the not-so-far-off future. International Chamber of Shipping and BIMCO has warned that there would be a severe crew shortage if the recruitment rate is not remedied and that there would be a need for 89,510 officers by 2026.
Opportunity in Chaos
Dry bulkers are making a fortune as unoptimized supply lines are being utilized in a scramble for energy and food security. Ziad Nakhleh, CEO of TEO shipping which operates dry bulkers, stated that Australia’s shortfall in energy in Europe was great news for them. Bulker shipping rates increased by as much as 26 % for different types of bulkers from February 24th to March 23rd.
These long hauls across the Pacific and the Atlantic work great for their business, with them ending up charging $ 25,000 for the much longer route instead of $ 5,000-$ 6,000, which was the norm . This is one of many examples where European countries, among many others, will have to pay much higher to obtain the same service. According to Clarkson, sanctions have led to considerable price rises in freight rates. Large crude carriers saw a 591% increase in price (week on week), newer Suezmaxes had an increase of 285% and newer Aframaxes had an increase of 157%.
Countries such as India and China are benefiting from the extremely slashed rate at which they can procure Russian crude. India has become the second-largest consumer of Russian oil after China. With Indian refiners buying 18 % of the Russian market, up from 1 %, which they imported before the Ukraine war . They still cannot fill the void which would be left if the EU took their business elsewhere. EU bought 61 % of Russian fuel exports, which amounted to 57 billion Euros, compared to India with 3.4 bn euros and China with 12.6 bn Euros .
Nice to Know
At FleetMon, we develop not only powerful APIs used by the world’s largest companies but also provide historical AIS data and generate high-quality and informative charts and graphics. These are used by Statista and SPIEGEL, among others.
Carsten Hilgenfeld, Head of Research and Development at FleetMon, states:
These charts display the number of port calls from Rostock to Russian ports and from Russian ports to Rostock. Here, the clear drop with the beginning of the attack on Ukraine and the accompanying sanctions can be seen.
Spike in Commodity Prices
The heightened risk also ensured that vessels do not frequent Ukrainian ports. Worlds 30 % of wheat and barley are provided by Russia and Ukraine – around 20 % of its maize and 53 % of its sunflower oil. The Russian Federation is the world’s largest exporter of natural gas and the world’s second-largest oil exporter . It is a little surprising that commodity prices have reached record highs, 34 % higher than last year, according to the United Nations Food and Agricultural Organization.
Russia has also started a battle of attrition against Ukraine by siphoning off-grain from occupied Ukrainian territories and shipping them off to the middle eastern countries via Crimea. All the while, they are preventing Ukraine from shipping their own grain. This hits Ukraine particularly hard as it exports more than 98 % of its cereal from the Black Sea. More than 20 million tonnes of grain remain stockpiled for now in Ukraine.
This threatens a global food crisis, which Russia has quickly taken advantage of by offering free trade in exchange for sanctions relief. Russia has also been in talks with Türkiye to establish a shipping corridor in the Black Sea to transport grain safely. This requires Ukraine to de-mine the coastal areas, a demand Ukraine has quickly dismissed due to mistrust and the suspicion that Russia would exploit such an opening to attack southern Ukraine and Odessa. Hence the grain lies in limbo, with prices rising across the world.
The Sting of Sanctions
On the more economical side of things, the rouble’s fall is adding fuel to the fire, with the sanctions targeting 80 % of Russian banking assets, and US and European financial markets are out of reach for Russian businesses. They find themselves in a precarious position when financing trade deals as US and European regulators would unequivocally reject their payments. With the rapid devaluation of the rouble due to it being less acceptable, Russian businesses find themselves unable to pay for the goods they ordered, which leads to abandoned shipments and unpaid debts.
Then there is the stigma that comes with the sanctions. A windward report states that even businesses that are not directly precluded by sanctions seek to distance themselves from Russian companies. Bunkering operations by Russian vessels decreased considerably, and overall foreign port operations by Russian-owned commercial vessels decreased by 64 % in just one week . Since February 28th, the daily number of Russian registered vessels seeking jobs has increased by a factor of three. The average number of Russian port calls has also decreased by 40 % compared to last year, reducing down to 120 calls per day .
