Russia’s invasion of Ukraine, which began on 24 February 2022, has been widely condemned by the international community. The ‘specialist military operation’, as it has been called by Russia’s President Putin, marked a dramatic escalation of the conflict that began in 2014 with Russia’s annexation of Crimea and the uprising of Russian-backed separatists in part of the Donbas region.
Russia’s invasion of Ukraine, which began on 24 February 2022, has been widely condemned by the international community. The ‘specialist military operation’, as it has been called by Russia’s President Putin, marked a dramatic escalation of the conflict that began in 2014 with Russia’s annexation of Crimea and the uprising of Russian-backed separatists in part of the Donbas region. At the time of writing, fighting has been fierce, with Russian forces meeting considerable resistance by determined Ukrainians armed by some NATO countries, as well as Sweden. Ukrainians fleeing the fighting have crossed borders into neighbouring countries, notably Poland, creating Europe’s biggest refugee crisis since the Second World War.
Shipping has been affected on numerous fronts – at the time of writing, much of the Black Sea and Sea of Azov are closed to commercial shipping, fighting is ongoing in several Ukrainian port cities and Ukrainian ports are closed for operations, with some vessels having been strategically sunk to block entry and exit. Most of the 109 ships stuck in Ukrainian ports are bulk carriers or general cargo vessels, together laden with around 1.25 million tonnes of grains and oilseed, which are in danger of spoiling. Exports of such commodities have dropped from up to 6 million tonnes per month to around 200,000 tonnes in March 2022. While most of the crew members of the ships trapped in Ukraine have been evacuated, around 500 seafarers remain on board as members of skeleton crews tasked with caring for the ships and their cargoes.
Commercial vessels entering the Black Sea face dangers such as floating mines, some of which have reportedly drifted away from their intended location, and risk becoming collateral damage from attacks against port infrastructure. All ports in Russia and certain sea areas in the Black Sea and the Sea of Azov have been included in the Hull War, Piracy, Terrorism and Related Perils Listed Areas by the Joint War Committee, triggering the payment of additional war-risk premium for vessels transiting, or stuck in, those areas. For some vessels blocked in Ukrainian ports, premium payments could exceed the value of the vessel.
The knock-on effects of the conflict have sent shock waves through global markets. Governments have sought to punish Russia with far-reaching sanctions on Russian entities, individuals and goods. Coming on the back of supply chain and logistical disruption resulting from the covid-19 pandemic, the closure of Ukrainian ports and trade restrictions targeting Russia have stifled export of commodities such as grain, oilseeds, vegetable oils and metals from both countries, causing global shortages and high prices. Efforts to export Ukrainian goods via Romania, requiring transit by train, lorry or via small Danube River ports, will only go so far to make up for the dramatic reduction of exports of such commodities.
Sanctions
New sanctions have been introduced to weaken the Russian economy and encourage Russia to cease its actions in Ukraine. Financial, trade, shipping and immigration restrictions have been imposed by many Western countries, notably the EU, the US and the UK, with new sanctions implemented on an almost daily basis, not always synchronised between the various regimes, creating confusion for operators across the industry. Many major companies have been keen to distance themselves from trade and business in or with Russia and Russian entities. Industry players are avoiding doing business with Russians even if they are not on the official sanction list, from fear of being inadvertently caught by sanctions in cases where ultimate ownership is not clear. Among the shipping companies affected is the Russian state-owned Sovcomflot, which has one of the world’s most modern fleets of oil tankers and gas carriers; sanctions imposed by the EU and the UK have forced the P&I Clubs with which Sovcomflot ships were entered, including Gard, the West, the UK Club and North of England, to terminate P&I insurance cover.
Russia has retaliated by imposing bans on exports to Western countries of a number of products, including telecoms, medical, vehicle, agricultural and electrical equipment, as well as some forestry products such as timber.
At the time of writing, the recent wave of sanctions targeting Russian interests include the following.
