Insight: After attacking Ukraine wheat exports, Russia faces own shipping challenge

Novorossiysk Commercial Sea Port PAO

08/08/2023 07:00

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      Russian turning to "shadow fleet" to move its grain,
sources say
    

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      Major global grain traders reduce activity in Russia
    

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      Russia aiming to export volumes of wheat near record highs
    

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      Russian-operated fleet of grain ships well below needs
    

  
    By Jonathan Saul and Nigel Hunt
       LONDON, Aug 8 (Reuters) - Russia's lack of ships and
Western grain traders' shrinking appetite for business with
Moscow are adding to rising costs of moving Russian wheat, at a
time when the war in Ukraine has spilled perilously close to
vital Black Sea supply routes. 
    President Vladimir Putin promised to replace Ukrainian grain
with Russian shipments to Africa after Moscow in July ended an
arrangement that gave Ukraine's food cargo safe passage in the
Black Sea, imposing a de-facto blockade on its neighbour and
attacking storage facilities, in an escalation of the war.
    Ukraine's response, sea-drone attacks on a Russian oil
tanker and a warship at its Novorossiysk naval base, next door
to a major grain and oil port, has added to these new dangers
for transport in the Black Sea. 
    Eduard Zernin, head of Russia's Union of Grain Exporters,
cited a potential aggravation of what he called "hidden
sanctions" that "may lead to an increase in freight and
insurance costs" for Russia.
    This "will be reflected in the price level of wheat and
other grains on the world market", Zernin told Reuters.    
    Even though agriculture exports are not subject to direct
European and U.S. sanctions imposed after Russia invaded Ukraine
last year, Moscow says restrictions placed on banking and
Russian individuals are "hidden sanctions" on the food trade.
    The financial and security risks associated with trading
with Russia - compounded by the Black Sea corridor collapse -
are driving up costs of freight for Moscow and pushing it toward
older and smaller vessels run by less established shipping
operators, Reuters reporting based on conversations with 10
marine insurers, traders and shipping companies showed. 
    The situation is raising doubts about whether Russia can
keep up a record pace of exports and if not resolved could push
global wheat prices higher, the sources said.
    Already, prior to the expiry of the deal, grain carriers and
commodity houses had reduced exposure to Russia. 
    Global commodity houses are no longer helping Russia with
the mechanics of trading its grain. Cargill, Louis Dreyfus and
Viterra stopped such work on July 1, adding more pressure on
Moscow to handle all aspects of grain deals including transport.
    Cargill has said it would continue to ship grain from
Russia's ports. It declined further comment.
    Dreyfus, Viterra and ADM declined to comment, while another
major international group, Bunge, did not respond to a request
for comment.
    "It is not going to be easy for them (Russia)," said one
industry executive with knowledge of grains exports. 
    Last year, Russia exported a record volume of wheat on ships
chartered from international companies and traders. While
exports remain strong, in the past few months it has had to
source more of its own freight, increasingly relying on a
"shadow fleet" of older vessels typically operated by companies
based in Turkey and China, three shipping industry sources said.
  
    "There is very little coming out now for international
companies", said the executive, who, like other industry sources
consulted for this story, asked not to be named because of the
sensitivity of the issue. "Most of what is coming out is dealt
with by Russian traders using (shadow) fleet ships, which
international traders would not touch". 
    In a sign of Russia's growing hunt for vessels, its requests
for charters doubled to 257 in July compared with the same month
last year, according to data from maritime platform Shipfix that
collates from hundreds of market participants.
    The data does not show how many of the requests were
fulfilled, or which ship operators were involved. 
    The requests for ships were up 40% from June, and are likely
to climb further as the export season gathers pace.
    Denmark's NORDEN and two other Western shipping groups that
declined to be named told Reuters they stopped working with
Russia after the invasion of Ukraine in February, 2022.
    
    INSURANCE    
    Without the Black Sea corridor in place, both Russia and
Ukraine warned in July that ships destined for each others ports
could be treated as legitimate military targets, which three
marine insurance source said was a further blow to Western
companies' risk appetite.
    Insurance for ships heading to Russia's Black Sea ports
currently costs tens of thousands of dollars in additional
premiums daily, the three sources said, with rates ticking
higher following Russia's attacks on Ukraine's other waterways
through the Danube in recent days and Kyiv's response.
    The Black Sea remains a critical area for Russian exports,
with other locations more complicated and costly.
    One shipping source familiar with the matter said even
before insurance, ship operators were charging up to $10,000
more daily for Russian cargoes than for cargoes leaving nearby
ports in Bulgaria and Romania, as the collapse of the deal and
Black Sea escalation weighed.
    Mike Salthouse, head of external affairs with leading ship
insurer NorthStandard, said that ever since the United States
and Europe imposed sanctions, some traders and insurers fear the
ultimate beneficial owners of Russia's ports and terminals could
be connected to designated individuals. 
    "The ownership structure is not readily apparent from
routine or even enhanced due diligence," he said, leading to "a
level of reluctance with engaging in Russian trades."
    The industry executive said another risk was if a vessel
needed to buy fuel from Russia, a situation the source said
could create problems with Western sanctions enforcers, making
it harder to then conduct non-Russian business.
    "It's not easy to flip into the normal trade after that",
the executive said.    
    Russia's Black Sea terminals handle about 70% of the
country's grain exports. They include the Novorossiisk and Taman
ports. 
        
    "TRADE BARRIERS"
    Despite the tensions, global wheat prices remain well below
the peak after Russia's invasion last year triggered fears of a
global hunger crisis. The removal of more Ukrainian grain from
the world market could add to supply pressure unless Russian
exports or large crops from other producers make up the
difference.
    Two sources said the escalation of tensions in the Black Sea
was likely to impact Russia's export numbers, and was
discouraging shipping companies from bringing vessels to Russian
ports, especially newer ships that carry more.
    In a statement to Reuters, Russia’s agriculture ministry
forecast grain exports will fall about 8% during the 2023/24
season from Russian last year's high of 60 million tonnes. It
did not give a reason for the drop.
    Wheat exports will be down a little less, to 44-45 million
tons, Zernin said, in line with estimates from the International
Grains Council.
                         
    SHIP BUILDING    
    The ministry in December announced a plan to build a fleet
of 61 new grain ships, citing "sanctions pressure and the
refusal of many international carriers to cooperate with
Russia". 
    Russian exporters need 34 grains ships with a carrying
capacity of 60,000 tonnes and 27 with capacity of 40,000 tonnes,
the ministry said in December. It did not say when they could be
built by Russian shipyards.
    Russia's state-owned agricultural leasing company
Rosagroleasing said in March of this year it had placed orders
for a fleet of grains ships that it planned to launch within
three years.
    No orders have currently been reported for Russian companies
either domestically or internationally, according to data from
valuation company VesselsValue. New ships typically take up to
three years to build. 
    Many of the Russian operated current fleet of 31 mainly
smaller dry bulk carriers are over 30 years old, VesselsValue
data showed, making it harder to access some ports with
stringent requirements for ships over a certain age.
    "We don’t see Russia building its own fleet from scratch in
the short term in order to meet its immediate needs. The primary
focus is going be on chartering from the commercial market,"
said Victoria Mitchell, analyst with Control Risks consultancy. 

 (Reporting by Jonathan Saul and Nigel Hunt in London, Reuters
reporters, additional reporting by Polina Devitt in London and
Gus Trompiz in Paris; editing by Frank Jack Daniel)
 ((jonathan.saul@thomsonreuters.com; + 44 207 542 4357 ; Reuters
Messaging: jonathan.saul.thomsonreuters.com@reuters.net))