Russia – Ukraine crisis: will safe corridors be enough?

Vessels have been unable to leave port since shortly after the conflict began on 25 February 2022, amid reports of naval blockades, mines and other obstructions. The opening of ‘safe corridors’, which allow certain grain carrying vessels to leave, is therefore welcome news to vessel owners and their insurers, as well as to the sellers, buyers and insurers of grain cargoes.

The global shipping community is watching closely as the RAZONI, which became the first vessel to leave Ukraine along a ‘safe corridor’ on 1 August 2022, makes its way to Turkey and eventually onto Tripoli. If the voyage is successful, it paves the way for other vessels to leave Black Sea ports.

Indications are that around 25 million tonnes of grain are awaiting export via the ‘safe corridor’. The threat of deterioration of these agricultural products has necessitated swift action to ensure that grain can be utilised and storage freed up before the next harvest yield, and there are reports that a further 16 vessels are ready to leave imminently.

However, Ukraine’s infrastructure minister has stated that it will take many months before grain exports reach pre-war levels (in August 2021, 194 grain-carrying vessels departed from all Ukrainian ports). The first two weeks are a pilot regime, meaning no more than five vessels are likely to leave from Odesa, Chornomorsk and Pivdennyi during this period.

A host of practical difficulties may also delay departures, including availability of crew, pilots and tugs. Concerns around safety remain as it is unclear if the tide will shift the mines laid by both Russia and Ukraine and, therefore, what volume of tonnage will be prepared to carry shipments through the ‘safe corridor’. Whilst vessels already at Ukrainian ports will be keen to leave, there is a more pressing issue as to whether those safe vessels who traditionally served the Black Sea and Sea of Azov will be prepared to return. It also waits to be seen if there is a limit to the number or type of vessels which Russia will permit to leave as part of the agreed initiative.

However, there are promising early signs as a number of other vessels in the Black Sea, whose AIS data has been largely inactive since the outbreak of war, appear to be manoeuvring in readiness to load grain cargos at the permitted ports.

The current focus is understandably on grain exports, but cargo interests and their insurers remain in the dark on the significant volumes of other commodities that remain at ports and in store in Ukraine.

At the outbreak of the war, President Zelensky granted unprecedented levels of power to the military and government agencies, including the ability to seize or expropriate property as well as prohibiting or restraining exports of designated commodities, including agricultural products, oil and gas.

It is commonplace for the peril of seizure by foreign governments/militaries to be excluded from cover by virtue of the Institute Cargo Clauses (A) wording which is prevalent in the London Market. However, those cargo interests which may have bespoke covers responding to seizure of goods, or the threat of the same, are an enduring concern in the London Market.

Some policyholders may try to argue that coverage has been triggered under bespoke covers for the confiscation, deprivation or restraint of access to insured cargo. It is possible that those exposures (if covered) may crystallise in late August or early September. Each cover will of course need to be carefully considered on its own wording and by reference to the facts of each case.

On a practical level, the issues are complex and are changing almost daily. Malcolm Arrowsmith, managing director of Cargo Recovery Consultants, who have more than 40 years’ experience in organising and performing transhipment of distressed cargo, has identified some key practical issues:

“The real issue, however, is less the departure of vessels which have been loaded with corn and wheat since 24 February 2022, and much more, whether new vessels will be able and willing (and permitted) to sail back into these same ports to load fresh cargoes for export.

If they are, then the next important question is whether the railways and roads will be safe inside Ukraine such that fresh quantities of grain now stored in the interior of the country can be safely transported to the port terminals/silos in anticipation of these other ships coming in to load these new loads. This is not as easy or simple or cheap as one might think. In recent weeks the Ukrainian railways have increased tariffs for the railcars which are available as demand has heated up.

In all regions of the Ukraine, there are vast volumes of grains stored in silos and warehouses which need to be exported. There are thousands of rail cars each day sitting at the border/customs check points waiting for the paperwork to be completed so that the goods can be discharged from Ukrainian railway wagons and then re-loaded to EU railway wagons, the two systems being incompatible, which creates a bottleneck. Trucking has similar delays at the border crossing points because of volume of paperwork to be handled.

The next issue for grains transported overland, is to find storage space at export terminals/locations, whether that be in Poland, Germany, Romania or elsewhere. All the large trading houses have been very active in reserving as much space as they can in anticipation of exporting not only the old crop grain but also the new crop grain which is now being harvested. The costs for railways/trucks/trans-loading charges etc., is high – upwards of US$100 per mt would be a minimum additional expense for all this.

Internal continued storage inside Ukraine is the other point which has to be taken into consideration. Normally speaking, the storage contracts inside Ukraine are negotiated on an annual basis beginning on 1 July each year. This is done on the basis that old crop grains have by that date been fully exported, thus freeing up the storage space once again for the current harvest. This year is very different as old crop grain has been stuck in those storage locations with a much slower off take being realised due to the inability to shift grains over land in significant volumes as compared to export via the traditional seaport methods”.