US sanctions
- Prohibit investment in the so-called breakaway republics of Donetsk and Luhansk in Eastern Ukraine and the import and export of goods, services and technologies to and from those regions;
- impose sanctions against the Russian financial services sector, including several Russian state-owned financial institutions, banks and financial institution subsidiaries;
- add several Russian individuals, entities and vessels to the Specially Designated Nationals and Blocked Persons List;
- prohibit the importation into the United States of products of Russian Federation origin, including crude oil, petroleum fuels and oils, LNG and coal products;
- prohibit new investment in the energy sector in the Russian Federation; and
- allow for sanctions to be applied to any person operating in the aerospace, electronics or marine sectors of the Russian economy.
EU sanctions
The EU has adopted five packages of sanctions since 23 February 2022, which include:
- measures targeting individuals such as President Putin, Sergey Lavrov and members of the Russian State Duma and National Security Council;
- economic sanctions covering the finance, energy, transport and technology sectors;
- imports from Russia to the EU of iron, steel, wood, cement, coal and solid fossil fuels;
- banning Russian vessels from EU ports and Russian aircraft from EU airspace;
- excluding key Russian banks from SWIFT;
- restricting Russian state-owned media from broadcasting in the EU;
- diplomatic measures, including the suspension of visa facilitation provisions for Russian diplomats, officials and businesspeople; and
- restrictions on economic relations with the non-government controlled areas of Donetsk and Luhansk.
UK sanctions
The government extended existing sanctions, imposed following Russia’s annexation of Crimea, to the non-government controlled areas of Donetsk and Luhansk. Additional individuals, companies and financial institutions have been added to the UK sanctions lists, aiming to stifle the Russian banking system’s access to UK financial markets. New restrictions on trade and export controls against Russia’s hi-tech and strategic industries were announced. Russia’s national airline Aeroflot has been banned from UK airspace and Russian ships are banned from UK ports. UK persons are prohibited from broking, chartering and selling vessels to persons connected with Russia.
Yachts owned by Russian individuals and entities
Around 10 per cent of the world’s superyachts are owned by Russians. At least 16 superyachts, worth an estimated US$2 billion, have been seized in Europe, due to links to sanctioned Russians, since the invasion of Ukraine. Most seizures have been by European authorities, as well as the US and UK.
Supply chain issues – disruption, delays, freight increases
The disruption brought by the covid-19 pandemic has continued into 2022, with travel restrictions and quarantine measures imposed in response to outbreaks of the disease. At the time of writing, China’s commercial capital and busiest port, Shanghai, remains under strict lockdown. When this is combined with increased consumerism during the pandemic, as household spending changed from vacations and restaurants to consumer products such as video games and exercise equipment, demand for shipping currently outstrips availability. In response, shipping carriers have concentrated their vessels on the routes with most demand, in particular China to North America. Ship traffic at popular ports has backed up, with up to a fifth of all the world’s containerships reportedly stuck in port congestion, a quarter of those in China.
As a result, container shipping rates remain high, with container ship owners continuing to enjoy high charter rates, and corresponding high freight rates for shippers. The container sector as a whole is making record profits.
Consumers are bearing the increased costs and delay, with disruption to every part of a container’s journey. In addition to ship congestion, the pandemic and its restrictions have also limited the availability of dockworkers and lorry drivers, causing delays in handling cargo. Empty containers left uncollected on less popular routes compound the issue by creating a lack of availability of containers.
P&O Ferries
On 17 March 2022, UK-based P&O Ferries, operating a fleet of passenger and cargo RoRos between the UK and continental Europe, made headlines by suddenly dismissing all 800 staff with immediate effect via a recorded video call. As part of the move designed to save costs by employing cheaper labour, the company, which is controlled by Dubai-based DP World, suspended its ferry services and told customers to make alternative arrangements. CEO Peter Hebblethwaite subsequently admitted to British MPs that the company chose to knowingly break employment law by avoiding consulting with unions prior to the mass sacking. At least three P&O vessels were subsequently detained by the Maritime and Coastguard Agency (MCA) due to various deficiencies.
Trade wars
Economic conflicts, or ‘trade wars’, where one country imposes import tariffs or similar restrictions on products from another country, have the potential to cause significant disruption to global markets. Often a side effect of protectionist policies, trade wars can create uncertainty in the global trade environment that fuels the shipping industry.
