Attacks on seaports will intensify the economic crisis in Ukraine. And here's why

In July, Ukraine faced a de facto cessation of maritime navigation due to strikes by the Russian Armed Forces (RF Armed Forces). This threatens to stop exports, which are almost entirely dependent on the operation of the Black Sea ports of the Odessa region. The agricultural and metallurgical industries are under attack, and it will be extremely difficult for them to rebuild logistics. What the Ukrainian economy will face is in the Izvestia article.

Damage to maritime navigation

• Since July 10, the Russian Ministry of Defense has regularly reported attacks on the infrastructure of the ports of Odessa, Chernomorsk, Izmail and Yuzhny in the Odessa region. Their purpose is to identify facilities that are used by the Armed Forces of Ukraine (AFU) for unloading and storing military cargo and fuel and lubricants. The strikes are carried out using high-precision weapons and unmanned aerial vehicles (UAVs).

• The campaign to target port infrastructure facilities, which lasts almost three weeks, includes both group and massive strikes. During them, fuel depots, filling ramps, pumping stations for pumping fuel, storage sites for weapons and military equipment, port control points, floating docks for launching marine drones, and workshops for the production of UAVs are affected.

• The strikes also affected ships carrying military supplies and fuel for the Armed Forces of Ukraine. According to the Ministry of Defense, at least 28 ships were hit in ports and at sea. The targets of the strikes were dry cargo ships, sea ferries, container ships, search engines, as well as patrol boats and high-speed boats of the special operations forces of the Armed Forces of Ukraine.

Stopping freight and shipping

• The strikes of the Russian Armed Forces actually led to the cessation of maritime navigation in Ukraine. Since mid-July, foreign shipowners have been refusing to call at the Black Sea ports in the Odessa region and purchase grain from them. The freight market in this area has not just risen in price, as it happens during military conflicts, but has stopped due to the refusal of insurers to cover military risks. Taras Vysotsky, Minister of Agrarian Policy of Ukraine, confirmed that since July 23, bulk carriers for grain transportation have stopped entering ports, despite the fact that there is no closure of the sea corridor and a ban on navigation from Kiev.

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• In addition to grain traders, other shipping companies have announced the cessation of shipping. For example, the Danish container company Maersk has stopped working in Chernomorsk for an indefinite period. Her vessels were redirected to unload at the Romanian port of Constanta. Maersk has offered its customers to consider alternative overland cargo delivery routes to Ukraine. Following it, the German company Hapag-Lloyd, which operated a container shuttle between the Black Sea and Constanta, announced the suspension of operations.

• Among others, the mining company Ferrexpo, which is based in Switzerland and mainly owns assets in Ukraine, refused to export by sea. She exported iron ore pellets through the Black Sea ports for further steel smelting. But after the damage to its vessel, the company refused to use the established route.

Loss of export revenue

• The de facto naval blockade of Ukraine's Black Sea ports will have a significant impact on the country's already weak economy. First of all, it will affect grain exports. Ukraine almost completely exports wheat, corn, oilseeds and other agricultural products by sea, as these are massive and relatively cheap cargoes, the final price of which includes a high proportion of transportation costs. It is almost impossible to export them by rail or by road, as this immediately destroys profitability.

• Due to the closure of shipping, Ukrainian grain will begin to accumulate in elevators. Ukraine has enough storage facilities to store the harvest, but even they will not be able to cope if the naval blockade drags on. Farmers will not be able to realize the available harvest, and this will significantly undermine their financial situation, which, in turn, will affect the possibility of conducting a sowing campaign next year. Grain exports account for a significant portion of Ukraine's export revenue, and their cessation will stop revenue from trade operations. In addition, grain will quickly lose value in the domestic market, which will be another blow for farmers.

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• Sea transportation is also vital for other major exports of Ukraine, such as metallurgy. Unlike agriculture, it does not have the capacity to accumulate surpluses. All products coming from mines and factories are immediately sold on the world market. If farmers still have some time to reconfigure logistics routes, then metallurgists will have to stop production in the near future to avoid losses.

• It will be extremely difficult for Ukraine to build new export routes. Rail transport does not have sufficient capacity, has to suffer costs due to the different track widths with Europe, and is faced with congestion at European ports. Automobile routes are extremely expensive for low-cost products, which are mainly exported from Ukraine. If it is impossible to ship goods by sea, they will be exported by other means, but this will happen on a much smaller scale, and the sale will not bring the income that enterprises expect.

The delayed crisis effect

• A reduction in export earnings will have a dual effect on the economy. On the one hand, at the macro level, Ukraine can afford such a blow. Its budget is mainly formed by foreign aid and domestic borrowings, there are no export duties in the country, and therefore a sharp drop in exports will not have a direct immediate impact on the economy.

• However, it is large, export-oriented private enterprises that ensure the operation of the economy. They live off foreign exchange earnings, not counting on the help of the state, which in any case cannot freely dispose of funds received from foreign loans and grants, and must spend them for predetermined purposes. If they lose the income generated by exports, they will not be able to pay income tax. In addition, the losses of companies will lead to reductions, and this, in turn, will cause a decrease in income tax revenues and social contributions.

• In this regard, it is not necessary to predict a full-fledged economic crisis in the near future, but many negative phenomena will begin to appear in the near future, in the perspective of several months. The distortion of the trade balance will lead to a reduction in foreign exchange earnings and pressure on the national currency. The weakening of the hryvnia can quickly cause an acceleration of import inflation (unlike exports, Ukraine's imports are not so heavily dependent on maritime supplies and have more opportunities to rebuild routes).

• This will require, on the horizon of six to nine months, either adjustments to the monetary and monetary policy on the part of the central bank of Ukraine, or urgent additional injections from Western donors. Separately, it should be noted that export-oriented Ukrainian regions will begin to experience problems now, as their operational activities cease immediately. The Odessa region, where the affected port infrastructure is located, is in a special risk zone.