With Ukraine effectively opening up a new naval front with its enemy Russia by declaring six Russian ports as war-risk areas last Friday and then promptly attacking a Russian tanker, the situation in the Black Sea has gone from bad to worse with many international shipowners now avoiding the area.
Even though Russia’s invasion of Ukraine has been raging for a year and a half, the Black Sea had been treated a bit differently by the two sides due to its importance for exporting their most valuable assets – Russian oil and Ukrainian grain.
One of the main reasons it was all at least working, if not 100% smoothly, was the United Nations-backed deal to allow Ukrainian grain exports across the Black Sea. Brokered by the UN and Turkey last July, the deal lasted about a year at which point Russia decided to back out of the agreement due to its demands not being met.
That was the spark for a chain of events which are getting progressively worse and threaten to grind all shipping in the Black Sea to a halt.
Immediately after Russia withdrew from the grain deal, it stated that all vessels calling Ukraine will be suspected of carrying weapon supplies to Ukraine.
Russia’s navy then conducted multiple strikes on Ukrainian grain facilities and ports including at the Danube River port of Izmail which was an alternative route for exporting grain via Romania.
Tomas Alexa, an analyst at maritime risk management company Ambrey told Splash that Russia has also re-started the deployment of sea mines in the Ukrainian exclusive economic zone.
Ukraine immediately answered in kind with Ukraine’s Ministry of Defence announcing that all vessels in the Black Sea heading to Russian ports or to temporarily occupied ports of Ukraine may be considered as carrying military cargo. Also, navigation in the northeast Black Sea region and the Kerch-Yenikal strait was “declared dangerous and prohibited.”
Regardless of the threats made by both countries, Alexa does not see either country treating most vessels as military targets since both countries are dependent on their Black Sea exports, and neither would benefit from shipping companies severely limiting their activities in the area.
However, Ukrainians showed their teeth by attacking a Russian naval ship at the key oil port of Novorossiysk last Thursday, briefly halting all tanker loadings, and then using a drone to damage the Russian product tanker Sig in the Kerch Strait over the weekend, something that has put marine insurers further on edge.
“Whilst the attack on an MV was an escalation, the choice of the vessel showed that Ukrainians were very selective of their choice of target – a Russian-flagged, US-sanctioned vessel. Kyiv is aware of the Russian dependency on the Black Sea hydrocarbon export as almost a third of Russian hydrocarbon exports flow from the Black Sea port,” Alexa said.
“The news coming in daily actually shows that the situation in the Black Sea is getting worse, making seaborne trade in the region even more difficult,” a new report from Xclusiv Shipbrokers states.
Any crude oil disruption in the Black Sea will primarily disrupt suezmaxes which account for 62% of all exports, according to data from BRS.
“A potential increase in congestion and insurance and freight premiums could be one of the direct implications from a further escalation in attacks on shipping in the Black Sea,” BRS warned in its latest weekly tanker report.
According to a report by investment bank Jefferies, the tense situation is likely to tighten vessel supply availability as shipowners avoid the Black Sea altogether. Combined with the rising price of Russian Urals crude above the $60 per barrel price cap, vessel supply is set to become even thinner.
The report claims that it is likely that spot rates in the Black Sea will garner an even larger premium than other routes to entice tanker owners to transit into the area but the true effects of this are yet to be seen.
Ambrey’s Alexa said the Ukrainian attacks on the tanker and the naval asset near a Russian port were designed to negatively impact Russian exports. The attacks will have an impact on insurance rates, crew willingness to call Black Sea Russian ports and on vessel owners’ threat level perception.
“Simply put, it will discourage trade. In maritime export terms, without the UN’s Joint Coordination Centre, Ukraine has less to lose compared to Russia,” he said.
Meanwhile, for the Ukrainians, grain exports are already severely limited since the Danube ports can’t match the capacity of the blockaded Black Sea ports.
Weekly order volumes for agricultural commodities loading in Ukraine are at low levels compared to much of the past year and the average cargo size has also dropped to low levels, highlighting that the demand for seaborne transportation is focused on small cargoes from the ports in the Danube.
“As the new harvest season approaches, the last week of July saw an increase in demand for seaborne transportation of agricultural commodities from the Russian ports in the Black Sea. However, the past week has seen volumes retreating from the highs during the preceding week, possibly due to the evolving situation in the northeastern parts of the Black Sea,” Ulf Bergman, senior economist at maritime intelligence firm Shipfix, told Splash.
He added that cargo order volumes for grains loading in Romania increased last week after trending lower during the second half of July. The proximity to Ukraine suggests that an increasing part of the Ukrainian exports will reach the market through ports in Romania.
There are scenarios that are far bleaker than a decrease in grain or oil exports and an eventual rise in commodity prices.
“We could see a temporary suspension of traffic. If a non-Russia/Ukraine-flagged vessel gets attacked, it could trigger a localised cascade event in which vessels would stop moving until the motive of the attack is clear and the safety of navigation is restored,” Alexa explained.
If such an event would occur, there is a possibility of nations creating military-run escort corridors to facilitate the continuation of maritime traffic.
Why would any vessel owner or operator put their assets and reputation at risk to carry hydrocarbon cargo in a war zone..
Then there’s the risk to crew and dependants with insurance costs..