With the sixth round of sanctions, more goods have been barred from being exported to Russia. This means more checking for more goods, more goods seized and impounded at ports which means more pressure on the already taxed ports, and the vessels are retained in port longer as they have to be inspected to see if prohibited goods are being transported onboard. Shipping companies and shipowners also have to tread carefully as they can inadvertently violate sanctions by making crew member payments by a Russian bank or by simply paying for supplies, repairs, or services provided in port to a Russian vessel.
What Lies in Store for Russian Oil?
Although there are a variety of sanctions placed by the EU on Russia, the primary earner for the Russian economy is the oil exports. In 2019 Russia accounted for 41% of the EU’s natural gas imports. With Italy and Germany importing the most of this gas .
In the sixth round of EU sanctions imposed on Russia, an embargo has been placed on Russian Energy. Seaborne crude oil and other petroleum products will be phased out over 8 months. A few exceptions can continue to import Russian Energy, such as Hungary and the Czech Republic, due to their extensive dependence on it . In what seems like a retaliatory measure, Russia announced on June 15th that they would be cutting deliveries via the Nord Stream pipeline by 40 % for repairs. Germany has slammed the move and alleged that the action is politically motivated and maintenance work would not warrant a reduction of 40 % .
Germany and the Netherlands have chartered 4 and 2 FSRU, respectively, to reduce dependence on Russian energy imports while working on more permanent energy security avenues . Germany made a deal with Qatar on March 20th for the long-term procurement of LNG. EU leaders also agreed with the US to increase deliveries of American LNG by 15 billion cubic meters this year and an additional 50 billion cubic meters in the decade.
The Ordeal of Replacing Russian Energy
It is difficult and expensive to find a replacement for Russian gas, given the magnitude that was being imported. The contracts for LNG supply to countries are signed long-term, typically for 25 years. These contracts are constructed so that the party purchasing LNG cannot resell it to a third party. So although some countries are buying surplus LNG, they cannot sell it to the EU for now. The contracts will have to be rewritten and reconstructed. Another problem is that the EU wants to sign an LNG contract for around 15 years owing to its climate goals.
After 15 years, they will try to transition to greener energy sources. Germany made a deal with Qatar on March 20th for the long-term procurement of LNG. Which will be transported via ships, liquefied locally, and supplied to the consumers. The EU is expected to take till 2025 to wean itself off Russian gas completely. So, for now, it is business as usual, with large European energy giants Italy’s Eni SpA going as far as opening up rouble accounts to keep the gas flowing after Russia made a demand on March 31st that payments have to be made in roubles .
Russia exported 155 bcm of LNG in 2021 to the EU . EU is trying to import 50 bcm this year in a step towards energy security, which is a mammoth task. Henning Gloystein, Director of Energy at Eurasia Group in London, has said that 30 to 40 bcm is difficult, but to get to 50, everything in the LNG industry around the world would have to work as planned . Not only this, but there is a fundamental price advantage to using Russian energy. LNG imported from the US or Qatar has a minimum price that must be paid for the deal to be economical. In importing, there is the price of the LNG itself, plus the cost of shipping the LNG, plus the price of liquefaction for its use. Which only makes the transition more difficult.
In turn, Indian oil exploration company ONGC used to export the Russian crude for refining. Still, this time it is finding no bidders due to the dread of possible sanctions and hence has resorted to selling one shipment each to local refiners Hindustan petroleum and Corp. and Bharat Petroleum Corp . Russia is expected to turn to large Asian consumers such as India and China in the future for selling gas.
The war affects more than just the countries directly involved. Because Russia and Ukraine are a significant part of the world’s breadbasket, vulnerable economies are most exposed to being hit as the world economy is already reeling.
Europe’s newfound appetite for LNG has the world reeled as the price skyrockets. The situation remains highly fluid for now and is given to the temperament of Political leaders. The full impact of the war may not be quite visible as of now, like in the case of Germany, which has not seen much of a decline in their ship calls to and from Russia. It is undoubtedly because the commodity of trade between the two nations mostly fell under the essential goods category. Still, as the war progresses, IMF has warned that the impact on economies worldwide would be severe.
New shipping routes are charted in the changing global supply chain dynamics as alliances are forged. At this delicate juncture, only time will tell how events will unfold.
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List of References
 NATO, Risk of collateral damage in the North Western, Western, and Southwest Black Sea, April 13, 2022