The recent intensification of Russian attacks on Ukrainian port infrastructure and vessels has led to a significant rise in war risk insurance premiums, posing a severe threat to the profitability of Ukrainian agricultural and metallurgical sectors. The sustained attacks, including those on ships participating in the UN's World Food Programme, have forced insurers to reevaluate the risks associated with shipping to and from Ukraine, driving up the cost of transporting essential goods like grain and metals.
Several months ago, Russia began a systematic campaign of strikes against Ukraine's port facilities. This strategy, aimed at crippling Ukraine's export capabilities, has already resulted in damage to nearly 300 port facilities, 177 vehicles, and 22 civilian ships, according to Ukraine's Minister of Development of Communities and Territories, Oleksiy Kuleba.
JOIN US ON TELEGRAM
Follow our coverage of the war on the @Kyivpost_official.
Russian attacks on Ukraine's port infrastructure are not a temporary disruption but a strategic shift aimed at halting the functioning of Ukraine's maritime corridor. As noted by maritime analysts, these targeted strikes on Odesa and surrounding ports are designed to dismantle Ukraine's export capabilities systematically. These attacks occur in addition to the fact that Russia continues to destroy granaries and port infrastructure in Ukraine, as well as steal Ukrainian grain from the occupied territories.
Australian Foreign Minister Visits Kyiv, Confirms Reopening of Embassy
Institute for the Study of War (ISW) recently assessed that Russian strikes against civilian vessels and other grain corridor infrastructure are “almost certainly intended to undermine Western confidence in Ukraine's ability to enforce and defend the corridor, influence ongoing Western discussions about long-term support for Ukraine, and impede Ukraine's ability to survive economically during the war.”
Notably, the Russian attacks appear to specifically target ships owned by EU companies, with a disproportionate number of those vessels being damaged. Out of the six ships struck recently, most belonged to EU-based owners, such as companies from Greece, Latvia, and Portugal. This pattern suggests a deliberate attempt by Russia to inflict harm on European interests.
Insurance Rates Skyrocket, Freight Rates Show Resilience
The market has responded to these heightened risks with a notable increase in insurance rates. Within just one week, the cost of insuring vessels traversing the Ukrainian maritime corridor in the Black Sea rose to 1% of the ship's value, up from 0.75% previously. “For a $50 million ship, that would be an increase of $125,000 per voyage,” explains Bloomberg. However, “vessels can often get cheaper rates than market ones thanks to no-claims discounts.”
Oleksandr Vetyukov, Financial Director of Atria Insurance Broker, provides specific figures: "If the cost of corn on a Cost, Insurance and Freight (CIF) basis is $245 per ton, war risk insurance would cost approximately $1.2 per ton. For a vessel with a cargo of 6,000 tons, the total cost of insurance would be about $7,350."
Interestingly, the impact on freight rates has been less dramatic than initially anticipated.
Following the Russian attack on port infrastructure on Oct. 8, many expected a sharp increase in freight rates. However, the market did not react as severely as it did in Izmail in 2023, when rates surged by 50%. Freight rates for various routes have risen, with coasters heading to Italy and Spain seeing an average increase of $2 per ton. Similar increases have been observed for shipments from Danube ports to Turkey. This muted response suggests that shippers and insurers have already factored in a certain level of risk when operating in the region.
Konstantin Sobol, a freight broker and shipowner, reports that there hasn't been a significant spike in freight rates following recent attacks. He explains: "There's a slight increase in freight rates compared to July-August, but it's mainly due to increased demand for corn and soybean shipments, rather than the attacks."
However, the Ukrainian maritime transportation market remains risky, shipowners who enter the deep-water ports of Ukraine receive an additional premium for risks.
Ships of the segment of 50 thousand tons or more can receive a bonus of $150 to 300 thousand per shipment. For example, a ship of the "Supramax" type receives $10-11 thousand per day, but when entering Ukraine, this rate increases to $16-17 thousand.
When delivering cargo to Indonesia or China, the price can reach $300 thousand, with possible fluctuations depending on the circumstances. In more stable periods, the main premium was insurance compensation, when owners of "supramax" received up to $100 thousand premiums compared to non-risk routes.
How Ukraine's Government and Global Companies React
In response to these challenges, the Ukrainian government is taking steps to reassure insurers and shipowners. According to the Deputy Minister, critical infrastructure objects are protected by engineering structures. This includes approach channels, berths, transformer substations, buildings, and diesel generator installations.
Following recommendations from the General Staff of the Armed Forces of Ukraine, Black Sea port facilities have been equipped with boom barriers. Furthermore, to protect the ports' energy infrastructure, gabions and reinforced concrete blocks are being used, which prevent enemy air and sea drones from reaching their targets. These measures demonstrate Ukraine's commitment to maintaining the safety and operability of its port facilities, despite the ongoing threats.
