Putin's war against Ukraine is threatening to become extremely expensive for Russia's entire shipping industry. This, because the Lloyd’s Market Association’s Joint War Committee has added Russian waters to its list of high-risk areas. It is expected that insurance companies will begin charging additional premiums for local shipping companies and ports in the coming weeks, or simply completely refuse to insure Russian vessels. The situation in the Black Sea serves as an instructive example.
Insurance costs are spiraling ever faster upward
What has been happening in the Black Sea since the outbreak of war on 24FEB22, could soon apply to all Russian shipping companies as well as the country's coastal waters. Since then, insurers have been levying an extremely high war-risk surcharge on merchant ships crossing the Bosphorus on their way to the Black Sea. This means that the insurance now likely exceeds the cost of hiring the vessel itself. A US$50-million, five-year old tanker hauling a standard 1-million-barrel Russian cargo would need to pay $5 million in insurance premiums alone - roughly $1.5 million more than the cost of hiring the carrier, according to a report in the American Journal of Transportation.
The reasons for the enormous risk surcharges are obvious. For example, since the outbreak of the war, it has been proven that five ships were hit by missile attacks, leading to them exploding and sinking in the Black Sea. Furthermore, drifting naval mines also pose a high risk to vessels and their crews.
Charter rates becoming unaffordable
Because of the ongoing war, and with no end in sight, some insurance companies are meanwhile refusing altogether to insure ships bound for the Black Sea. This has pushed prices up again since the remaining pool of insurers can now demand higher premiums.
In addition to insurance prices, charter rates charged by owners or their agents for vessels operating in that region, have also shot through the roof. A Bloomberg survey reveals that it costs about US$3.5 million to hire a tanker to ship a million-barrel cargo to Italy, coming from the Russian Black Sea port of Novorossiysk. That is well above the sum of $700,000 demanded earlier this year.
Seizures are a further risk
It cannot be ruled out, for example, that the navies of the neighboring states will confiscate ships crossing the Black Sea and chain them up - as a sort of pledge for the settlement of war damages or other outstanding claims. Reasons for the seizure can be easily constructed, such as the insinuation of clandestine arms transports, or the attempt to spy out military restricted areas and their surveillance, threatening national security.
The AJT report points out that, theoretically, ship owners could do without insurance. If so, however, this would have a knock-on effect that would ultimately put them on the hook for the risk of pollution, removal of wrecks, cargo liability, and any crew liability and repatriation.
Most owners are likely to shy away from such consequential costs for uninsured merchant vessels.
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