Conflict in Ukraine would destabilize trade in the Black Sea region and bulker owners should prepare for riskier business and higher freight rates if the situation deteriorates, lawyers have told TradeWinds. Further sanctions on Russia look inevitable unless the situation de-escalates. Ukraine and Russian ports in the Black Sea are major export hubs for grain, as well as coal.

Lawyers from Stephenson Harwood in London told TradeWinds they expect trading restrictions in the region would tighten the freight market, driving up bulker rates. This would in turn increase the price of export commodities, which could cause more defaults in sale and shipping contracts, they said. Kirsty MacHardy, a partner at the firm, said: “Shipowners will want to ensure charterparties include fit-for-purpose sanctions, war risks and safe port clauses that allow them to refuse to go to a Ukraine port should tensions escalate to the required threshold level. They will likely also be revisiting who bears the cost of any war-risk insurance. Shipowners may well also need to revisit their financing arrangements to see what sanctions restrictions have been agreed.”

The same goes for lenders, according to Jameel Tarmohamed, trade finance partner at Stephenson Harwood. “Financiers may want to accelerate loans to or financings of Ukrainian-based companies and will be looking at how best to protect the assets that they have financed through potential enforcement of security over Ukraine-located assets,” he said. This could increase insolvencies across the parts of the supply chain that rely on that source of income, he added.

Shipowners should maintain a watchful eye on emerging risks and their legal options, Holman Fenwick Willan’s (HFW) head of dry shipping told TradeWinds. “I think that the main point for owners is to look at the severity of what is actually happening. For example, if there is action on the land side and nothing is happening at the seaside or the port side, it’s not necessarily immediately a war risk, [shipowners] cannot say, ‘No, I’m not going to go there’,” Jean Koh explained. “An assessment of the risks and the severity of the risks will be necessary at each moment.”

If war were to break out, owners would also need to look at whether ports are safe to use and whether they can rely on the shipping contract’s safe port warranties, Koh said. These provisions enable owners to refuse to follow orders to proceed to an unsafe place. Sanctions were imposed on Russia and certain regions of Ukraine in 2014, some of which are still in place today. After warnings to Russia by the European Union, US, UK and Canada, further sanctions will be inevitable, according to Daniel Martin, partner at HFW. “I think the only question is: what specific restrictions will [sanctions] include?” Martin told TradeWinds. “I think if I was a trader looking at this region, the sort of things I’d be thinking about would be: will we see more Russian individuals and entities added to sanctions lists? If you’re buying Russian grain or Russian coal now, you will have done due diligence and counterparty checking to ensure that your counterparty is not on a [sanctions] list. But that may change if we see further sanctions imposed.” Further sanctions could restrict the ability to call at ports, Martin said. Regimes imposed historically on Iran, Libya and Ivory Coast have sanctioned port operators or the facilities themselves.

The regions of Donetsk and Luhansk in Ukraine are currently subject to international sanctions. Martin wonders whether this could be extended to other areas of the country in the event of a conflict. “One of the benefits from a diplomatic and political perspective of imposing sanctions is the ability to ratchet them up over time and in response to developments. Therefore, I think as the situation progresses, you may well see changes in the sanctions landscape over time,” he said.

Something that will be less predictable is what Moscow will do next — and it could impact exports. “Whereas with other sanctions programs, we’ve tended not to see the country that’s subject to sanctions itself imposing countermeasures, we’ve historically seen Russian countermeasures,” Martin explained. “Therefore, it might be that there may not be an EU, US, UK reason why trades cannot continue. But if Russia was to stop exports — impose local restrictions on wheat coming out or other restrictions of that sort — then those would be relevant from a Russian perspective.”

Black Sea Dry Cargo Trade by Numbers:

  • The Black Sea region is a major export hub for dry-bulk commodities and Ukraine is the top exporter in the region.
  • The country exported around 105.5 MMT of dry cargo during 2021, according to loading data compiled by bulker tracking platform Oceanbolt. Of this figure, around 40 MMT was loaded at the port of Yuzhny, making it the Black Sea’s top export port for dry cargo overall.
  • Russia is the Black Sea’s second biggest exporter with 89.1 MMT of dry bulk loaded last year, according to the data.
  • Unsurprisingly, China was the top importer of dry commodities from the Black Sea, taking 37.9 MMT of in 2021. Turkey was the second biggest destination, accounting for 31.7 MMT last year.
  • Grain exports from the Black Sea are a major source of demand for panamax, supramax and handysize bulkers.
  • Panamaxes carried 39.3 MMT of grain exports from the region last year, while supramaxes and handies both carried roughly 23.9 MMT.
  • Coal is the other major commodity exported from the Black Sea, totaling 53.9 MMT in 2021. Russia exported two-thirds of this trade, which was carried predominantly on capesize vessels.