The Russian-Ukrainian War’s Impact on Maritime Commerce

Texas Lawyer

Russia’s unprovoked invasion of Ukraine has triggered significant reactions in the world of maritime commerce. In a matter of days since the beginning of Russia’s main offensive, the price of bunker fuel used for vessel propulsion systems has skyrocketed as have tanker charter-hire rates and war-risk premiums for vessels transiting to or from regions impacted by the conflict, including the Baltic and Black Seas, which have been designated as “listed areas” by the insurance industry’s War Risk Council. The Russian Navy has closed access to the Sea of Azov (the body of water guarded by the Crimean Peninsula that affords maritime access by Ukraine to the Black Sea, along with the port of Odessa farther to the east), and blocked the movement of numerous merchant ships therein and in the Black Sea, stranding their crews who are running low on provisions, and bringing to a halt the export of Ukrainian grain, which will severely impact the world’s grain supply. The United States has imposed blocking sanctions on Russia’s Central Bank and two largest commercial banks Sberbank and VTB, as well as other sanctions on Russian companies, including restricting Russia’s largest maritime and freight shipping company SovComFlot’s access to long-term debt, which could adversely affect its ability to construct thirty ships on order, which in turn may impact the contracted shipyards, and may indirectly affect the company’s ability to charter its fleet of 140 vessels. The European Union has imposed similar sanctions on Russian banks and corporations. The United States and the EU have also agreed to restrict SWIFT bank transfers from a number of Russian banks. In addition to other sanctions that mirror those implemented by the United States and EU, Canada has banned Russian owned or registered vessels from entering Canadian waters. The United Kingdom has taken similar action. Remarkably, numerous major western companies are either cutting ties to Russia or halting business activity, which will further stifle the flow of investment capital to what soon may become the world’s largest third-world country.

One Russian ship subject to the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) sanctions list has been seized by France, various superyachts owned by Russian oligarchs have been seized, and a number of vessels approaching Ukrainian waters have been struck by missiles, including the tanker Millennial Spirit and cargo ships Yasa Jupiter, Namura Queen, Lord Nelson and Banglar Samriddhi. A sixth vessel, the Helt, was hit below the waterline and sank. International traders are proving more reluctant to charter Russian owned or operated vessels for fear of downstream sanctions problems, or purchase Russian oil and fuel supplies, even though sanctions have not yet been imposed on Russia’s exports of crude oil, gas or coal (save for the U.S. import ban on these commodities). Vessel traffic bound for Russia has declined by more than 50% since the war started.

Russian oil and tankers account for a sizable volume of the world’s capacity. Sidelining both, even if indirectly by reticence to purchase or charter, will have a major impact on oil prices and freight rates, driving both much higher.  Should Russia default on its foreign debt, which seems increasingly likely, chartering such vessels may prove financially risky with the threat of arrest lurking behind preferred ship mortgages attendant to these tankers. As of this writing, sanctions against Russia’s oil and gas industry remain in the offing, though political pressure has led the European Union to commit to reducing its reliance on Russian gas by two-thirds by year’s end.  Ironically, the pipeline feeding that gas runs through Ukraine.

The war also impacts the manning of merchant vessels globally. There are numerous Ukrainians who serve as officers aboard ship. Whether the war will enable them to continue to do so is problematic because these seafarers may not be easily repatriated after their hitches end or paid in light of conditions in Ukraine. Here, the United States could serve as a safe haven given the Administration’s decision to allow Ukrainian nationals lawfully in the United States to remain here for the next eighteen months. Yet, U.S. Customs and Border Protection (CBP) has implemented inconsistent policies across the nation, which incredibly in some ports detain Ukrainian crew members aboard ship preventing them from entering the United States because of this repatriation issue. Numerous Russians also serve as merchant marine officers and their relationships with Ukrainian crew members will no doubt strain relations aboard ship on which both nationalities serve, especially when CBP permits Russian seafarers to repatriate through the United States. CBP’s policies are out of kilter with the Administration’s stated support of Ukraine.

From a maritime-law perspective, questions arise as to whether Russia’s wanton war and its consequences may trigger a charter’s force majeure clause, which generally has the effect of suspending contract performance obligations that are disrupted by unforeseeable events beyond the control of the vessel’s owner or charterer. For example, the ASBATANKVOY form provides that neither the vessel owner or charterer is liable for any delay, loss or damage, or failure to perform “arising or resulting from: Act of God; act of war; perils of the seas; act of public enemies, pirates or assailing thieves; arrest or restraint of princes, rulers or people,” among other events. Generally to apply, the force-majeure language must directly apply to the vessel, owner or charterer. While higher bunker prices in the market caused indirectly by Russia’s invasion may make it more expensive to transport cargo, those prices arguably would not constitute a force majeure event under the ASBATANKVOY Clause above. The same is true for higher war-risk premiums for cargo being shipped to the United States from the Baltic or Black Seas. Such premiums make the voyages less profitable, but do not prevent performance. For those vessels detained in Ukraine, while vessel owners may rely on the force-majeure clause to excuse their inability to perform, their charterers may face exposure to enormous demurrage or detention charges, which may not be covered by the governing force-majeure clause. Oftentimes, such charges are excluded from force-majeure coverage. Of course, it’s necessary to review the specific force-majeure clause language in play to gauge how it applies in any given situation.

Like many charters, the ASBATANKVOY form also includes a war-risk clause that kicks in when a port is blockaded or hostilities there or in the vicinity make it too dangerous in the master’s discretion to proceed to it safely and carry out cargo operations.  In that event, the charterer, or in the absence of the charterer’s instructions, the vessel’s master may direct the vessel to an alternate port and discharge the cargo without violating the charter.

The murder of innocents coupled with the prospect of broader sanctions has prompted numerous maritime companies to reconsider their charters with Russian vessel operators, the carriage of containers to Russia, and sales of Russian oil carried by sea. Should the United States or its NATO allies ultimately decide to sanction the Russian oil and gas industry, the impacts likely will be swiftly felt across the maritime industry in the form of even higher charter hire rates, in Europe in the form of energy shortages and possible recession, globally in the form of even higher inflation, and will no doubt accelerate the financial implosion of the Russian economy that currently ranks on a par with the state of New York.

Maritime commerce has been buffeted by the pandemic’s headwinds for the past two years.  The industry now faces the reverberating shockwaves of Vladimir Putin’s unleashing a Pandora’s Box of unintended consequences, including further exacerbation of global-supply chain logistics. It will be some time before the winds die down.

“The Russian-Ukrainian War’s Impact on Maritime Commerce,” by Keith Letourneau was published in Texas Lawyer on March 20, 2022.

Reprinted with permission from the March 20, 2022, edition of Texas Lawyer © 2022 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.