Supply Chains Prepare For Hit As Russia-Ukraine War Situation Escalates

Significant geopolitical events coupled with tragic human costs typically have a massive impact on shipping rates — at times negative but often significantly positive. As the Russia-Ukraine crisis escalates by the hour, many rate-positive shipping instances that were considered low probability even a few weeks ago look more plausible all of a sudden. On Wednesday, Cleaves Asset Management’s CEO Joakim Hannisdahl said that war is bad, except when it concerns shipping.

Dry bulk regions

Military actions could end up curtailing ship activities in the waters of the Black Sea, a crucial transit point, especially for all kinds of dry exports. Russian military exercises have done so.

VesselsValue has tracked ship’s movement data and discovered that Russia’s naval maneuvers have visibly influenced traffic. Ukrainian and Russian waters of the Black Sea and the Sea of Azov had been designated as “listed areas” by the War Risk Council on 15 February, indicating high war-risk insurance premiums.

shipping containers — Representation Image

Per a well-known ship brokerage firm named BRS, the Black Sea was the second-largest grain-exporting region in the world in 2021 reporting about 111.2 million tons of cargo; Ukraine and Russia accounted for nearly 30% of wheat exports, while Ukraine had accounted for nearly 16% of corn exports globally.

BRS observed that by January end, Ukraine had completed exporting 71% of wheat that was predicted for the current marketing phase but 32% of the expected corn exports.

Agribulk exports encounter risks on land and not just at the sea. A land grab or even an attack by Russia may minimize grain production because farmers usually flee the conflict, agricultural equipment and infrastructure are damaged, and the economy is crippled.
A major part of the most productive agricultural plot of Ukraine lies in the east. Hence, it is more prone to potential Russian attacks.

Per Braemar ACM Shipbroking, such a landslide risk may affect the upcoming wheat marketing period. The key grain-producing regions are situated by Russia’s border and the military risk also coincides with the start of spring wheat-planting season.

Brokers and analysts have, in general, cited the possible rate upside for some size categories of both tankers shipping as well as dry bulk. Conflict-related trade disruptions may compel replacement imports to cover longer distances, demanding an increased ship supply.

Container markets

The container shipping market may seem significantly less prone to the Russia-Ukraine crisis than dry bulk and tanker shipping. However, Lars Jensen, the CEO of Vespucci Maritime, foresees a significant risk ahead, especially one which may prolong congestions and also have freight rates high for a longer period.

At last week’s FreightWaves’ global supply chain event, Jensen recalled how Maersk, the then-largest shipping line in the world, in 2017 was a victim of a huge cyberattack and was fully off-grid for about a week. He recollected how it took Maersk a couple of weeks to get running. The shipping giant had also experienced collateral damage in another cyberattack that targeted Ukraine that the Western intelligence had blamed Russia for.

Fast forward to conflict as it appears now. If we were to observe sanctions, Russia is likely to fight back with cyberattacks. There is a risk that the most critical infrastructure would be targeted and shipping ports, lines, and terminals fall under the critical category.

Tanker markets

Russian oil and gas exports would also feature in the firing line of sanctions, as that they form the lifeblood of the Russian economy and is responsible for 40% of revenues in the country.

During a roundtable conducted earlier in the month, attorneys at Seward & Kissel estimated how energy sanctions could play out. Associate Andrew Jacobsen observed that Russia’s energy interests have long been targeted by the US sanctions since the 2014 Crimea annexation, but by sectoral sanctions that boast narrow targets excluding shipping, not blocking sanctions that do not permit business activities with the US entities, or that include the US currency. Blocked entities feature on the Specially Designated Nationals or the SDN list.

On Wednesday, the US declared blocking sanctions on two Russian banks, PSB and VEB, and on their subsidiaries.

Reference: wsj.com