China–United States
The conflict began when former President Trump imposed tariffs and other trade barriers on China in January 2018. Despite the two sides having signed an economic and trade agreement in January 2020, tensions continue to persist. Although President Trump’s tenure ended in January 2021, experts expect the trade war to continue under the new administration, as President Biden reportedly has no plans to end the tariffs that are in place.
China–Australia
Toward the end of 2020, China leaked to the media a 14-point list of grievances against Australia, including the latter’s decisions to ban Huawei from the rollout of the 5G network, enacting foreign interference laws and calling for an inquiry into the origins of covid-19. China subsequently imposed restrictions on an array of Australian imports, including lobsters, beef, barley, coal and timber, prompting Australian exporters and Chinese importers to seek new markets for their products.
Brexit
On 24 December 2020, the EU and UK reached a Trade and Cooperation Agreement, which applied provisionally from 1 January 2021, before formally entering into force on 1 May 2021. It provides for free trade in goods, as well as for cooperation in a range of policy areas, transitional provisions about EU access to UK fisheries and UK participation in some EU programmes.
Northern Ireland, the only part of the UK that shares a land border with the EU, is subject to a separate arrangement, known as the Northern Ireland Protocol, by which it continues to follow many of the EU rules on trade. A regulatory border has effectively been created in the Irish Sea, requiring additional checks and paperwork on goods moving between Great Britain and Northern Ireland.
The EU introduced full import checks on UK goods on 1 January 2021. The UK, on the other hand, having initially announced it would phase in new customs procedures and border controls in stages between January and July 2021, recently declared a further delay to the introduction of full border checks on goods imported to Great Britain from the EU. The checks will now be introduced in stages on 1 October 2021, 1 January 2022 and 1 March 2022.
Environmental measures
The global cap on sulphur emissions imposed by the International Maritime Organization (IMO), entered into force on 1 January 2020.
The driving factor behind the global cap is to improve vessels’ environmental footprints. One of the most harmful pollutants that vessels emit is sulphur dioxide (SO2), produced from the combustion of fuels containing sulphur. SO2 is considered to have significant adverse effects on both the environment and human health.
Under the global cap, the IMO set strict limitations on vessels to use fuels with a sulphur content of no more than 0.5 per cent, rather than the previous limit of 3.5 per cent. Potential implications for shipping are substantial, particularly the availability of compliant low-sulphur fuels and their effect on ships’ engines.
Focus now seems to be moving to ‘zero-carbon bunker fuels’, namely shipping fuels that emit zero or, at most, very low greenhouse gas (GHG) emissions across their life cycles. Two alternative fuels – ammonia and hydrogen – have been identified as the most promising zero-carbon bunker fuels for shipping, being more scalable and cost-competitive than other biofuel or synthetic carbon-based options.
Meanwhile, LNG is expected to play a limited role in the decarbonisation of the shipping sector, for specific niche applications on pre-existing routes or in specific vessel types.
Global sanctions
The impact of international sanctions on the global maritime industry remains very significant. Although international sanctions are designed to aid international law and foreign policy objectives in matters such as terrorism and human rights abuses, they continue to be politicised and unpredictable. Shipping businesses and insurers face challenges in managing their exposures to risks in markets affected by sanctions.
Brexit
Prior to Brexit, the United Kingdom pursued its sanctions policy through the United Nations and the European Union. Since Brexit, EU sanctions have continued uninterrupted under the Sanctions and Anti-Money Laundering Act 2018, which also provides for the UK to implement its own sanctions.
Whilst UK sanctions largely mirror those of the EU, there is scope for divergence, in their application, effect and enforcement, as well as in relation to designated individuals and companies, as demonstrated with the recent waves of sanctions following Russia’s invasion of Ukraine. Both the UK and EU have stated that they intend to coordinate their sanctions policies as much as possible. With the UK historically having been active in shaping EU sanctions policy, it is expected to continue to take a proactive approach under its own regime. The EU, meanwhile, is likely to keep a close eye on UK actions while also striving for more robust, uniform enforcement of sanctions across its member states.
Brexit is likely to have serious practical implications on the machinery of the EU’s sanctions as, with the departure of the UK, it has lost a determined sanctions advocate, a well-versed diplomatic corps able to create the consensus needed among member states for issuing new sanctions regimes, and the intelligence on which the European Council has relied to adopt sanctions.
