The Decisive | Season 3 Ep.11 - Global Security Hotspots: Impacts on Marine Cargo

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Kristin Hallam: You're listening to the Decisive Podcast, insights and analysis to empower confident decision making. Welcome to the Decisive podcast brought to you by S and P Global Market Intelligence.

Kristin Hallam: I'm your host, Kristin Hallam. In this episode, we're discussing global security hotspots and their impact on marine cargo with Colm Strach, our head of global cargo risk. This is a natural follow-on to last week's episode on takeaways from the Trans Pacific Maritime or TPM conference. Colm, welcome to the podcast.

Columb Strack: Thanks, Kristen.

Kristin Hallam: On February 26, S and P Global Market Intelligence delivered our annual briefing at the joint cargo forum event at Lloyd's in London. Lloyd's, as our listeners may know, is a world-renowned insurance market providing specialist marine war insurance, which has been particularly affected by geopolitical developments in recent years. Colm, could you share some of the key topics that were on the agenda?

Columb Strack: Yeah. The biggest concerns right now by some distance are Russia's war in Ukraine and the broader conflict in The Middle East. Those have, of course, been dominating the agenda for some time now, and there's a real possibility in both of those cases of serious further escalation in the coming months. What also stood out is how these have affected commercial shipping in particular, which has been deliberately targeted in both of those conflicts, and that's had quite a serious impact. Lives have been lost, ships and cargo destroyed, and that's forced the shipping industry and the insurers at Lloyds to adapt. Both of these conflicts are pretty complex in terms of the actors involved, and they're fast-moving. So that's been a major concern for businesses and governments and top of mind for a lot of our customers.

Kristin Hallam: Let's focus on the Ukraine conflict for a moment. With the ongoing war between Russia and Ukraine, how would you describe the current situation in the Black Sea?

Columb Strack: Probably the best way to think of it or describe it is a situation of mutual deterrent. So both sides have shown that they can attack ports and ships, but so far they've stopped short of seriously disrupting each other's exports. Ukraine has managed to effectively force Russia to pull its fleet out of the Western Black Sea using anti-ship missiles, domestically built unmanned surface vessels, or naval drones. And that's been quite a significant shift because at the start of the war, Russia had essentially full control of the sea. It imposed a blockade on Ukraine and practically destroyed all of its navy. But now, because of the innovation that Ukraine has shown, especially when it comes to small unmanned systems with Western support, Russia's larger warships have become much more vulnerable. They're really just big expensive targets now. It's also worth talking about how important Black Sea trade is for both countries.

Columb Strack: So when Russia withdrew from the Black Sea Grain initiative a year and a half ago, Ukraine set up its own shipping corridor through the territorial waters of NATO countries, Romania, Bulgaria, Turkey, and that has paid off. About 90% of Ukraine's agricultural exports are now shipped by sea, and cargo through the Odessa ports has recovered to pre-war levels, and that's much higher than it was even during the grain deal with Russia. On the Russian side, Novorossiysk is its busiest commercial port and an important hub for oil exports, especially for tankers heading to Asia. Last year, about half of all Suezmax tanker visits to Russian ports went to Novorossiysk in the Black Sea. There's also the Shekharis terminal, which handles about 80% of Kazakhstan's oil exports via the Caspian Pipeline Consortium, and that stayed exempt from sanctions. So the stakes are pretty high for both sides.

Kristin Hallam: How do you see this evolving?

Columb Strack: So baseline forecast is that the current situation continues over the next twelve months. We're likely to see attacks on individual ports and vessels as we have done consistently so far, that could lead to short periods of escalation lasting up to maybe a few weeks at a time. But as things stand, we don't expect those to reach a level where they seriously disrupt exports for any extended period. But that said, our confidence in that assessment has weakened over the last few weeks, especially now as we've entered a more unpredictable phase with The US pushing on both sides for a ceasefire.

Kristin Hallam: Helen, what do you think could trigger a new escalation in the conflict and further disruption in cargo flows? Are there specific moves from either Ukraine or Russia that we should be watching?

Columb Strack: Yeah. So the most likely escalation pathway is if Ukraine steps up attacks on Russia's economy to raise the cost of the war. And that would be a way of gaining leverage in negotiations, especially given that without it, Ukraine will essentially be forced to negotiate on Russia's terms. At least that's how it's looking at the moment. That has already been happening to some extent, so Ukraine's really stepped up its long-range missile and UAV attacks into Russian territory over the last few months, not just targeting military infrastructure, but also refineries, power stations, and transport infrastructure. Now, if we're looking at what could trigger a major Russian response against Ukraine's export corridor, there are a few things to watch for. First would be a strike on the Kerch Strait bridge that physically blocks the shipping channel underneath it. That would cut off the Sea Of Azov, trapping any vessels inside it for a long time, potentially months, if further strikes from Ukraine were carried out to delay clearance repairs.

