Sanctions Rattle Project Sector

By Jeremy Bowden

As rigorous sanctions continue to disrupt and divert global breakbulk and project cargo operations, we investigate how shippers are being forced to find new routes and suppliers to fill the gaps.

From Issue 1, 2024 of Breakbulk Magazine.


Increasingly rigorous sanctions from the West on goods and finance moving in and out of Russia mean hard times for breakbulk and oversized cargo handlers involved in the trade. The minefield of new restrictions is causing a drop in the volume of business and lengthy diversions for remaining project cargo handlers and freight forwarders – as well as opportunities for those willing to circumvent the rules.

Since the invasion of Ukraine, Western nations led by the G7 and EU have imposed a range of sanctions on goods exiting Russia, along with a raft of financial restrictions and penalties designed to limit Russia’s income and constrain its economy, including the removal of Russian banks from the Swift financial system. Most imports, including breakbulk and heavy-lift, are still allowed, but the financial restrictions mean there can be difficulties in payment, while some companies are no longer doing business in the country.

The impact has been to progressively restrict activity generally in the breakbulk and heavy-lift sector, according to sources, and also to shift remaining cargo flows away from Russia’s European ports, such as St. Petersburg and Novorossiysk on the Black Sea. The latter recently became the headquarters of Russia’s Black Sea navy – adding risk to any civilian activity.

“There is no doubt that the Russian sanctions have had a profound effect on the shipping industry,” said Alexander Brandt of legal firm Reed Smith, which deals with thousands of sanctions issues. Another source agreed, adding that Russian freight forwarders in particular were suffering, with sanctions on goods hitting the volume of trade in and especially out of western Russia.

Those involved in Europe are also taking a hit, but less so because Russia makes up a relatively small portion of trade. While Russia can still import most goods, it is difficult to get insurance or for buyers to pay – and difficulty in paying puts freight forwarders and shippers off, according to sources. Some establishment Russian freight forwarders have not even been able to pay BIMCO fees, as banks won’t relay the money.


Abiding by Sanctions

The financial and insurance restrictions are also having a major impact beyond Russia and Europe. Brandt noted that while shippers, freight forwarders and contractors may be spread around the world (and not themselves subject to UK, EU or U.S. restrictions), insurance, financing and brokering remains concentrated within the EU, UK and U.S. “So, tonnage that is reliant on these Western service providers is effectively forced to abide by the sanctions, or risk compromising their insurance, breaching financial covenants,” he said.

According to the International Energy Agency, Russia has transferred much of its oil exports to an alternative “dark” tanker fleet designed to avoid these restrictions. This has kept oil exports at near pre-war levels, with the main destination switching from Europe and North America to India, China and Turkey.

As with oil, there is a black-market fleet developing for other goods, with operators located primarily in the Middle East, China and parts of Asia. Traders here will circumvent the new rules, according to sources, but often at a premium – “But it still makes life much more difficult for freight forwarders in Russia – not straight forward business as usual”, said one.

Brandt said there were risks associated with switching to these alternative vessels. “This fleet of aging tonnage operates almost entirely outside the G7 sphere of influence and has garnered widespread attention, not least because the lack of adequately capitalized insurance behind these vessels could prove disastrous in the face of a major casualty.”


Alternative Routes and Markets

As with oil, Russian and Belorussian companies have had to find alternatives to western markets for their export goods, including in parts of South America, some Indian buyers and especially China. But these outlets are not “under the same conditions,” according to one source, with lower prices in some cases and higher transit costs.

Previously, the majority of oversized cargo was transported to and from Russia through its north-western seaports, primarily St. Petersburg. But now, from western Europe into St. Petersburg, 90-95 percent of lines are no longer available, said the source, with routes through Finland also closed. Some cargo has switched to the Russian Far East, although ports there are having problems coping.

For example, Bremerhaven roll-on, roll-off was used heavily by freight forwarders based in St. Petersburg, which gave them easy access to the rest of the world. Now operators have to find direct lines, which are not always available, and have to get bigger volumes before a shipment can take place - making shipping more costly and difficult.

And in some cases, rather than using Europe as a transhipment hub, logistics providers have switched to nearby alternatives like Tangiers in Morocco, said one freight forwarder, where sanctions “are not being applied in the same way.” The long-term implications are reduced flows and a change of routes for freight forwarders and shippers away from Europe, with the new routes incurring longer voyages, higher costs and insurance issues.

Brandt said that Reed Smith had seen a decrease in Russian activity. “Either [the goods and commodities] are not being shipped or, more likely, they are not being shipped by our clients,” he noted. However, he could not say whether volumes had shifted from the Russian West to East coasts. “On the dry side, the majority of the instructions remain focused on the Russian Baltic and Black Sea ports. We have seen limited use of the Northern Sea Route by Western nexus tonnage, which I attribute in part to potential sanctions complications (including the designation of Atomflot, that operates nuclear powered ice breakers along the NSR).”

Peter Molloy at Drewry Shipping Consultants said he had also been unable to identify a switch in flows on individual routes.


