How do sanctions impact on trade in the Black Sea Region?

“Today, Kazakhstan, Russia, Ukraine and the Danube Region countries together make up around 40 per cent of the global wheat trade. The Black Sea Region is the runner-up (after the Persian Gulf Region) in oil and natural gas resources…The military conflict in eastern Ukraine and the trade embargo against Russia had a significant impact on container turnover in the countries of the Black Sea Region. However, by the end of 2016, almost all Black Sea Region countries had increased traffic of loaded containers. According to the Ukrainian Sea Ports Administration, Black Sea Region ports showed growth, which allowed them to restore the positions lost in 2015.”

Arthur Nitsevych Partner, Attorney Interlegal Law Firm LMAA and SCMAA member, FNI nitsevych@interlegal.com.ua,
Alexey Remeslo Associated Partner ICS, MNI, Interlegal Law Firm, remeslo@interlegal.com.ua

From the beginning of Russian military aggression in the Crimean Peninsula, the international community’s position has been clear in condemning Russia’s interference in Ukraine’s internal affairs and the violation of its territorial integrity and sovereignty. The international community demanded that the Russian Federation comply with international regulations and obligations, inter alia, under the framework of the Budapest Memorandum. These demands were rejected by Russia on the grounds that the exit of Crimea from Ukraine was unrelated to the obligations set out in the Budapest Memorandum.

CRIMEA IMPACT
No doubt the annexation of Crimea affected trade in Black Sea Region countries. Today, Kazakhstan, Russia, Ukraine and the Danube Region countries together make up around 40 per cent of the global wheat trade. The Black Sea Region is the runner-up (after the Persian Gulf Region) in oil and natural gas resources. It is also replete with proven reserves of minerals, metals and other natural resources. The Black Sea is an inland sea, with ports located in many coastal cities, such as Batumi, Burgas, Constanta, Kerch, Novorossiysk, Odessa, Samsun, Sevastopol, Sochi, Sukhumi, Trabzon and Varna.

The military conflict in eastern Ukraine and the trade embargo against Russia had a significant impact on container turnover in the countries of the Black Sea Region. The total throughput of containers in 2015 did not exceed 2.3 million 20-foot equivalent units (TEU). In addition, due to low freight and charter rates, the majority of container lines operated at best at breakeven. However, by the end of 2016, almost all Black Sea Region countries had increased traffic of loaded containers. According to the Ukrainian Sea Ports Administration, Black Sea Region ports showed growth, which allowed them to restore the positions lost in 2015. One notable event of 2016 was a forced change in export routes due to the transit embargo imposed by Russia. The change complicated significantly the routes of Ukrainian trucks and railcars carrying goods to Kazakhstan, Central Asia and other states through its territory early on in the year, and in summer transit carriage of goods from Ukraine to Kazakhstan and Kyrgyzstan by road and rail were banned.

COASTAL CARRIAGE

Coastal carriage between the Ukrainian sea ports has become very common in recent years. According to statistical data, mutual trade between the Russian Black Sea Region and other Black Sea Region countries is insignificant. The turnover between the Krasnodar Region and its neighbors in the Black Sea Region (Abkhazia, Bulgaria, Georgia, Romania and Ukraine) in 2016 to 2017 amounted to only $495m and $576m respectively. By comparison, the Russian Federation spent nearly the same amount (approximately $0.5bn) on fruit and vegetables alone in Egypt in 2017, while the Black Sea Region’s share in the aggregate turnover in Kuban decreased from 5.3 per cent to 4.9 per cent over the same period. Growth in throughput turnover between regional exporters and non-Commonwealth of Independent States (CIS) countries occurred first of all in the Middle East, and then in Mediterranean countries. According to the State Statistics Service of Ukraine, in 2017, Ukraine’s turnover in trade with Russia increased substantially: Moscow regained its status as one Kiev’s largest trade and economic partners, with goods supply increasing by 39.9 per cent compared to 2016.

BLACK SEA REGION CASE STUDY
Unfortunately, issues related to sanctions are too politicized. The practice of applying UNCLOS, for instance, with regards to the regime of transit passage through straits used for international shipping, is a little bit different from the standards set forth in this Convention. Ukraine, in turn, does not make it possible to provide security, since vessel detention does not imply this.

Interlegal portfolio contains the following notable cases:
– case on m/v MEKHANIK POGODIN (IMO:9598397). For over 7 years, m/v MEKHANIK POGODIN (IMO:9598397) was owned and used by legal entity which was not subject to special economic and other restrictions of Ukraine. But according to primary documents submitted under vessel call at the sea port, the documentary vessel owner was subject to special economic and other restrictions (sanctions) which resulted in immediate vessel detention.


Today, case has been considered by the court of appeal. Both vessel arrest and detention have similar effects: route restriction, i.e. it has been blocked at the sea port. Vessel has been detained by the Harbour Master in compliance with Award of the State Border Service of Ukraine. It has been operated under the Lease Agreement concluded in 2011 between OJSC “WEB Leasing” (the Lessor) and LLC “V.F. Tanker” (the Lessee). OJSC “WEB Leasing” has been entered into the Ukrainian list of sanctions. While staying at the sea port, there was the last lease payment term. Following lease payment, title on the vessel was transferred to LLC “V.F. Tanker”. Therefore, now there are no lawful and reasonable grounds for further vessel detention. Unlawfulness of further detention has been certified also by Expert’s Opinion of the Koretsky Scientific and Research Institute of State and Law. But Kherson District Administrative Court rejected the claim on vessel release. Now it got clear how thin the line between legal and political matters is. Further vessel detention will threat essential losses to be incurred by the state of Ukraine, due to the vessel further idle stay, while the shipowner will obtain damage reimbursement from the insurers;

– case on m/v SEABREEZE (IMO: 9143312). The court made an order on arrest of one vessel due to the other vessel’s actions. Although the Prosecutor Office states that both vessels have the same manager, today it is false statement, since the company had ceased to manage the vessel long time before the sanctions were imposed. Therefore, information from out-of-date commercial sources has launched state mechanisms and in fact has impeded absolutely lawful and transparent business;

– case on m/v KANTON (IMO: 9412311). The court arrested m/v KANTON (flag of Tuvalu) for breach of the regime of calling at the Crimean sea ports. Having called at the closed Crimean sea ports, shipowners, masters and crew members committed the crime stipulated by Article 332-1 of the Criminal Code of Ukraine.

– case on m/v SKY MOON (IMO: 7525334). In 2016 the vessel was detained due to breach of the procedure of entering/leaving the occupied territory of the Crimea, followed by her seizure in favor of the state of Ukraine in 2017.

*NOTE: The views and opinions expressed in this article are those of the authors and do not necessarily represent or reflect the policy or position of Miller Magazine.

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