Columb Strack: Second would be a major attack on Novorossiysk's oil export facilities. As I mentioned, that port is crucial for Russian exports, and any serious damage there would hit Russia's economy pretty hard. And third, sabotage of the TurkStream pipeline. So since Nord Stream was taken out and the Ukraine gas transit contract expired at the end of last year, TurkStream is now the only pipeline route left for Russian gas exports to Europe. So any of those three would probably trigger serious escalation, leading to a major disruption in the Black Sea. Given the point about leverage, allowing seaborne exports to continue freely would likely become part of the wider negotiations, which could now potentially drag out until both sides agree to a ceasefire or some sort of deal to end the war.

Kristin Hallam: Now recently, there have been reports of explosions on ships carrying Russian exports. What is your take on this situation, Colm?

Columb Strack: So, since December, there have been at least five cases where vessels have been damaged by still unexplained explosions. Four of those were oil tankers that had either recently carried Russian oil or stopped at Russian ports, and the fifth was a Russian flag general cargo ship. We think it's very likely these were deliberate attacks probably using limpet mines or something similar. There's no indication yet of who is responsible, but it is within the capabilities of Ukraine, US, or European NATO countries. Looking at the pattern of the targets, the aim was probably to show that Russian seaborne exports can be disrupted by force. Again, probably as a form of leverage ahead of the expected ceasefire negotiations. But at least two of the ships don't appear to have been involved in sanctions violations, which suggests to us that these attacks aren't just about deterring vessels from participating in the shadow fleet. We're expecting more of these types of deniable attacks in the coming weeks and months, particularly against tankers operating out of Novosiersk, Ostluga, and other Russian oil ports in the Baltic. 

Columb Strack: And that applies not just to ships that are suspected of sanctions violations, but all vessels calling there regardless of their flag or ownership. Russia, from their side, whoever they think is behind this, is likely to respond with its own deniable operations in Europe, things like sabotage of undersea cables, energy export terminals, LNG facilities, and other infrastructure in particular that it it sees as helping European countries reduce their reliance on Russian energy. If Russia determines that Ukraine is responsible for the attacks, we'd likely see an escalation against vessels using Ukraine's Black Sea export corridor. So that's another potential trigger for escalation against shipping in the Black Sea. In the end, it all comes back to this idea of leverage, both sides trying to show how much economic damage that they can cause if their demands aren't met in these these future negotiations.

Kristin Hallam: Let's pivot to the Middle East. The ceasefire in Gaza has ended without extension or progressing to phase two, so there is currently no ceasefire in place. What's your perspective?

Columb Strack: Yes. So the first phase of the ceasefire ended on March 1, but there was no agreement to move into the second phase or or even extend the first. The terms for the second phase would require Hamas to dismantle its military and government and Israel to would have to withdraw, from Gaza and end the hostilities. But right now, it doesn't look like either side is willing or able to commit to that. So Israel, in response, has also cut off aid to Gaza now, saying it wants to pressure Hamas into accepting a ceasefire extension proposed by The US. That proposal would require all remaining hostages to be returned to Israel, but only if a permanent end to the war was then agreed by the end of the ceasefire. And that seems unlikely at this stage. If that doesn't happen, Israeli military operations in Gaza will almost certainly restart in the coming weeks or months, and we'd expect to see more Israeli airstrikes, across Gaza along with troop deployments to key border points, transport routes, urban areas, a large scale like it like it was before these ceasefires.

Columb Strack: On the other side, Hamas has probably lost the ability now for large scale rocket fire into Israel, but they probably would still fire smaller numbers of rockets, 20 or fewer, at, sort of closer Israeli border communities, but less frequently than before. And for any attacks on ports, Ashkelon, Ashdod being the close ones, but also further north, We're probably looking at maybe a handful of rockets, or missiles now in terms of capability, and those would most likely will be intercepted by Israel's air defenses.

Kristin Hallam: Now the Houthis in Yemen have indicated they might resume attacks on shipping if the ceasefire collapses. How do you think that would unfold?

Columb Strack: Well, the Houthis have been quite clear. They've repeatedly said that they'll resume attack if the ceasefire in Gaza collapses, and we think that is credible. More recently, they've also warned that if Israel doesn't allow the aid back into Gaza, they'll take action. So could well be back in that situation by the time this podcast goes out. And we think it's very likely that the tax will resume for the same reasons that the Gaza ceasefire is unlikely to hold. And if that happens, we also expect the US coalition to resume its air strikes on Houthi targets in Yemen, which in turn would expand that target set of Houthi attacks on shipping to US and UK affiliated vessels. Those air strikes by the The US led coalition have had an effect, by the way. In the second half of last year, the number of Houthi attacks on shipping was just under half of what it was in the first six months, and that is most likely down to The US, UK, and Israeli air strikes on the launch sites of the anti ship missiles and the the weapon stockpiles.