Iran
The 2016 Joint Comprehensive Plan of Action (JCPOA) resulted in the EU lifting restrictions against Iran in the following sectors:
- financial, banking and insurance;
- oil, gas and petrochemicals;
- shipping, shipbuilding and transport; and
- precious metals and currency.
Some restrictive EU measures remain in place (but these relate largely to military goods: weapons and items that might be used for internal repression) and some entities and individuals remain listed. All trades related to Iran, therefore, need to be checked to ensure that they comply with the remaining sanctions.
On 8 May 2018, the Trump administration announced the United States’ withdrawal from the JCPOA with effect from 27 June 2018. However, the Biden administration has promised to rejoin the JCPOA. The positions of both sides have shifted considerably in the past three years, however, and the ongoing negotiations to reach a deal are finely balanced. While some argue that the imposition of overly strict sanctions pushes Iran to develop its nuclear programme, others say that the lifting of sanctions will itself allow Iran to develop nuclear weapons.
Other countries
The United States has also imposed sanctions on Venezuela. In particular, it has targeted any vessels considered to be involved in the petroleum trades between Venezuela and Cuba. Vessels that contravene such sanctions risk being added to the list of Specially Designated Nationals and Blocked Persons (the SDN list), maintained by the US Treasury Department’s Office of Foreign Asset Control, which has grave implications for the trading and insurance cover of any designated vessel. Additionally, the United States deems any vessel undertaking activity involving PDVSA, a Venezuelan state-owned oil and natural gas company, as being engaged in the Venezuelan oil sector, and thus at risk of being added to the SDN list.
Syria also faces comprehensive sanctions by the United States, the UK, UN and the EU in response to the Syrian government’s alleged support of international terrorism and human rights violations in the country. Since implementation, the sanctions have been strengthened several times as a result of escalating violence in the region. Current imposed sanctions include trade restrictions on the import, purchase and transport of crude oil and petroleum products from Syria. Other restrictions include travel bans and asset freezes on certain Syrian officials, as well as a ban on Syrian investment by US persons.
Russia is also subject to economic sanctions by the UK, EU and United States, following Russia’s failure to comply with demands regarding the annexation of Crimea and Sevastopol. The sanctions were initially in the form of asset freezing and restrictions on travel. Since July 2014, UK, EU and US sanctions prohibit:
- the import into the EU of goods from Crimea or Sevastopol; and
- the provision, directly or indirectly, of financing or financial assistance, as well as insurance and reinsurance related to such imports.
Since August 2014, the supply of dual-use goods to Russian persons or for use in Russia if they are intended for military use, as well as the supply without prior EU authorisation of goods related to oil exploration and production activities in Russia, are also prohibited. As discussed above, sanctions targeting Russia have widened considerably following its invasion of Ukraine earlier this year.
In retaliation, Russia has issued its own embargo on the importation into the Russian Federation of goods from the United States, EU, Canada, Australia and Norway.
Autonomous vessels
Interest in autonomous and remotely controlled ships continues to gather pace. From completely unmanned vessels, to vessels remote-controlled from ashore, to vessels with automated processes and decision support systems, the field is a wide one.
On 18 November 2021, the world’s first electric and self-propelled container ship, Yara Birkeland, completed its long-awaited maiden voyage in Norway. Meanwhile, in China the world’s first autonomous, electric container feeder ship, the Zhi Fei, with a capacity of about 300 TEU, has begun operating between Qingdao Port and Dongjiakou. Back in Europe, in a collaboration between the City of Amsterdam, the Amsterdam Institute for Advanced Metropolitan Solutions and the Massachusetts Institute of Technology, a fleet of autonomous, fully electric vessels called RoBoat is in production, with one vessel having been launched at the time of writing. Designed to transport people, goods and waste through Amsterdam’s vast network of canals, the project aims to reduce the city’s congestion in a sustainable way while making profit.
