The seven-day-old Russian invasion of Ukraine has set off an “earthquake” in the shipping and trade industry, disrupting routes, diverting merchant ships, and driving up costs as Western sanctions on Moscow start to bite, according to the founder of Israeli marine intelligence firm Windward.
Windward, which leverages artificial intelligence and machine learning to solve shipping complexes for clients, has been tracking the effects of the conflict across the global shipping ecosystem since the crisis began last Thursday. In a report Wednesday, the company said there had been a sharp decrease in transit activity in the Bosphorus strait (also known as the Strait of Istanbul), which connects to the Black Sea and the Sea of Azov where Ukraine gets its sea access, and a sudden spike in vessels changing their AIS (automatic identification system) transmitted destination from Ukrainian ports to Constanta, Romania, and to Istanbul, Turkey.
Russian and Ukrainian ports on the Black Sea are big export hubs for wheat, corn and crude oil. Russia is the world’s largest supplier of wheat and Ukraine accounts for around 12% of global wheat supply and about 16% of global corn exports, according to the US Department of Agriculture. Together, the two countries also account for 80% of sunflower oil, which is used in food processing.
According to the Windward report, insurers have raised costs by up to 5% to provide cover for merchant ships through the Black Sea, adding to the already high rates for transporting goods through the region and further affecting supply chain complexes hit by the pandemic.
Western sanctions on Russia have also taken a toll, massively increasing the risk to shipping companies and financial institutions that work with Russian entities, and sending shockwaves into trade finance, a global system of financing the import and export of goods.
The current crisis “is nothing of an earthquake,” Ami Daniel, CEO and co-founder of Windward, told The Times of Israel in a phone interview Wednesday.
“The world is being polarized. We are seeing a new breed of moral sanctions. We’ve seen oil prices shoot up to over $100 a barrel, we’ve seen Russian oil become almost toxic, and Russian vessels become toxic,” he said.
Oil prices kept surging Wednesday and briefly topped $110 per barrel, as investors worried about the Russian invasion.
Russia is a vitally important supplier of oil, natural gas and metals, and higher prices for those commodities are sure to inflict economic damage around the world. Europe relies on Russia for nearly 40% of its natural gas and 25% of its oil.
Adding to supply constraints, some oil buyers in recent days have shunned Russian crude oil, fearing that if sanctions were applied to Russian oil or gas, their purchased oil could be rendered unusable.
Daniel estimated that there were some 30 million barrels of Russian oil currently in transit “and no one will receive them, they haven’t been unloaded at any port” for fear of exposure to sanctions violations.
The US has censured a number of major financial institutions and Russian companies in various industries, including the country’s largest shipowner Sovcomflot (SCF Group), a state-owned company that specializes in the transport of oil, oil products, and liquefied natural gas.
Sovcomflot directly owns 229 tankers, according to Windward’s research, but some 2,000 out of about 44,000 cargo and tanker vessels operating in the world in the last two years are owned by companies registered in Russia and fresh sanctions on additional firms can be imposed at any time, Daniel said. Western companies will have to consider re-negotiating every deal that includes a Russian entity, according to the report, co-written by Daniel.
These 2,000 vessels “have become toxic, and no one is willing to touch them because nobody knows what will happen. OFAC [the US Department of the Treasury’s Office of Foreign Assets Control], in one of its announcements, said in a very elegant way ‘please do not sign any contract… for 14 days with any Russian-related entity,'” said Daniel, adding that this has led to “completely shutting off everything and anything Russian.”
Amy Myers Jaffe, research professor and managing director of the Climate Policy Lab at Tufts University, told the Associated Press that “cargoes have already been rejected by European refiners in the market, because people are afraid sanctions might be coming, and so they don’t want to be caught with some cargo they can’t resell.”
Russia’s actions in Ukraine have made its crude oil “one of the most toxic barrels on the market,” Louise Dickson, senior oil market analyst at Rystad Energy, told the news agency.
Sanctions impact trade financing
On Tuesday, the UK said it was banning any ship with Russian connections from entering its ports as the country stepped up efforts to isolate Russian President Vladimir Putin and his government over the invasion of Ukraine.
Announcing the blanket ban in a tweet, British Transport Secretary Grant Shapps encouraged other countries to prohibit ships tied to Russia from using their ports. “We’ve just become the first nation to pass a law involving a total ban of all ships with any Russian connection whatsoever from entering British ports,” Shapps said.
The decision came a day after Scotland’s first minister, Nicola Sturgeon, urged Shapps to block a Russian tanker from docking in the Orkney Islands, where the ship was due to arrive Tuesday.
Earlier this week, Turkey moved to restrict access to Russian warships through the Bosphorus and Dardanelles straits.
Over the past day, Daniel noted, the world’s three biggest shipping lines — Danish shipping giant Maersk, Switzerland-based MSC and France’s CMA CGM — suspended all non-essential deliveries to Russia. This meant some “28% of container capacity being pulled out of Russia; this is an earthquake,” he explained.
The sanctions are also hugely impacting trade financing, the system by which imports and exports of goods are bankrolled through direct payment or lines of credit by financial institutions.
“By cutting off access to the US and European financial markets, Russian businesses will be unable to finance the majority of global deals as payment for those exports will be halted by US and European regulators,” according to the report.
With major Russian banks like Sberbank, VTB Bank, and Promzvyazbank (PSB) blacklisted by the US, about “5-8% of all trade finance capacity has been pulled out of the market, because they have been working with everybody,” Daniel said.
And with Ukraine completely shut off for exports, “that creates a crisis in the wheat market… no one is going to take Russian wheat right now,” he went on, noting that major companies have joined governments in sanctioning Russia.
This week, multinationals such as Boeing, Airbus, Exxon, Apple, Ford and Nike joined tech companies like Meta (Facebook), Google, and Microsoft in either suspending operations or restricting access or service in Russia over its aggression in Ukraine.
Russia is a superpower “entrenched in trade, finance, shipping trading — every aspect of the global economy,” he said.
“We have never seen this before, ever in the history of economic sanctions. People have always done the minimum, not the maximum. They’re doing the maximum now because of the horrific situation” in Ukraine, said Daniel.
Agencies contributed to this report.