Impact of Ukraine war on global shipping

Impact of Ukraine war on global shipping
Expert risk article | May 2022

Ukraine invasion adds to pandemic challenges

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.

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