Russia’s wheat export disruption leads to shipping challenge.

Russia’s shortage of ships and decreasing interest from Western grain traders in dealing with Moscow are contributing to increased transportation costs for Russian wheat. This is occurring alongside the escalating conflict in Ukraine, which has raised concerns about the security of crucial Black Sea supply routes.

In July, President Vladimir Putin pledged to substitute Ukrainian grain with Russian exports to Africa. This decision followed Moscow’s termination of an agreement that allowed safe passage for Ukraine’s food shipments in the Black Sea, effectively imposing a blockade on its neighbor. This move escalated the conflict and included attacks on storage facilities.

Ukraine retaliated with sea-drone attacks on a Russian oil tanker and a warship located at the Novorossiysk naval base, which is adjacent to a significant grain and oil port. These actions have further compounded the risks associated with transportation in the Black Sea.

Eduard Zernin, the head of Russia’s Union of Grain Exporters, pointed out the possibility of heightened “hidden sanctions” that could result in elevated freight and insurance expenses for Russia.

Zernin informed Reuters that this situation “will impact the price of wheat and other grains on the global market.”

While agricultural exports aren’t directly subjected to the European and U.S. sanctions resulting from Russia’s invasion of Ukraine last year, Moscow contends that banking and individual restrictions are considered “hidden sanctions” affecting the food trade.

Financial and security concerns linked to trading with Russia, exacerbated by the disruption in the Black Sea corridor, are causing a rise in freight expenses for Moscow. This is pushing the city towards utilizing older and smaller vessels operated by less established shipping companies. This insight comes from Reuters, which collected information from 10 marine insurers, traders, and shipping firms.

The current situation is casting doubt on Russia’s ability to maintain its record pace of exports. If left unresolved, this issue could potentially drive global wheat prices higher, as indicated by the sources.

Before the deal’s expiration, grain carriers and commodity houses had already decreased their involvement with Russia.

Major global commodity firms, including Cargill, Louis Dreyfus, and Viterra, have ceased assisting Russia with the logistical aspects of trading its grain. This development, effective from July 1, has intensified the pressure on Moscow to independently manage all facets of grain transactions, including transportation.

Cargill has stated its intention to persist in shipping grain from Russian ports, but it refrained from offering additional comments on the matter.

Dreyfus, Viterra, and ADM opted not to provide comments, while Bunge (NYSE: BG), another significant international entity, did not respond to the request for comment.

“It’s not going to be an easy path for them (Russia),” remarked an industry executive familiar with grain exports.

In the previous year, Russia achieved a record wheat export volume through ships chartered from international firms and traders. Despite maintaining robust exports, Russia has recently needed to secure more of its own freight. This has led to a growing reliance on a “shadow fleet” composed of older vessels, often managed by companies based in Turkey and China, as indicated by three sources within the shipping industry.

“There’s very limited involvement from international companies now,” stated the executive, who, like other industry insiders in this story, preferred to remain anonymous due to the issue’s sensitivity. “The majority of shipments are being managed by Russian traders utilizing ships from the (shadow) fleet, a choice international traders tend to avoid.”

As an indication of Russia’s heightened search for vessels, its charter requests saw a doubling to 257 in July compared to the corresponding month last year. This data, sourced from the maritime platform Shipfix, aggregates information from numerous market participants.

The data does not provide details regarding the fulfillment of these requests or the specific ship operators involved.

Ship requests increased by 40% from June, and it is anticipated that these numbers will rise even more as the export season gains momentum.

Denmark’s NORDEN, along with two other Western shipping companies that chose not to disclose their names, informed Reuters that they ceased their collaboration with Russia following the invasion of Ukraine in February 2022.

Insurance

The absence of the Black Sea corridor led to Russia and Ukraine issuing warnings in July that ships bound for each other’s ports could be considered legitimate military targets. This situation was deemed an additional blow to the risk appetite of Western companies, as indicated by three marine insurance sources.

At present, insurance for ships en route to Russia’s Black Sea ports comes with daily additional premiums amounting to tens of thousands of dollars, as reported by the three sources. These rates have increased further in the aftermath of Russia’s actions targeting Ukraine’s other waterways via the Danube, along with Kyiv’s response.

The Black Sea continues to be a vital region for Russian exports, given that other alternatives are more complex and expensive.

A shipping insider knowledgeable about the situation stated that even before factoring in insurance costs, ship operators were imposing an additional daily charge of up to $10,000 for Russian cargoes compared to shipments departing from neighboring ports in Bulgaria and Romania. This reflects the impact of the deal’s breakdown and the escalation in the Black Sea.

Mike Salthouse, the head of external affairs at prominent ship insurer NorthStandard, noted that since the implementation of sanctions by the United States and Europe, certain traders and insurers are concerned about potential links between the ultimate beneficial owners of Russia’s ports and terminals and individuals who have been designated.

“The ownership structure is not easily discernible through standard or even heightened due diligence,” he explained, which has resulted in “a degree of hesitancy in participating in Russian trade.”

The industry executive highlighted another risk involving vessels needing to purchase fuel from Russia. This scenario, the source noted, could potentially lead to issues with Western sanctions enforcement, complicating the execution of non-Russian transactions.

“It’s not easy to flip into the normal trade after that”, said the executive.

Russia’s Black Sea terminals, notably Novorossiisk and Taman ports, handle around 70% of the country’s grain exports.

Trade Barriers

Despite the ongoing tensions, global wheat prices are still significantly below the peak levels reached after Russia’s invasion last year, which raised concerns about a potential global hunger crisis. The reduction of Ukrainian grain from the global market might contribute to supply constraints, unless Russian exports or substantial harvests from other producers help offset the shortfall.

According to two sources, the intensification of tensions in the Black Sea is expected to have an impact on Russia’s export figures. It is also deterring shipping companies, particularly those with newer vessels that have larger capacities, from directing their ships to Russian ports.

Russia’s agriculture ministry informed Reuters through a statement that it anticipates a decrease of approximately 8% in grain exports during the 2023/24 season compared to the previous year’s peak of 60 million tonnes. The ministry did not provide a specific explanation for this decline.

Wheat exports are expected to decline slightly less, reaching around 44-45 million tons, as stated by Zernin. This projection aligns with estimates from the International Grains Council.

Ship Building

In December, the ministry unveiled a strategy to construct a fleet comprising 61 new grain vessels. This initiative was motivated by factors such “sanctions pressure and the reluctance of numerous international carriers to engage with Russia.”

As outlined in December, Russian exporters require 34 grain ships with a capacity of 60,000 tonnes and 27 with a capacity of 40,000 tonnes, according to the ministry. However, no specific timeline was provided for their potential construction at Russian shipyards.

In March of this year, Russia’s state-owned agricultural leasing firm, Rosagroleasing, announced that it had initiated orders for a fleet of grain ships with intentions to introduce them within a three-year timeframe.

As of now, there have been no reported orders placed by Russian companies, either within the country or internationally, according to data from valuation firm VesselsValue. The construction of new ships typically entails a time frame of up to three years.

According to data from VesselsValue, a significant portion of Russia’s existing fleet of 31 primarily smaller dry bulk carriers is more than 30 years old. This aging fleet faces challenges in accessing certain ports with strict regulations concerning the age of ships.

Victoria Mitchell, an analyst with Control Risks consultancy, stated, “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.”