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Impacts of the Russia-Ukraine War on Ports and Transport

The Russian invasion of Ukraine has shaken up and impacted the world. The effects of the conflict are felt in almost all areas of global politics, trading, and even peoples’ personal lives. It is worth asking: What are the local, regional and global implications for the port and transport sector?

That being said, at HPC we were involved in the improvement and development of the container terminal at the Port of Odessa -now operated by HHLA- and maintained close ties with staff -almost 400 of them- which brings about a whole new dimension to the conflict as one is more directly exposed to the horrors of the war.

In order to get a better understanding of the direct consequences of the war upon the port and transport sector, the following breakdown provides an overview.

Dennis Koegeboehn, Partner at HPC
Hamburg Port Consulting GmbH

Direct Impacts

Commercial shipping activity and port operation in the northern Black Sea have stopped – Transportations links are indefinitely interrupted
The commercial traffic in the northern Black Sea and the Sea of Azov has been terminated immediately after the invasion. Altogether 18 Ukrainian ports have been closed.

Shipping lines are no longer accepting bookings for Ukrainian ports – for how long? That remains to be seen. Besides the lack of cargo and staff in the ports at this stage, potential damage to super- and infrastructure is a material risk for fast recovery, as it is the likely significant damage to the hinterland connectivity of the ports.  

Indicating the catastrophic impacts of the war, Ukrainian imports have dropped by 92% according to statistics.

Substitute transportation routes have been established, but may not last
Partially offsetting the reduced imports, corresponding values in neighbouring countries have increased by up to 47%. This is also reflected in a significant increase in cargo handling at the Port of Constantia (Romania) which has experienced a 23% growth, making it a potential hub for Ukraine's agricultural exports. This trend will depend however on stable hinterland infrastructure.

Yet, other ports in the Black Sea are unlikely to benefit from the war; even the medium-term upside for Constantia may be under scrutiny since insurers have extended the declared War Risk Zones to Romania and Georgia. Securing insurance becomes at best costly, if not impossible. Wheat transportation cost per ton have jumped up by 17% within one week in late February already.

Other ports with a potential for picking up some of the cargoes are Thessaloniki in Greece and the Northern Adriatic Ports. In addition to the necessary capacity provision, performant hinterland connectivity will be required to establish reliable and resilient transport solutions. Once the links to these ports are established and provide reliable exporting facilities, the recovery of a local exporting option may be possible. The likelihood is for these connections between ports and the hinterland to be operated in partnership with third-party exporters.

Shortage in grain supply from Europe’s bread-basket drive food prices
Ukraine and Russia combined, account for roughly 25% of the global annual wheat production; Ukraine alone exported 74 million tons of grain in 2021/2022. With the war raging in its core grain production regions, and with both countries having suspended exports, a significant proportion of global supply is no longer available on the market.

Adding the lack of fertilizer exports from the region to the equation, the remaining global production will be subject to higher costs, higher demand, and more speculation, leading up to related-price adjustments.

While grains may be sourced from alternative markets such as Australia, this would result in longer transport distances and higher ton-miles for transportation putting bulker capacities under stress. An increase in charter rates may be expected, further adjusting grain prices. In light of the already prevailing food shortages -e.g. in some parts of Africa-, catastrophic starvation must be expected in the region unless timely actions are taken.

Impacts on global ports is limited to few key trading partners
Russia’s share of global GDP was 3.11% in 2020. Almost half of it coming from international trade, particularly from oil and gas exports. The immediate effect may be significant. In Rotterdam for instance 13% of the 470m tons handled every year are related to cargo coming from and to Russia. In the port 30% of crude oil, 25% of gas and 20% of oil products and coal originate from the Eurasian country. Additionally, 10% of container transport are connected to Russia. Similar dependencies prevail across other northern range industry players.

Ports relying on trade with Russia are likely to recover their pre-war import volumes once substitute exporting partners are identified.

Should the conflict continue over a longer period or expand, global economic implications are to be expected. For the time being, the direct impact from the war on global containerised cargo should be minimal given Russia’s limited relevance in global economy.

Sanctions against Russia bring the national ports sector to a hold
Sanctions imposed on Russia by the global community in response to the war have virtually excluded the country from international trade lanes for containerised cargo. Major shipping lines have terminated operations in Russia and do not accept bookings with port calls in the country. Some of these are industry leaders like Maersk, MSC, CMA CGM, Hapag Lloyd, ONE, among others. Russia has therefore become isolated from global trade lanes and cargo handling at its ports has practically stopped.

It will take time for international companies to resume operations in the country even after the war is over and sanctions are lifted.

Ukrainian Ports Outlook
The future of the Ukrainian port sector depends on the outcome of the war. Although there are ports such as Odessa that remain within Ukrainian territory, significant support from the West may be expected for rebuilding infrastructure. In addition to the potential development that such aid would bring for the sector in the medium-term, closer relations between Ukraine and the West should be expected. The ‘economic marvels’ of the country are its natural resources, 90% of which are located in territories that Russia attempts to separate. Additionally, its vast grain production, once recovered, should lay important foundations for a self-sustained and prosperous country.

In a scenario where all or most of Ukrainian ports fell under Russian control, there would be no upside for them. As the sanctions would likely continue in this case over a longer period of time, a globalised world finds irony in the fact that substitute alternatives can actually be found, minimising the impact of the war on a global scale.


Strategic Impact

Strategic plans for the use port land are to be revisited in light of the ongoing energy shift
The Ukraine war has accelerated the energy transition in Europe. Meanwhile, other supply sources are to be used for which dedicated import capacities need to be established. As a result, ports and terminals will be fast-tracking the required development and expansion of energy import infrastructure to facilitate gas imports inter alia from the Middle East and North America.

At the same time, the already existing oil and coal capacity in the terminal sector may prove to be excessive for future demand, which opens the opportunity for (re)developing other port usages.

Pressure from rising costs to accelerate vertical integration in the logistics sector
The impact of the conflict on the transportation industry is significant. Whilst the immediate adoption of alternative routing has maintained a certain level reliance on the supply chain, longer transport distances, combined with substantially increased fuel costs, are bound to hit the lower margin hinterland transportation sector, beyond the areas with ongoing conflicts. Mounting operational costs, in combination with fixed-term contracts, are likely to put at risk several businesses that already experiencing significant pressure from this situation. This scenario may accelerate vertical integration for shipping lines, as well as attract potential investments for solution portfolios for a fully integrated supply chain.

Global geopolitical shifts 
In recent weeks, and hoping to secure alternative trading partners, Russia has shifted its efforts towards increasing trade with China, India and Bangladesh. This tactic comes as part of a strategic move towards further expansion of the Eurasian Economic Union (founded in 2015 by Russia, Belarus and Kazakhstan) towards the Southeast corner of the continent.

It is yet to be decided whether this strategy provides significant transportation opportunities within the region and strengthens global economic interrelations, or if the larger focus on Asia hints towards a more confrontational global future. 

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You can also meet Dennis face-to-face at TOC Europe.