How the Logistics Sector Is Coping with the Onslaught of Sanctions

Rearrangement of the global transportation market presents new opportunities for Eurasia’s players

The war of sanctions that is being waged against Russia has effectively cut it off from many of its traditional shipping and logistics corridors compelling Moscow to drastically redraw its map of export and import routes for essentially all goods. This has essentially affected a volume of traffic equal to 12 to 13 million tons of cargo annually. This is further compounded by problems with equipment and infrastructure, causing a whole slew of additional complications. Russia’s current challenges present an opportunity to global players who could profit from offering Russia the most attractive solutions.

In 2021, 60% to 65% of all goods imported into Russia originated in Asia-Pacific. That said, logistically, more than 80% of these goods came from the West. Such had been the typical shipping route until the past few months. 

A twenty-foot container would usually be loaded onto a Panamax ship, travel across the Indian Ocean, through the Suez Canal and via the Mediterranean, sail into the Atlantic past Gibraltar, and then turn North to be finally unloaded somewhere in Antwerp, Amsterdam, or Hamburg. Once at a European port of entry, the container would be picked up by a truck and transported to a freight yard near Yekaterinburg, Moscow or even as far as Novosibirsk. Far from obvious to the uninitiated, this route used to be considered by many logisticians as both cheap and reliable

This is now a thing of the past, opening up an opportunity for Russia's Asian trade partners to try and develop a more direct shipping route. Experts predict that the throughput capacity of Russia's eastern transport corridor will increase dramatically in the nearest future, allowing China to ship greater volumes of goods to Russia and later on to the West along the Trans-Siberian Railway and the Baikal-Amur Mainline. This is a chance for China to use Russia’s railway infrastructure even more extensively as a backup alternative to facilitating its Belt and Road strategy.

On top of that, China is expected to turn into a transhipment hub for goods imported into Russia from other Asia Pacific countries. As a result, the revenues that will be lost to European ports and logistics centres will likely go to Asian exporters.

80 per cent of the freight transported to China via the Trans-Siberian Railway has traditionally been made up of Russian coal. In contrast, the reverse flow of freight traffic primarily consists of containers loaded with all sorts of goods that are often unloaded off ships in the port of Shanghai and reloaded onto the rail. The range of goods could include anything from Ecuadorian bananas to oranges shipped from Morocco.

Over the coming years, Russia intends to at least double the throughput capacity of its border crossings on the border with China in addition to expanding the capacity of its Far Eastern seaports, including, in particular, the port of Vostochny, expected to grow by as much as 30  to 40% by the end of the year.

Other opportunities for seaborne shipping from Asia to Europe using the Northern Sea Route are also opening up. If properly developed, this route will allow Asian shipping companies to reduce the time it takes for goods to travel to Europe, resulting in marked cost savings, which will be particularly beneficial and relevant amid a recent dramatic rise in the cost of transportation. From 2018 to 2019, it cost $3,000 to ship a container from China’s coast to the United States, compared to the current $18,000, a six-fold increase.

Although currently, Northern Sea Route shipping could perhaps be still classified as an "adventure," Russia will have to do whatever it takes to upgrade this experience to the level of "business as usual". This goes beyond just arranging icebreaker escorts or providing meteorological support and includes the construction of new railway lines that would string together a network of Arctic Ocean seaports along the entire route. There is reason to expect that brand new logistics centres will continue to be built in addition to a dramatic increase in the capacity of existing terminals. Asian construction companies are obvious candidates for being awarded potential contracts, given their extensive expertise.

There is yet another promising opportunity for Asian companies that have presented itself quite unexpectedly and involves shipping containers. After global logistics operators such as Denmark's Maersk or Switzerland's NSC, along with major French and Italian players (making up close to a good half of this market), chose to stop servicing Russian shipments and started pulling their containers out of the country, Russia has been forced to deal with an acute shortage of standard containers for carrying goods.

For as long as Moscow was a part of global logistics chains, containers were of little concern to anyone. In a standard situation, these regular metal boxes served as returnable tare. They had not been produced in Russia because metal makers found it too unprofitable. But the situation has changed in a dramatic fashion causing an acute shortage that can be filled by China, the world’s largest producer of containers.

China built this capacity during the height of the COVID-19 pandemic. Back then, a great share of the containers shipped to the US just got stuck there because it was just not economically feasible to ship empty containers back across the ocean. China managed to find a way out of this conundrum despite racking up significant losses in the process. Now is China’s chance to recoup its losses.

As the sanctions continue to mount, Russia might be forced to buy a significant number of containers considering that even Chinese-owned containers might not be used for shipping goods to Russia as a result of the West's secondary sanctions.

And so, it appears that it is Asia's transportation companies stand to gain from the West's sanctions war against Russia as Europe's departure opens up new opportunities for them. Interestingly, it is unlikely that China's transportation companies could fill this gap because they are being closely watched by US regulatory agencies. And yet, this gives a chance to benefit the likes of Vietnam’s logistics sector. It could, for instance, secure shipments of coffee from Brazil or Colombia, both of whom are ready and willing to ship to Russia but have to deal with European shippers’ unwillingness to make shipments.

Another business segment that could potentially be taken over by Asian shipping companies involves supplying coal from Colombia to Germany (as a substitute for coal from Russia) and shipments of Russia's mineral fertilizers bound for Argentina, Paraguay, Brazil, Ecuador and other countries in the region. At this juncture, these countries are experiencing an acute shortage of fertilizers. They are ready to pay a hefty premium to those capable of offering a solution to this problem.

Russia’s sanctions evasion strategies represent yet another opportunity to make a buck. This undertaking is likely to involve (and perhaps is already involving) North African countries and Turkey and Israel, who are busy setting up offshore centres. Opportunities for more trade are also expanding for nations such as Iran, India, and Afghanistan.

On top of that, there are several countries that could benefit from providing Russia with alternate schemes and ways of owning seagoing vessels beyond the traditional offers of Liberia or Panama. Russian ships could additionally be moved to the jurisdictions of such nations like Kazakhstan, Vietnam, Cambodia, and even Mongolia, which conveniently happens to have its international register of shipping.

As one can see, the current logistics crisis represents a window of opportunity. Trans-European transport corridors are being displaced by transcontinental ones, generating business for the region's carriers. Down the road, this could provide lucrative growth opportunities for local builders who would be involved in setting up the much-needed infrastructure. By and large, recent changes in the logistics sector are expected to drive shipping costs down, thus making goods from Asia more competitive and helping jurisdictions that will be prepared to provide sanctions avoidance services. These are all excellent opportunities for Eurasia’s nations.

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