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Redrawing the map: observations on a year of conflict in Ukraine

MariTrace, 27 February 2023

Photo by @shaahshahidh at Unsplash.

Hours before the anniversary of Russia’s invasion of Ukraine, an emergency session of the UN General Assembly called for Russia to immediately leave Ukraine. China, India and Pakistan abstained from the vote - along with Mongolia and the Central Asian countries. Across Southeast Asia and Australia, newspaper headlines on Friday morning were focused on China’s role in the Russia-Ukraine conflict: Singapore’s Straits Times outlined how China seeks to assert a clear position while retaining diplomatic room for manoeuvre. Choreographed amid a sequence of summits and assemblies led by the US and Europe, China signalled the major themes of their position on Ukraine in the sidelines of last weekend’s Munich Security Conference. At a meeting in Moscow on Wednesday with China’s top diplomat, Russia’s leader maintained that relations with China are proceeding “as we planned in previous years”. Early on 24 February, China released a 12-point position paper – including a call for universal support of the Black Sea Grain Initiative and stabilising global supply chains. China and India have been among the lead non-aligned actors in the current geopolitical theatre, a position that may come under increasing pressure in the months to come. Headlines in the Friday morning editions of India’s major press were light on Ukraine commentary - and make no mention of China’s position. The subject was entirely absent from Dainik Bhaskar - the world’s third largest newspaper in circulation - while the Times of India did not feature India’s abstention at the UN General Assembly vote, instead choosing to highlight the arrival of Indian submarine INS Sindhukesari at Jakarta - India’s first ever long-range deployment. Turkey’s leading daily - understandably preoccupied with devastating earthquakes that began in Turkey and Syria on 6 February - was similarly mute on the subject of Ukraine. China’s 12 point plan hinges on the concept of ‘indivisible security’ (also favoured by Russia) which asserts the right of nation states to safeguard their legitimate security interests, while recognising that no country’s security should be built at the expense of others’. This concept (also at the foundation of UNCLOS) will be severely tested on the world’s oceans. Of the various ways in which the ongoing conflict is likely to affect the maritime world, the net effects are likely to include novel approaches by companies - and governments - to circumnavigating conventional supply chains.

Black Sea Wheat: a precedent for the future of food security?

Over the past 12 months, food security - notably the cost of wheat and grains - has received particular attention. The Black Sea grain deal expires on 19 March and negotiations on extending it have already begun. Prior to war in Ukraine, Russia enjoyed a strong position in exporting wheat to Turkey and out to the world through the Bosphorous, helped by its fleet of smaller ships. In 2014, the Black Sea was producing 9% of total global grains, with shipments from the Black Sea region (mostly Russia and Ukraine, also Kazakhstan, Romania, Bulgaria, Serbia and Hungary) accounting for 21.4% of total grain exports in 2014. Southeast Asia (notably Indonesia and Bangladesh) sourced about half of their wheat supply from Ukraine, Russia and the EU-27. Eight years ago, Black Sea Wheat became popular (particularly for countries that were struggling to stabilise their currency against the US dollar) owing to a fall in Russia’s rouble and Ukraine’s hryvnia, a drop in freight prices - and low oil prices. As Black Sea Wheat became increasingly important for countries seeking better import deals, a Futures and Options contract was introduced in December 2017. By 2018, the contract (denominated in USD) allowed traders to exploit differences in the Chicago and Paris exchanges (the traditional home for wheat derivatives) and also caught the attention of hedge funds. The contract allowed traders to hold their positions until contract expiry, without having to receive or deliver actual shipments of wheat. Coinciding with peak harvest pressure, competitive supply levels at French ports in June-July of 2022 left Russia priced out of the market. However, the Black Sea Grain Initiative soon allowed price spreads to reverse, rapidly leaving French and eastern European prices high and dry - compounded by the effects of a hot summer and early sales of French wheat to North Africa and China. The wide spread between Black Sea and European wheat FOB in 2022 gave Russian and Ukrainian exporters a four-month window in the Southeast Asian market before the seasonal arrival of Australian and South American supplies. Through the winter of 2022-23, Black Sea Wheat continued to exert pressure on Chicago and European exchanges.

Grey oil: the evolution of global energy trade?

Perhaps the most visible examples of opportunities created by war is seen in the movement of global oil supplies. In December 2022 sanctions banned the import of Russian crude oil into Europe; further restrictions were announced in January. On Saturday the EU listed Sun Ship, set up in Dubai by Sovcomflot in 2012, which operates 104 vessels, mostly tankers, flagged to Liberia, Panama, Marshall Islands and the Russian Federation.

Snapshot of Sun Ship global fleet. Source: MariTrace data.

Sanctions project a powerful political message, but can be circumvented. By early February 2023, the volume of Russian oil on international waters had recovered to approximately that recorded last June. Limiting Russia’s oil revenue is difficult: the global fleet that are owned or controlled by Russian interests comprises about 6,500 vessels (of which around 440 are of particular interest to governments and analysts).

In the brief time since the introduction of sanctions on Russia’s oil, a shadow market has emerged. Most of Russia’s embargoed cargo is going to China and India. But the volume of oil to unknown destinations has increased. Russia’s embargoed oil travels via ‘grey’ networks that do not recognise the $60 price cap – yet are not illegal. Supported by new trading and finance entities that have sprung up in non-conventional hubs, far away from the incumbents in Geneva, Japan and London, this new market is using a large (and growing) tanker fleet, logistics services from outside of the group of countries supporting the sanctions, delivering to destinations that are similarly not participating in sanctions.

Oil shipments from Russia to China and India, February 2021 to February 2023. Source: MariTrace data.

Supply chain innovation: Butterfly Effect?

The compound effects of war in Ukraine take place in a global economy that was already in a fragile state, emerging from successive phases of a pandemic that is still reshaping how people live and work - everywhere. China is perhaps correct to assert that “Unilateral sanctions and maximum pressure cannot solve the issue; they only create new problems”. But problems are also clearly opportunities - for some. Well before the sanctions on Russian crude, China has been buying Russian commodities at discount rates. The grey trade in oil and the supporting services needed to enable it may yet generate innovation in finance and supply chain architectures, that circumnavigate conventional structures and thinking. In matters of food security, how far the grain deal can set a precedent for other security of supply architectures remains to be seen. Lessons from the Black Sea Grain initiative illustrate how maritime supply chains extend far in land. Four thousand kilometers from open water, inland ports at Kazakhstan’s border with China are jammed. Grain traders, worried that Russia will not extend the grain deal, are right to eye the effects of low oil prices on supply chains. Even for traders that seek workarounds for sanctions, logistics on dry land can throttle supplies: limited availability of railroad rolling stock to transport wheat (and other commodities) across Russia and Kazakhstan, coupled with delays in ship inspection at Ukraine’s battered ports, will restrict how much grain can reach southeast Asia and other markets, for many months to come. The conflict in Ukraine is redrawing the global supply chain map, undermining existing architectures and exposing gaps to be rapidly filled by opportunists. Drones swarming in the Black Sea have not yet generated tornadoes in distant oceans, but the initial conditions have been irrevocably altered.

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