| |
Shipping operators have had to adapt to evolving physical and legal security in international waters.
By: Antonia Colibasanu
Though the
cease-fire in Gaza has eased tensions in the Middle East, the prospects
of a wider conflict still remain, and energy markets expect a new hike
in oil prices accordingly. A new hike would make Russian oil all the
more attractive to traders, especially since price caps prevent it from
being sold for more than $60 per barrel.
This explains
why, as European and American officials admitted, “almost none” of the
shipments of seaborne crude in October were traded below the
$60-per-barrel limit. Apparently, no actions were taken against shippers
who moved oil above the price cap until last month. To address the
matter, the U.S. Office of Foreign Assets Control started to implement
sanctions on offending operators, blocking tankers from Turkey and the
United Arab Emirates that allegedly disregarded the price limits. Three
Greek shippers that had been delivering Russian oil for decades (and
continued to do so after Western businesses abandoned routes to avoid
running afoul of sanctions) have since announced they would finally cease operations.
Meanwhile, EU officials are discussing new measures
that could better enforce the cap, by adding to existing mechanisms,
requiring more documentation, or introducing a requirement for
attestations to include itemized ancillary costs such as freight and
insurance. The European Commission is also considering restricting
Russia's access to the used oil tanker industry.
These
developments have added more risk and uncertainty for operators in the
shipping industry who now have to adapt to evolving physical and legal
security in international waters. The war in Ukraine had already made
the Black Sea a high war-risk area, and after Moscow withdrew from a
U.N.-brokered grain deal, Ukraine had to negotiate a public-private
partnership with global insurers, an agreement reached on Nov. 15 to
affordably cover ships carrying grain and critical food supplies. Even
so, merchant vessels still need to exercise caution; a ship transporting
grain was damaged by a mine in the Black Sea just a week ago.
Meanwhile, in the
Eastern Mediterranean, ships bound for Israel face a 10-fold increase
in war-risk premiums as the conflict in Gaza continues, prompting
private operators to ask for government assistance. On Nov. 17, fearing
strikes from both state and non-state actors active in the area, the
International Maritime Security Construct and the Coalition Task Force
Sentinel recommended that vessels make their voyages at night. They also
recommended that vessels communicate to either the United Kingdom
Marine Trade Operations or U.S. Naval Forces Central Command their
movements ahead of time – or whenever there is reason for elevated
concern. Owners and management have been additionally advised to make
sure that sailors headed to Israel are informed of any potential
security issues, and that shore leave is taken with local security in
mind.
One of the most
immediate challenges after the Ukraine war was a shortage of workers;
Ukraine was a major source of seafaring laborers, many of whom were
displaced by the conflict. Though the International Maritime
Organization highlighted labor risks in 2022, it has yet to update them
for 2023, so it’s unclear just how bad the shortages are. (Some
estimates believe the number could reach 40,000 by 2025.) The situation
in the Middle East is likely to make things worse. The Israel-Hamas war
has generated a great deal of uncertainty for mariners, who are
concerned with their own safety, and for shipping companies, which have
to pay a premium for experienced workers. With a higher risk of damage
in two important bodies of water, the price of insurance has soared,
making overall operating costs all the more expensive. Coupled with the
disruption in maritime trade routes, this means that cargo has had to
travel longer distances to reach markets, which has already contributed
to a volatile operating environment.
More, Western
sanctions have given rise to Russia’s “shadow fleet,” boosting sales and
transactions and raising the value of older vessels, particularly
tankers. This has slowed the process by which ships are recycled and has
spurred growth in new ship-owning corporations in China, the United
Arab Emirates and India, with the goal of capitalizing on the large
premiums connected with the new trade routes. In 2022, 864 new
enterprises in the maritime industry were created with a link to or
relationship with Russia. Of these, 87 maritime firms sport vessels that
were previously Russian-owned or Russian-flagged. And 23 of them are
UAE-based, while Turkey, Singapore and the Seychelles account for much
of the remainder.
Before 2022, the International Maritime Organization had described the shadow fleet
as a collection of gaining, high-polluting vessels with opaque
ownership and sometimes unknown identification. While that definition
still stands, and while vessels avoiding sanctions are mostly old and
may frequently turn off their signals – ships may now be less
confidential about their owners and IDs.
Also before 2022,
tax policies, especially those associated with climate change, made
shipowners flag their vessels under foreign countries, often under open
registries. (This mostly affected developed countries.) The growth of
open registries is associated with beneficial tax regimes and the
ability to hire international crewmembers, allowing owners to reduce
costs. In 2022, more than 70 percent of global ship capacity in dead
weight tons was registered under foreign flags. Added to the growth of
the global shadow fleet associated with Russia, this phenomenon has
become only more pronounced.
Gabon is an interesting case study. According to maritime news outlets, Gabon's ship register has doubled since the start of the war in Ukraine.
In May 2023, data from S&P Global showed that 98 percent of
Gabon-flagged tankers above 10,000 dwt fell under Russian trade and
shipping sanctions as high-risk vessels, or had no identifiable ultimate
group owner. Little is known about Gabon’s ship registry since the coup
in August this year, but there is no indication that Russia or other
sanctioned countries like Iran and Venezuela have stopped using it – on
the contrary. At the same time, Russia has reportedly used Mongolia’s ship registry to cover its oil trade from sanctions.
All of this
points to an increasingly complex environment in which the demand for
the shadow fleet creates little incentive for recycling but encourages
the creative circumvention of legal restrictions. Second-hand vessels
may be in demand, but flagging them under open registries means there is
little accountability for their operations or safety. The more they are
used, the more dangerous they are to the rest of the world fleet and,
generally, to the environment.
In addition to
flag registry, insurance is a key element in what makes the current
shadow fleet tick. Two-thirds of Russian crude tankers are now insured
by unknown or no-name companies, most of the time virtually lacking any
insurance. Because they lack insurance and conceal their ownership,
these tankers do not abide by international maritime norms. As they go
offline and carry out shady ship-to-ship transfers – sometimes even in
crowded areas like the Bosporus – they not only pose a danger to other
vessels in the area but also accentuate just how little political will
there is to act on this issue both in the industry and in the Western
coalition.
All the while,
pressure is growing on worldwide shipping. People still expect to
receive their goods quickly despite the fact that the sheer distance of
trade routes has fundamentally changed, and despite the fact that
consumption patterns and energy markets frequently stymie efficient
transportation.
It’s a
particularly difficult set of interconnected problems to solve,
especially since trade policies (including sanctions) require more
cumbersome checks, create new risks and complicate shipping routes.
Taken together, these dynamics increase the complexity, volatility and
uncertainty in the industry's operational and market landscape. The
question of how shipping can adapt to these changes while maintaining
the necessary capacity to efficiently ensure global trade and stable and
predictable rates is a key concern for international businesses. The
answer will determine how the global economy will evolve in the years to
come, with major implications for global stability and the global
geopolitical balance. |