Allianz: War likely to worsen supply chain disruption

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-today 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

…said 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

…Captain Rahul Khanna, added.

The International Monetary Fund (IMF) 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.

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% of its corn exports2. 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 Russianowned superyachts have been seized.

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

…said 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

…Justus Heinrich, added.

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

Vessels and crew trapped in the war zone

At the start of the conflict approximately 2,000 seafarers were stranded aboard 94 vessels in Ukrainian ports, according to the International Maritime Organization (IMO). 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

As 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 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. The Helt sank off the coast of Odessa having likely struck a mine, killing two crew.

Marine insurance losses 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. 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.

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.

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.

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.

Crew shortage problems

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), Russian seafarers account for just over 10% of the shipping industry’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.