In Ukraine, a guarantee mechanism has been introduced and continues to operate, which provides guarantees of compensation for damage caused as a result of the armed aggression of the Russian Federation, in particular to operators and/or owners of ships and inland navigation vessels during their stay in the territorial sea of the country. At the same time, as of today, payments under the mechanism have not been made.
Shipping companies like Maersk have adapted to these challenges by launching new services, such as the weekly feeder route between Egypt's Port Said and Ukraine's Chornomorsk, which aims to mitigate the risks and provide more reliable transport routes for Ukrainian exports. This service offers shorter transit times compared to traditional routes through Romania's Constanța, but the overarching issue of safety and insurance remains a significant barrier to more widespread use.
Nevertheless, the increased insurance costs and the persistent threat of attacks are still placing pressure on the shipping industry. The shortage of available tonnage in the Black Sea-Mediterranean region has created an acute deficit of vessels, particularly for spot orders amid active Ukrainian exports. The volume of agricultural exports through the Ukrainian maritime corridor in August, September and the first decade of October remain stable. Only in the first 10 days of October, the volume of exports through the "sea corridor" reached 2.1 million tons, of which 1.5 million tons were grain. For comparison: for the whole of October 2023, 1.9 million tons were exported through the Black Sea ports, of which 1.4 million tons were grain.
This scarcity of ships, combined with the heightened risks, is gradually pushing up costs across various routes. In anticipation of further market growth, shipowners refrain from concluding contracts quickly, forcing charterers to increase rates to provide the necessary tonnage.
Why Russia's Strikes Hurt Ukrainian Businesses
Ukrainian farmers, who rely on exports for a substantial portion of their revenue, are facing steep declines in profitability. The soaring cost of transporting grain and other agricultural goods, combined with the uncertainty of being able to secure shipping, has put the future of many agricultural enterprises at risk.
Similarly, Ukraine's metallurgical industry is also feeling the pressure. The increased costs of shipping metal products to international markets and the associated risks have diminished profit margins, threatening the viability of this key sector.
In response, Ukrainian exporters may need to explore alternative routes, such as overland transportation to European ports, or seek government support in the form of export subsidies or tax breaks to offset the increased shipping costs. Additionally, investment in port security and air defense systems could help mitigate the risks and potentially lead to a reduction in insurance premiums in the long term.
Pavel Martyshev, an expert on food markets at the Kyiv School of Economics, points out a concerning trend: "The latest attacks could affect Ukraine's competitiveness, making Russian exports more profitable and contributing to its war machine." Indeed, in the 2023-2024 marketing year, Russia set a new record for wheat exports, delivering over 55.4 million tons and increasing supplies to several Asian countries.
Russia Targeted UN Food Program Vessel, But the World Can Still Protect the Vulnerable Markets
The recent attack on a Ukrainian vessel transporting sunflower oil to Palestine under a UN program underscores the urgent need for action. This incident not only highlights Russia's disregard for international law but also exposes the UN's apparent inaction in the face of threats to its own humanitarian efforts.
Ukraine needs international guarantees and support to ensure that shipping lanes remain open and that war risk insurance becomes more accessible to shipowners. Without such intervention, Ukraine's ability to export its agricultural and metallurgical goods will continue to be severely restricted, impacting global markets reliant on these supplies.
The UN could play a crucial role in mitigating these risks by facilitating the establishment of protected maritime corridors, negotiating for increased security guarantees, or even considering the deployment of a multinational naval escort for commercial vessels. Such measures could help stabilize insurance rates and encourage more shipping companies to continue operating in the region.
Moreover, the international community could collaborate to develop more comprehensive insurance schemes or financial instruments that would lower war risk premiums for vessels operating in conflict zones. Such measures would help stabilize the cost of freight and ensure the continued flow of Ukrainian goods to global markets, particularly as Ukraine remains a key supplier of agricultural products to many countries.
Ukraine officially appealed to the International Maritime Organization with a call to immediately send an international monitoring mission to the ports of Odesa against the background of increased Russian terror.
The EU called on all countries of the world to condemn Russian attacks on freedom of navigation and global food security, to appeal to Russia and put pressure on it in order to immediately stop these attacks and illegal aggression against Ukraine.
As Russia's strategy of targeting port infrastructure continues to impact Ukraine's export capabilities, the international community's response in the coming weeks and months will be crucial. Without intervention, Ukraine's ability to export its agricultural and metallurgical goods will continue to be severely restricted, impacting global markets reliant on these supplies.
The world must act decisively to protect not only Ukraine's economic interests but also global food security and the principle of free maritime trade. Stakeholders at all levels – from international organizations and national governments to private sector entities – must collaborate to find innovative solutions to this pressing challenge.
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.
You can also highlight the text and press Ctrl + Enter