Columb Strack: But it's very unlikely that air strikes alone will stop further attacks completely. So we've been advising our, clients that the the risk of vessels passing through the Bab El Mandeb Strait remains severe over the next twelve months, And that risk applies to all ships. They're not just those linked with Israel, The US, or The UK because there's a high chance of misidentification. The Houthis are working with a a mix of open source data and Iranian intelligence support for their target selection. That's often proved to be outdated or incomplete. And going by the data that we've collected, only, I think, it's 37% of the ships targeted actually had some direct affiliation with with those countries and 63% didn't. Attacks when they do happen are likely to involve anti ship cruise missiles, attack drones, various types of unmanned surface or underwater vessels. And those last ones are particularly dangerous because they tend to hit at or below the waterline, which makes serious damage or sinking of vessels much more likely than the the missile strikes that we've seen.

Columb Strack: In terms of the wider impact on trade, the Houthi attacks last year caused the 65% drop in traffic through the Bab El Mandeb Strait, which is next to Yemen, and a 50% drop through the Suez Canal. That's added time, and cost to supply chains as a lot of the operators have had to reroute cargo, and we expect that situation to continue for at least the next six to twelve months.

Kristin Hallam: Yeah. That was the Red Sea was certainly a big theme at TPM last week. Now last year, we witnessed several direct attacks between Israel and Iran. If the ceasefire with Hamas breaks down, do you anticipate further such attacks?

Columb Strack: The last direct exchange was in October when Israel destroyed most of Iran's advanced air defenses. And so far, there hasn't been a response from Iran to that. Although Iran did say at the time that the ceasefire with Hamas was probably a welcome opportunity for Iran to hold off on that retaliation for now. But if Israel returns to military operations in Gaza along with probably more strikes on Iran's proxies, the Houthis in Yemen, that increases then the likelihood of Iran launching another round of missiles at Israel. And our assessment is that the risk of a regional war, though it sustained direct attacks between Israel and Iran, is severe and remains severe unless nuclear talks between The US and Iran achieve a new deal by around October, which is when the UN restrictions on Iran's ballistic missile program from '20 from the 2015 nuclear agreement when they are set to expire. So far, Israeli strikes on Iran have been limited to military sites for air defenses, missile production facilities, But the real risk of escalation comes if Israel expands its targets to include Iranian oil export infrastructure or, of course, if it attempts to destroy Iran's nuclear program.

Columb Strack: And if that happens, Iran would likely respond by announcing that it's closing the Strait Of Hormuz for Israeli shipping. That would be enforced in practice by targeting Israeli linked vessels in the Gulf and on approach, to the strait in the Arabian Sea.

Columb Strack: So probably vessel seizures, strikes using drones, unmanned naval systems, or missiles similar to what the Houthis have been doing off Yemen. And that would affect any ships connected to Israel by flag ownership or management. The only scenario in which we see Iran attempting to fully close the straight the straight the formers or indiscriminately targeting international shipping would be in the event of a regional war involving The US where Iran sees a direct threat of regime change. So it's very much a last resort for Iran because shutting the strait would cut off its own main source of, foreign currency and almost certainly in itself trigger US military intervention. The Strait Of Hormuz is, just for context, one of the the world's most critical energy choke points. It's about 20% of global consumption of petroleum liquids that passes through it every year. If we did get to a point where Iran decides to fully close it, it could probably use a combination of sea mines and anti ship missiles hidden along its coastline to sustain that blockade for up to several months.

Kristin Hallam: Colin, you've given us a lot to think about. It's time to wrap up our conversation. As we look ahead, what are some key developments that businesses should be keeping a close eye on over the next year?

Columb Strack: Okay. So, in summary, that situation of mutual deterrence in the Black Sea, which has allowed exports for both Ukraine and Russia to continue, is increasingly likely to be challenged in the coming weeks or months, as both sides try to strengthen their positions ahead of potential ceasefire negotiations, which The US is pushing for. And in The Middle East, we're probably gonna see a return to attacks against shipping in the Red Sea in the next few weeks. Similar situation to how it was last year. But the bigger issue there is Iran's nuclear program is the big question and whether The US manages to negotiate a deal with Iran before Israel decides that it has to take military action. If it can't do that, then we're probably looking at a major escalation that would have serious consequences for shipping through The Straits and Formos. Some indicators we're looking at, for both of those scenarios and and we'd advise to keep an eye on. In the Black Sea, trigger events including Ukrainian strikes or sabotage on the Kerch Strait Bridge, Russia's export facilities at Novorossiysk, or the TurkStream pipeline.

Columb Strack: Any significant damage there would probably result in Russian retaliation, aimed at stopping Ukraine's export corridor. And then in The Middle East, Israeli air strikes, new ground operations against Hamas would almost certainly trigger Houthi attacks on shipping in the Red Sea. What we're also keeping an eye on there is progress towards a new nuclear deal between The US and Iran. The closer we get to October, without a new deal, which is when these these restrictions UN restrictions on the on Iran's ballistic missile program expire, the more likely it then becomes that Israel, probably with US backing, would, go for the the military strike option.

Kristin Hallam: Alright. And we'll leave it there. Thank you so much, Colm, for taking the time to share your insights with us. That wraps up this episode of the Decisive Podcast. Until next time. Thank you for listening.

Kristin Hallam: to the Decisive podcast from S and P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.