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Sanctions developments and the impact on the shipping industry resulting from Russia's invasion of Ukraine

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Ocean

The tragedy of the war in Ukraine has led arguably to the biggest response from the international community the world has ever seen. Over the past month, the US, EU, UK, Canada, Australia and other nations have rushed in a raft of wide-ranging primary and secondary sanctions legislation targeting Russian individuals and companies. This has included embargoes on Russian oil imports and the general ostracising of Russia by the international community.

The impact of these measures is something that the shipping community is still trying to work through.  One might have expected that the raft of sanctions and embargoes would have provided certainty and clarity – for example, by making clear that all trade with Russia was out of bounds. Instead, the opposite is the case - nearly three weeks into this ever-evolving situation there is a great amount of confusion as to what is and is not permitted, which is leading to significant debate, disputes and stand-offs (and in due course litigation) between commercial parties.

Shipping companies, insurers, classification societies, along with many other international businesses nervous of reputational damage have taken the decision to "self-sanction" leading to the wind down of any of their dealings connected with Russia, in many cases, even where their specific trading activity with Russia is still permitted.

While international alliance in the form of the Transatlantic Task Force announced in recent days between the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States has brought a welcome sense of cohesion and alignment on specific policies (such as the removal of certain Russian banks from the SWIFT financial messaging service), the raft of new sanctions legislation being enacted internationally, including by the UK, EU and US, varies greatly between sovereign states both in scope and application albeit with a certain degree of overlap.

Below is a snapshot of the issues and concerns we have seen in recent days:

Sanctions

When the US/EU previously introduced sanctions, for example against Iran and Venezuela, those sanctions expressly prohibited the carriage of oil originating from those countries.  The position was clear and parties knew where they stood. The oddity of the recent sanctions against Russia is that even though they are far wider-ranging than previous sanctions packages, they do not expressly prohibit vessels from calling at Russian ports and/or loading Russian oil.

Even the recent embargoes announced by the US (on 8th March) only prohibit the import of Russian oil into the US – they do not expressly prohibit US companies from calling at Russian ports, loading Russian oil, and carrying it around the world. By contrast, the UK and EU both continue to permit and rely on Russian oil imports for the time being.

Nonetheless, some parties do not want to have anything to do with doing business in Russia or involving Russian entities or cargo, and/or are concerned that doing so may expose them to a sanctions violation despite the wording and understanding of the current sanctions regime.

In the shipping world this has led to parties carefully reviewing their contracts, and in particular their sanctions clauses, to see whether they bite and provide them with a basis for refusing to go to Russia, or lift Russian oil, or perform a contract with any Russian flavour to it.  Often those parties are left disappointed to find that their (lengthy) sanctions clauses do not help them, due to the fact that the trade itself has not been sanctioned.

War Risks

The further issue arising is whether it is currently safe for commercial vessels to call at Russian Black Sea ports. Again, there is great confusion and debate in this area. 

On the one hand, the tragic events of the war itself are taking place in Ukraine, not Russia, so Russian Black Sea ports must be considered "safe" and not affected directly by war.  Commercial operations appear to be ongoing at those ports as normal.  On the other hand, war risks underwriters are charging a substantial additional premium for vessels to call at Russian ports, the Warlike Operations Area Committee (WOAC) has declared all Ukrainian, Russian and International Waters north of 44°North in the Black Sea as ‘warlike operations area’, and various ship registries have raised the recommended security level for Russian EEZ to security level 2 and advised against calling at Russian ports, all of which tends to suggest an increased level of risk.

We have also seen a number of queries surrounding whether shipowners are required under charterparties to proceed to Russian ports outside the Black Sea/Sea of Azov area, and whether these areas can be considered as safe under war risk provisions or other charterparty clauses.

Particular issues arise where vessels are crewed by Ukrainian seafarers. There have been reported instances of Ukrainian crew being singled out by authorities when calling at Russian ports, prompting shipowners to consider whether they are required to proceed to an alternative port or replace the Ukrainian crew. A further issue is whether Ukrainian and Russian crew members can continue to work on the same vessel. These cases all raise issues that are both morally and legally complex, with each case having to be considered individually.

Letters of Credit

From a lending perspective, banks are becoming more reluctant to engage in any transactions with a Russian element, even if the activity sits outside current sanctions. There have been multiple reports over the last week of instances where Western banks have refused to issue letters of credit to support the purchase of Russian oil. The wariness of lenders is apparently due to uncertainty regarding implementation of further sanctions, but also largely due to reputational risk of being associated with supporting flow of Russian goods, and it will be interesting to see how this approach filters into the wider lending industry in the weeks to come.

Conclusion

Sanctions implemented in response to Russia's invasion of the Ukraine are constantly evolving on a day-to-day basis.  Commercial parties are going to face further uncertainties in weeks to come and will need to continually monitor their position in this ever-changing environment, which may soon be compounded by Russia's own economic response to current sanctions regimes.

Such is the speed of change that the snapshot described in this article will undoubtedly very quickly become out of date as the crisis in the Ukraine reverberates around the world in the coming weeks.

We have been advising clients over the last two weeks on these issues and how to proceed under their contracts.

Schjødt would be happy to advise on any specific sanctions needs or questions and can also run RDC GRID searches (Global Risk Information Database) if required – please let us know if you need any assistance in this respect.

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