The potential benefits of autonomous vessels are attractive to the marine industry. Crewless vessels not only reduce crew wages and expenses but can also eliminate systems once needed to make the vessel habitable for crew, simplifying vessel design and creating more space for cargo. Autonomy also offers the potential for reducing human error, which is currently estimated to account for 75 to 96 per cent of shipping-related incidents. This has the obvious appeal of reducing costs relating to accidents and insurance. Also, by enabling operations that do not put human lives at risk, the number of human tragedies will be reduced. Without crews to hold hostage, the issue of piracy may also be reduced.
Although this has obvious appeal, there are nonetheless many challenges that will need to be addressed before this technology can be put fully into operation. For example, although risk of human error is reduced, new risk factors will emerge, such as possible technological failures and inadequacies. Cyber threats could also present new forms of piracy. While the developments will affect existing market players such as shipowners, charterers, banks and insurers, new parties will enter the picture, including suppliers of autonomous systems and onshore operators controlling or supervising vessels.
Insurers face the challenge of understanding and pricing the risk correctly, as autonomous vessels present new, as well as existing, risks. They will also need to consider how the current legal framework will fit with the new technology, not only with respect to technical requirements but also as to liability. For example, if an autonomous vessel is involved in an accident and causes damage to a third party, the question arises as to who is liable.
In June 2019, the IMO approved Interim guidelines for trials of MASS, addressing the identification and reduction of risks, appropriate training of personnel and cyber risk management of the systems and infrastructure. In May 2021, the Maritime Safety Committee (MSC) of the IMO completed a scoping exercise to consider how Maritime Autonomous Surface Ships (MASS) could be regulated, and how safe, secure and environmentally sound MASS operations might be addressed in IMO instruments. Existing IMO treaty instruments were analysed to identify provisions that applied to MASS and whether action is required. The next steps will be considered at a future session of the MSC, and could involve the development of a MASS instrument, which might take the form of a MASS Code.
Meanwhile, consideration is being given to the commercial framework for the use of autonomous vessels. It is anticipated that charter parties may not be appropriate in the future, as vessels will initially be designed and built for dedicated routes. Instead, early users of autonomous ships are expected to be non-maritime companies, which will contract with experienced ship managers for the vessels’ operation. BIMCO is currently adapting an existing standard contract, SHIPMAN 2009, for such use. The ‘service-based’ structure of SHIPMAN will be adapted to add autonomous ship-related services and to build in provisions for the operation and manning of a remote control centre.
Cybersecurity measures
Since 2017, all of the four biggest container shipping companies (APM-Maersk, COSCO, MSC and CMA CGM) and the IMO have been hit by cyber-attacks. The shipping industry is considered to be a vulnerable and highly lucrative target, with maritime companies’ shore-based networks particularly exposed to ransomware. The ‘NotPetya’ malware cyber-attack on Maersk in 2017, which reportedly cost the company around US$300 million, highlighted the opportunity for cyber criminals to bring a critical industry down, meaning payment of a ransom was perhaps more likely than other industries. Shipowners and operators should be aware that traditional marine insurance products might not cover all the risks of cyber incidents.
We also note that cyber-attacks can produce benefits for the shipping industry: on 7 May 2021, Colonial Pipeline, which carries fuel from Texas to the eastern United States, suffered a ransomware cyber-attack, resulting in the pipeline’s operations being halted to contain the attack. The ransom (of around US$5 million) was promptly paid, but the impact on operations was significant, leading to tankers being booked to carry fuel that would otherwise have been carried in the pipeline.
Ransom payments to cyber-criminals could put companies at risk of breaching sanctions, as well as other national and international laws and regulations, which could lead to severe penalties and enforcement action.
There is increasing concern that as the maritime industry becomes more reliant on technology, the exposure to cyber-attacks will increase. In recent years, the industry has taken measures to tackle the cyber threats and adopt the appropriate crisis management tools. In 2017, the IMO Maritime Safety Committee approved various measures intended to enhance maritime security, including adopting a resolution (MSC.428(98)) that required shipowners and operators to incorporate cyber risk management into their ships’ safety management systems by no later than the first annual verification of the company’s Document of Compliance after 1 January 2021. The third edition of BIMCO Guidelines on Cyber Security Onboard Ships in 2018 provides additional guidance for shipping companies in carrying out appropriate risk assessments and to include measures in their safety management systems to protect ships from cyber-incidents.
