The Impact Of Russia And Ukraine War On Maritime Trade

Maritime trade constitutes a major part of the global economy as one of the important trade routes. Considering all commercial transport activities, the fact that approximately 85% of them are carried out by maritime routes emphasizes the importance of maritime trade. Thus, maritime trade routes have a strategic value. In particular, the Black Sea, where the ports of Russia and Ukraine are located, has been a critical region throughout history. Both countries are indispensable in the production and export of agricultural products, and their wheat exports in particular account for 28% of global exports. Specifically, ports such as Odessa and Mariupol played a major role in Ukraine’s grain exports before the war. They were central to the shipment of not only grain, but also energy resources and other important commodities. With the outbreak of the war in February 2022, the situation was reversed. Beyond the destruction of cities, ports in the region were rendered non-functional or completely closed due to the war. Not only Russia and Ukraine suffered from the war, but also the maritime trade, which is of critical importance for exports, was deeply affected.

In this article, the effects of the war on maritime trade will be evaluated through its effects on trade routes, contract of affreightment (“COA”) and maritime insurances.

1. Impact of the War on Trade Routes

Russia and Ukraine are hosting critically important trade ports along the Black Sea and Sea of Azov, such as Odessa, Mariupol and Sevastopol. The closure or unavailability of these ports due to the war caused a crisis in the trade of grain and other agricultural products around the world, bringing exports, especially via the Black Sea, almost to a standstill. The serious disruptions in shipments pushed buyers to look for new alternative routes, which resulted in record prices for products and shipments. One of the new routes is the Arctic route for oil trade between Russia and China.

With the effect of the war, Ukraine started to use the overland route for the grains exported by sea, which did not have the expected effect. At this point, the ‘Grain Corridor Agreement’ was signed in Istanbul on 22 July 2022 with the mediation of Turkey and the United Nations. The aim of this agreement was to establish safe maritime trade corridors in the Black Sea and to restart grain shipments from Ukrainian ports in an effective manner. Within the scope of the agreement, Odessa, Chornomorsk and Pivdennyi Ports were reopened for grain shipments and Turkey took the responsibility to ensure the security of this corridor. In this way, critical food needs, especially for underdeveloped and developing countries, were met through routes created through policy. Although there is no doubt that maritime trade activities could not be continued as effectively as in the pre-war period, the use of the sea route was continued through the new routes created.

2. Impact on COA

The war between Russia and Ukraine has not only created physical threats for the ships travelling to the region, but also affected freight rates and contracts with its economic dimensions. The ‘safe ports and safe places’ clause, also known as ‘ports and safe places’ clause, has come to the fore in charter contracts. With this clause, it is regulated that force majeure provisions cannot be applied in the contrary activities by placing various limitations on the geographical regions on the route of the ship and therefore it is not possible to avoid liability. The term ‘safe’ in the clause may exclude not only a physical conflict but also political disputes. For this reason, the shipowners do not prefer to go to war-affected areas.

The impact of the war has also brought to mind the fate of COA’s under Turkish law. When the regulations of the Turkish Commercial Code No. 6102 (‘TCC’) on COA’s are analysed, it will be seen that there are some special regulations that can be included in the state of war, and these regulations will be applied to a great extent. Paragraph 4 of Article 1218 of the TCC, which gives the parties the right of termination in case of war, is discussed as follows:

“If, due to the outbreak of war, the whole or both of the ship or the goods to be carried by the ship in accordance with the contract of affreightment are no longer considered free and there is a danger of seizure or confiscation, the parties may exercise the right of termination without waiting for a certain period of time.”

In the event that the COA terminated for this reason and terminated before the vessel’s voyage, the parties are only responsible for the performance of their obligations arising up to that time. (Art. 1225 TCC) In the event that the COA is terminated after the voyage, the distance freight must be calculated and paid to the carrier in accordance with the procedure set out in Article 1210 of the TCC, including the return of the cargo to the port of loading for the voyage made until the time of termination.

In addition to the effects of the state of war on COA’s in terms of legal enforceability, freight rates have also increased significantly in economic terms. The risks caused by the war, increased insurance costs, and the use of alternative routes are some of the main reasons for this increase. The necessity to use safe ports, together with the preference for new and longer trade routes, increased logistics costs, which directly affected freight prices. In addition, the experimentation with alternative transport routes and the fact that buyers have turned to other sources for energy and food supply due to shortages have led to a significant increase in freight rates and the prices of the commodities transported.

3. Impact on Insurance Contracts

Russia and Ukraine’s war has also had a profound impact on marine insurance. The physical and political risks associated with the war significantly changed the scope and costs of marine insurance policies. Due to the regulations in the policies stipulating that losses due to wars will be excluded from coverage under the insurance contract, special war coverage was needed. Many ports in the region have become dangerous, and situations such as ships facing mines or military threats have brought ‘war risk’ policies within the scope of marine insurance to the agenda. In the case of war risk coverage, although losses arising from acts of war are covered, this has led to an increase in insurance premiums due to the high-risk levels in these regions. In addition, the conditions set out in the aforementioned ‘safe ports and safe places’ clauses have gained importance. The breach of this clause is often dealt with in such a way that the loss will be directly excluded from the coverage.

As a result of these reasons, the increasing importance of war risk coverages led to a significant increase in insurance costs. Although insurance companies narrowed the conditions in the policy for ships operating in war zones, they demanded high premiums. The ongoing effects of the war have considerably shaped the scope of marine insurance.

4. Conclusion

War between Russia and Ukraine has had undeniable and long-term effects on maritime trade. The conflicts in the Black Sea region have shaped different routes, affected COA’s, especially economically, and led to significant cost increases in marine insurance. As far as trade routes are concerned, the war disrupted the activities of busy ports in the region, leading to the preference of longer and more costly alternative routes for transport activities. Especially the transportation of critically important products such as grain and energy has become very difficult. Turkey’s strategic role over the straits was strengthened by its moves in the political arena. COA’s were affected by the uncertainties and risks caused by the war and led to a re-evaluation of the provisions between the contracting parties. In addition, logistics costs due to new routes also had a major impact on contract prices. In maritime insurance, the high risks brought about by the war forced to expand the scope of insurance policies, but this situation caused insurance premiums to rise rapidly and caused a financial burden.

The war affected all components of maritime trade, with the formation of new routes, changes in COA’s and increases in marine insurance premiums being among the most affected areas. It is important to establish a more robust system against unexpected crises such as war, to produce quick solutions and to minimise the impact of regional conflicts on the global economy.
Source: Kilinç Law & Consulting