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Ukraine Crisis
UKRAINE CRISIS – THE FALLOUT
Maritime sector fallout from the Ukraine crisis promises to be multi-faceted and large scale. Andrew Penfold analyses the situation
At the time of writing (mid-February) the outcome of the geopolitical stand-off between Russia and the Ukraine was not clear. Whether Vladimir Putin would activate his force on the border and invade the country or stand down with some form of compromise was unknown. However, what is clear is that the global attitude to the Ukraine and inward investment may well have been permanently compromised. What does all this mean for the port sector?
IIMMEDIATE IMPACTS
Attention has been focused on the LNG situation. Threats to curtail Russian LNG flows through the country’s transit pipelines to the EU present a major problem for the EU economy (and thus to global energy prices). If these flows were to stop – and similar disruptions felt in the oil sector – then a global energy crisis would be the immediate result.
At present, Russia provides around 45 per cent of natural gas imports into Europe and 25 per cent of oil imports. In addition, Russia is the largest coal supplier into Europe. Curtailment of these shipments could not be easily substituted in the short term. The impact of a disruption goes way beyond Europe, however, with Russia supplying around 7.8m barrels per day of crude and products to the world market and accounting for 10 per cent of seaborne trade tonnages and tonne-mileage. At least 65 per cent is destined for Europe.
Although China could readily absorb these commodities, it is far from clear how these could be redirected without a restructuring of the entire export infrastructure. It is, however, not just about energy, the position is much more complex.
The Ukraine is a major exporter of corn, barley, and rye, but it’s the country’s wheat exports that will have the greatest impact on food security around the world. The development of wheat production in the Ukraine has been a major success story of the past twenty years as the natural advantages of the fertile black earth resources have shaken-off years of collectivised inefficiencies. In 2020, the country exported around 18 million metric tons of wheat out of a total harvest of 24 million metric tons. It should also be noted that a large part of the country’s most productive regions are in the east – exactly those parts most vulnerable to a potential Russian attack or disruption.
Increasing production and exports have drawn in major investments in the past ten years, or so. There are numerous ports offering different capabilities with export elevators, but attention has focused on the so-called Tier I ports (those offering effective relatively deepwater export capabilities). These comprise Odessa, Ilichevsk, Yuzhny and Nikolayev, which offer a combined export capacity of around 23m tonnes per annum. The real problem here has been vessel size, with only Yuzhny able to load vessels significantly above 70,000dwt capacity. These limitations have effectively restricted the reach of Ukraine’s grain exports to medium haul markets. Great efforts and assessments have been directed towards improving export capacity but – always – uncertainties at the political level have stymied developments.
There are grain elevator/grain terminal expansion plans in the Ukraine, but funding looks risky and whatever the shortterm outcome this can only slow development of the Ukraine as a grain exporter.
8 If LNG fl ows from
Russia to the EU, transiting via the Ukraine, were to stop – and similar disruptions felt in the oil sector – then a global energy crisis will result
The broader fall-out from the crisis for the Black Sea as a whole is already being noted. In February the level of vessels loading in the Black Sea was reported (by Drewry) to be down 44 per cent. These difficulties will only be exacerbated by any prolongation of the situation and if there is an actual war it can be anticipated that shipping volumes will collapse further. The search for alternative supplies will accelerate.
LONGER TERM CONFIDENCE
When Russia annexed the Crimea in 2014 there was an immediate hit to the Ukraine’s economic development. The direct result was an overall contraction of around 19 per cent over two years as investment fled from the country.
Recovery was actually rapid, with a sustained period of expansion noted prior to the Covid downturn of 2020. Indeed, these years saw a relatively benign investment climate in the Ukraine with this being reflected in increased consumption and infrastructure investment. Any renewal of conflict will undoubtedly be manifested in more contraction. This can only undermine further scope for the investments necessary to lift the country into the middle income category where it belongs.
Even a stabilisation in the situation will damage confidence in the stability of the Ukraine and this can only reduce FDI and development in general.
IMPACTS BY SECTOR
Natural gas demand will be fundamentally shifted, whatever the outcome.
EU importers will lose faith in reliance on Russian gas either via the Ukraine or via the Nordstream project. This can only mean a search for alternate supplies and a rebalancing of the market. LNG is obviously the main beneficiary. We can certainly anticipate increased investment in LNG import terminals and increased storage capacity. Sourcing of these supplies will focus attention on the Middle East (especially Qatar) and the US. These are the sources with the scope to boost production – especially under a high price environment.
Grain trade seems certain to be disrupted. Effective partial removal of Ukrainian grains from the world market can only result in increased prices and the search for alternative supplies. Once again, this will place increased demand on the North American exporters – only these players have the scope to lift shipments in the short term. Prices will increase and it will be the poorer importers such as those in Africa that will feel the major pain from this. These developments will slow the pace of export terminal investments in the Ukraine and also undermine the scale of Russian exports.
The removal of Ukraine’s coal exports – at least in the short term – will further imbalance the European energy market. The central role of these (and Russian) supplies in Europe will also result in the search for alternative sources. This means increased shipments of coal from the Atlantic basin – Colombia and the US – and improved viability for distant suppliers such as Australia. Import terminals are not optimised for the larger vessels involved and this will see further CIF price increases. It could also have the effect of accelerating European trends towards ‘net-zero’.
Away from the bulk sector, economic contraction will be manifested in a reduction in consumption with an estimated hit of around 15 per cent for containerised goods flows even if actual war is avoided. There will be little scope for sustained inward investment in this sector.
PORT IMPLICATIONS
The Ukraine has been the target of considerable terminal investment in the dry bulk and container sectors in recent years. The problematic political nature of many of these projects has held back the pace of investment, however. Pushing investment projects to a level of bankability has always been difficult here, but the current political upheavals are of a different order. It is unlikely that significant investment will proceed until some stability is resumed. At present, investors will only give the country a very wide berth.
8 With or without