Some critics say, however, that the shipping industry disproportionately prior-itises the less likely ship hacking scenarios and should instead focus on the more common attacks on shore-based systems, including the rise of ‘cyber-piracy’, where container booking applications are hacked by criminals looking for ship manifests, container identity numbers, and ship sea routes to organise theft of containers transporting high-value goods such as electronics and jewellery.
Shipowners face an increasing obligation to avoid and mitigate the risk of cyber-attacks, to develop a cyber response plan and to train and educate crew and other relevant personnel. Failure to keep up to date in this respect could expose ship-owners to allegations of ‘unseaworthiness’ in the event of a cyber incident affecting a ship, shore-based control systems, electronic cargo documents or handing systems and the like. The development of autonomous vessels also presents the possibility of remote access to vessel controls, which could put autonomous vessels at risk of hijacking or sabotage.
Electronic bills of lading
The covid-19 pandemic has accelerated the digital revolution and renewed the interest of the shipping industry to move towards more wide-scale adoption of electronic bills of lading (e-Bills).
E-Bills are currently used only in closed systems through platforms whereby subscribers sign up to a set of rules that set out the specific form of electronic trading documentation to be used and by which subscribers agree that using such documentation shall mirror the position at law as if they were paper documents.
This self-evidently has significant limitations; where a subscriber to an electronic trading platform enters into a transaction with a party who is not subscribed, the electronic platform cannot be used and the parties must resort to issuing paper documents.
Currently, seven such platforms are approved by the International Group of P&I Clubs. Those Clubs provide cover for liabilities where e-Bills are issued within these platforms, but only if such liability would also have arisen under a paper bill.
However, the use of e-Bills also potentially exposes users to risk from hacking, systems collapse, e-theft and viruses, which are not traditionally covered by P&I Clubs and would need to be insured separately.
Meanwhile, BIMCO continues to champion the cause, having included an ‘Electronic Bills of Lading’ clause in the latest iteration of the popular NYPE form time charterparty and more recently having teamed up with the International Chamber of Commerce with the goal of establishing a global standard for e-Bills in the dry and liquid bulk sectors and encouraging their acceptance and adoption by regulators, banks, carriers and insurers.
While e-Bills have been given recognition in Singapore, and the England and Wales Law Commission recently published a consultation paper addressing the issue of e-Bills, it seems unlikely that legislative change in a few jurisdictions alone will result in a substantial increase in their use. The breakthrough, it seems, will come once they are recognised as transferable documents in all the jurisdictions through which they pass.
Major casualties
The year 2021 will be remembered for the grounding of the Ever Given, one of the largest container ships in the world, operated by Taiwan-based Evergreen Marine Corp, in the Suez Canal on 23 March 2021. The canal was blocked for almost a week, causing delays to hundreds of ships waiting to transit. Many others chose to divert around the southern cape of Africa. Releasing the Ever Given took numerous tugs, diggers and dredgers.
Evergreen’s woes have continued into 2022, with the Ever Forward grounding in Chesapeake Bay off the US city of Baltimore. Carrying over 5,000 containers, refloating efforts took over a month. The State of Maryland has reportedly demanded over US$100 million in compensation for damage to the local environment and seafood industry.
In May 2021, the brand new container ship X-Press Pearl caught fire off the coast of Sri Lanka, carrying almost 1,500 containers, including chemicals. After burning for 12 days, the vessel sank on 2 June as it was being towed to deeper water, resulting in Sr Lanka’s worst marine ecological disaster.
In August 2021, the bulk carrier Ambition Journey drifted aground in shallow waters of the Philippines after suffering engine failure while en route from Homonhon Island to China laden with 49,550 tons of nickel ore.
The car carrier Felicity Ace caught fire in the Atlantic on 16 February 2022 carrying nearly 4,000 cars from Germany to the US, including Audis, Porsches, Lamborghinis and Bentleys. She sank about 220nm off the coast of Portugal’s Azores Islands on 1 March.
In its annual report last year, the UK Marine Accident Investigation Branch (MAIB) raised large container ship safety as an issue for the shipping industry. The MAIB identified weather routing and parametric rolling as causes of the container collapse in one casualty it investigated. The agency also mentioned container storage standards and inaccurate declaration of container weight as contributory factors.