Jittery shipowners have started to avoid Black Sea ports in Russian or Ukraine's waters after the region was declared high risk by insurers, and Singapore-based traders said they were reviewing their exposure to Russian commodities as sanctions loom.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Networks of commodity traders, shipping finance executives and ship brokers in the shipping hub of Singapore said they have been on high alert since an escalation in the Russia-Ukraine crisis and the likelihood of a US response.
A major Japanese shipowner has not banned voyages into Ukraine's waters yet but the company will be alerted if any of its ships are sent to Ukraine, and will have to inform its safety and risk control team prior to the voyage, according to a company source.
The Japanese shipowner has also received precautionary advisories from the Japanese Shipowners' Association for navigation in Ukraine and Russian waters, the source said. A JSA official confirmed it has issued navigation advisories to members for Ukraine and Russian waters.
A Singapore-based shipbroker said owners of dry bulk vessels have been reluctant to send vessels to Black Sea ports since tensions began to escalate late last week and there have been more than the usual number of inquiries at bunker ports for fuel amid concerns of supply disruption.
On Feb 15. the Joint War Committee, an insurance trade body, added Ukrainian and Russian waters in the Black Sea and the Sea of Azov to its list of areas that require owners to notify underwriters of voyages.
The JWC represents underwriters from the Lloyd's Market Association and International Underwriting Association of London which provide marine hull insurance. It said its move was a precautionary measure, and while there have been no maritime incidents, the possibility of a miscalculation is clear.
The advisory comes after trade routes were partially disrupted due to Russian naval exercises in recent weeks.
Meanwhile, Singapore-based traders were mainly concerned about the severity of US sanctions and what would trigger them.
"It is a question of watching with bated breath, as any sanctions levelled on Russia will have a ripple through effect on trading efforts throughout the entire region," Maurice Thompson, Melbourne-based partner at law firm Clyde & Co, said.
He said it is not all doom and gloom and there will be 'winners' who are able to extract themselves from compromising trades and maximize market volatilities, just as there will be 'losers' who are trapped in their less flexible arrangements.
"There will be force majeure clause to consider, War Risk clauses, possible concepts of legal 'frustration' [depending on the underlying law of the contract], safe port warranty clauses etc," Thompson said, adding that ports in Ukraine could also be subject to further sanctions.
"Some will have adequate flexibility and protections in their contracts and others will not. What they all should be doing, however, is reviewing their potential exposure now," he said about commodity traders, adding that a spike in legal disputes is almost a certainty as counterparties take advantage of price swings.
Daniel Martin, partner at law firm HFW, said US sanctions could include restrictions on Russian banks that impact the ability of non-Russian entities to purchase and pay for Russian origin commodities.
"As a result, traders should be reviewing their exposure to Russian-origin commodities, assessing the risk that they may be impacted by sanctions and reviewing the contract terms to establish the contractual position if sanctions are imposed," Martin said.
He said trades could be impacted by sanctions in one of three main ways: the commodity becomes sanctioned, the counterparty becomes sanctioned or the receiving bank (or another intermediary) becomes sanctioned. "All three of these are possible."
Martin said non-Russian banks could become more cautious when processing inward or outbound payments involving Russian banks, Russian entities or Russian commodities.
"In light of this uncertainty, traders should look carefully at both their obligations to make payments, but also their rights to receive payment and liaise closely with their bank," he added.