Zuhair's article was originally published in Maritime Risk International and can be found here.
Developments in maritime law: war and carbon emissions trigger a change of tide
Introduction
The maritime sector is a constantly evolving area of regulations, and, for companies or individuals operating in the maritime industry, it is imperative to remain up to date with (and on top of) changes that disrupt the industry. Needless to say, this year the most prominent disruption is the ongoing war between Russia and Ukraine, but new laws aimed at reducing carbon emissions will also affect the sector. This piece will explore both influences and the impact they are having on the industry.
Consequences of the Russo-Ukrainian War
War and its consequences bring changes that not only reflect the trajectory of the war, but also the new deals that are brokered to ease the burden of war on the maritime sector. The social, political and economic outcomes of the ongoing war have thus far impacted the shipping industry in the following ways.
The Sanctions Regime
Western entities, particularly the USA and the European Union, have imposed a wide range of sanctions on Russia in attempt to curb its invasion on Ukraine. US President Joe Biden has officially stated that sanctions on every aspect of the Russian economy is on the table, including further sanctions on Russia’s energy sector. While the first ‘instalment’ of economic sanctions has left the shipping industry relatively unaffected, sanctions on the energy sector have had the effect of skyrocketing fuel prices, making shipping a lot more expensive.
Apart from the obvious increase in prices, further sanctions on Russia might have the dangerous effect of implicating third parties for breaching the trade embargo placed on Russia. If suspected, these entities could be accused of being in support of Russian activities or smuggling military armaments into Russia, thus causing potentially irreparable damage to reputations.
Supply and Demand
Russia is the second largest crude producer and clean petroleum exporter in the world, and Europe imports two thirds of Russia’s crude products. While there continues to be speculation on the breadth and the effect of the ever-expanding list of sanctions, it is necessary to acknowledge the detrimental effects the restrictions on Russia’s oil sector have caused thus far.
Amid high oil prices that continue to rise, Europe has thus far not found a reliable, long-term alternative producer and exporter which will fulfil its high import demands. Growth in oil output in OPEC countries has slowed in recent months, raising doubts on whether Middle Eastern countries, such as the oil-rich Saudi Arabia, could provide the oil required to satisfy the demand.
The volatility these conditions create not only imposes negative results onto Russia and Europe, but the maritime industry as a whole.
The Maritime Insurance Industry
One of the ripple effects stemming from the conflict in Ukraine is keenly felt in the marine insurance industry, as hundreds of vessels are stuck in the Black Sea amidst the ongoing war. This leaves ship crew and personnel stranded, not only exacerbating the current shortage in marine staff but also leaving shipowners concerned about the safety of the ships.
While marine insurance losses are currently limited, there is a feeling that there could be an impending wave of claims. As per Allianz’s Safety & Shipping Review 2022, 2,000 ships were trapped in Ukrainian ports in the Black Sea and the Sea of Azov at the start of April 2022. This could give rise to numerous claims under war policies from ships lost to potential bombings, rocket attacks and sea mines in the Black Sea. Non-war policy claims are also likely to increase too due to ships being trapped in the ports of conflict.
Prompted by the war in Ukraine and the strains it has caused on the maritime industry, in July 2022 the United Nations (UN) and Turkey have brokered a deal between Ukraine and Russia with the intention of resuming grain export through the Black Sea. The deal, which stipulates (amongst other things) that ships exporting Ukrainian grain in the Black Sea will be given a 10 nautical mile buffer zone, was announced amidst concerns of a global food crisis in which tens of millions more people have been forced into hunger. Whilst still nascent, this positive development could encourage shipping and insurance companies to resume trading from the Ukrainian ports of Chornomorsk, Odesa and Yuzhny.
Another positive development for shipping and insurance industries is the establishment of a protection zone, prohibiting parties involved in the conflict from attacking merchant or civilian vessels. Whilst Ukrainian President Volodymyr Zelenskiy stated that the pace of exports could be maintained through this initiative, the unpredictability of war means that there is no guarantee covert attacks on merchant ships will be completely eliminated. The buffer zone is a good first step in tackling the uncertainty garnered by the war, but more measures should be implemented to bestow the maritime sector with the confidence to safely continue trading operations in the region.
Automatic Identification System (AIS) Vulnerabilities
Not only has the maritime industry had to consider alternatives to safeguarding their ships and crews from the adverse effects of the war, but it is also tackling the rising insurance rates stemming from data vulnerabilities. Early in March 2022, NATO’s Allied Maritime Command issued a warning to ships in the Black Sea, notifying the vessels that there might be a high risk of Russia attacking commercial ships in the affected areas. NATO also warned of potential cyber-attacks, electronic interference, and AIS spoofing. AIS data vulnerabilities means that vessels operating in the area of conflict should consider switching to safer and more reliable systems of maritime safety management.
Environmental challenges
Aside from the war, those in the maritime sector are also having to adapt to new rules and regulations that are being introduced with a view to reducing carbon emissions. The International Maritime Organization (IMO) is leading the charge in this regard, establishing new laws that will force shipowners to, inter alia, demonstrate that their ships’ carbon emissions are on a downward trajectory. These regulations, which come into force on 1 January 2023, will regulate the operational efficiency of vessels. Effectively, shipping companies are being told that, to continue to operate, they either need to upgrade their ships, which will be costly, or slow down their voyages, which will result in less income. It is therefore prudent for shipowners to plan to ensure their operations will comply with the new rules.
Elsewhere, the UK Emissions Trading Scheme is looking to expand its reach to include the domestic maritime sector, demonstrating the growing importance of making the shipping industry more carbon friendly. Whilst this potential inclusion is still in its consultation phase, shipowners should be wise to the fact that environmentally friendly regulations are inevitable and will force the maritime industry to adapt accordingly.
Conclusion
The Ukraine-Russia war has had a negative impact not only on a human, social and political level, but its consequences have also disrupted the maritime sector. Whilst positive steps have been taken since the start of the war, the volatile nature of war means that shipowners need to stay vigilant and proactive when it comes to preserving their ships, their crew and their commercial obligations. 2022 has also shown that carbon emissions are very much at the forefront of the minds of regulators, and the maritime industry must approach these changes positively, else risk being left stranded on shore as their competitors sail on.