Getting Picky

Chris Higgins, commercial director at AFS Global, said that in his area, he had seen little change in the way people were shipping or how cargo is being routed. “Where it does seem to be having an impact, however, is how cargo is handled and the need to now have the relevant documentation available at every point of consignment. Those that don’t are seeing goods returned to the warehouse/factory which is in turn creating congestion and delays.”

Brandt agreed that documentation was becoming more of an issue, noting that, for those cargoes that could be traded lawfully, extensive due diligence on both counterparts and the origin/destination of the goods and commodities themselves had become the norm.

“Shipowners and their insurers behind them are now frequently asking for ownership information for counterparts to be crosschecked against sanctions databases, along with underlying documentation evidencing cargo origins.” He said this made the process much more difficult, “not least because there remains considerable ambiguity in the drafting of sanctions regulations.”

Further complication may arise from differing risk appetites among the various stakeholders in the trade, as well as different contractual rights that might restrict their options in response to sanctions risk.

In terms of heavy cargo projects moving into Russia, Brandt said there were a significant number of import restrictions requiring documentation, as well as restrictions on contributing to Russian oil and other infrastructure projects. “Again, while a shipowner itself may be permitted to conduct such activities (as they have no EU, UK or U.S. nexus) they may still require the support of their Western insurers, and indeed financiers/banks.”


Third Party Steel

The number of areas affected by sanctions keeps increasing, with one Russian forwarder reporting over 1,500 bans of some sort altogether. Among these, Higgins said new iron and steel rules that came into effect in September were creating particular problems for breakbulk. The rules effectively prohibit the trade of Russian iron and steel products processed in a third country, which widens the scope of sanctions significantly, although many shippers remain unaware of the issue.

Brandt said: “Specifically in respect of the new EU and UK measures restricting the transfer of processed Russian steel from third countries, we have seen a marked uptick in pre-fixture due diligence, in line with the guidance promulgated by both the UK and EU (which is largely aligned), and requires (among other things) provision of mill test certificates.”

Higgins said a mill test certificate will now be required from the factory of origin that categorically says the iron or steel included in that product did not originate from Russia for all imports to the EU and UK containing iron or steel.

“The implications for any importer unable to provide that documentation could be extreme. It could result in their business facing inspection. But more than that, it also could result in their whole supply chain being inspected. As a result, failure to comply could make third parties extremely nervous about working with that importer in the future,” Higgins said.

He added that importers will not be able to receive their goods until after the inspection, which may include a laboratory test, and would be liable for quay storage costs in the meantime. A huge amount of manufactured goods are now being swept up by the sanctions, according to Higgins.

“Due to the malleable nature of iron and steel, customs officials will be looking to inspect everything from construction materials to everyday goods such as pots and pans, knives and forks and much more. This is likely to catch some importers out as this will include goods with just a small amount of steel within the product, such as a BBQ set,” he said.

While the new regulation was officially announced in April, it was not widely publicized, which could cause problems, especially for unprepared cargoes currently at sea. Higgins said getting documentation in place early is crucial for the future smooth trading of any products that include iron and steel.

Other sources suggested off the record that the third-party steel rules were leading to a re-labelling of country of origin, with Turkey and India favored options. And in contrast, Philip Adkins, from Cadenza Group, said he had seen “no effect on Russian steel from third countries,” and “no real changes” to cargo flows, volumes or routes.


Fallout of War

As well as sanctions, the war itself has also had an impact on trade. Logistics provider, Wallenius Wilhelmsen Logistics Abnormal Load Services’ commercial department said that while it has limited involvement with cargo deliveries in and out of Russia, it had seen a big impact “on the availability of heavy transport vehicles - with Eastern European vehicles and drivers being withdrawn from the heavy transport market to participate in the conflict.”

The situation also means it is difficult to use railways as an alternative transport route, not least because they have been successfully targeted by saboteurs in Russia, severely disabling the network (which is crucial for military logistics). The attacks, which began in 2022, ramped up towards the end of last year, affecting many areas of the network that spans approximately 33,000 kilometers.

The British Defense Ministry reported that independent investigations in Russia indicated at least 76 instances of railway sabotage from February 2022 to October 2023, which it said presents a “significant problem” for Russian authorities.

Russian railways are also facing significant issues due to the lack of infrastructure for delivering heavy or oversized cargoes, and a shortage of qualified personnel, many of which are involved in military activities - as well as longer delivery times and physical limits of the system. Brandt said shortages of specific transportation equipment generally was also causing delays, prompting a shift to alternative, less efficient options.

As the West further ratchets up the pressure on Russia, increasing the number of finance and cargo pipelines being restricted or blocked, a wider and wider range of goods and logistics are becoming affected. Within Russia, sourcing, tendering, and execution of heavy cargo projects are all being hit, posing challenges for reliant industries such as oil and gas. While some trade may be moving to alternative companies and routes, these are less efficient, riskier, and more costly. The only solution for many involved largely depends on a ceasefire, peace talks and a rolling back of sanctions - none of which are likely any time soon.


Breakbulk Middle East 2024, the region's largest event for the breakbulk sector, is taking place on 12-13 February at the Dubai World Trade Center. Reserve your tickets.