The capacity test. How additional regulation is holding back the recovery of the sea container industry in Ukraine

The expected resumption of regular container traffic to the ports of Greater Odesa has encountered difficulties that went beyond the maritime industry last month. First, the first call of the Turkish container carrier Akkon was disrupted, then the postponement of a voyage of the global leader in container transportation, the Swiss MSC Mediterranean Shipping Co, became scandalous, and the partners of the feeder service of the Ukrainian company Iteris also had problems.

The reason for this was the joint measures taken by a number of government agencies to conduct additional inspections of export agricultural cargo in containers, which significantly slowed down customs clearance and the transportation process itself. The problem demonstrates the lack of full coordination between the government and business, which is often lacking in our realities. Therefore, the most urgent task is to find opportunities to combine the interests of economic protection of the state during the war and to ensure proper conditions that will facilitate the return of international container lines to the ports of Greater Odesa. The elite of the global container business is currently testing this capability of our country. The conclusions, as we can see, are partly disappointing.

 

How did the mass media response illuminate the problem?

A few weeks before the launch of the MSC service, the Ukrainian industry community was already actively discussing the difficulties encountered in clearing export containers at the ports of Greater Odesa. Businesses were surprised by additional cargo inspections that effectively blocked the transportation process. It was not clear how long these procedures would take. The accumulation of containers at the terminals grew along with the indignation of market participants.

At the same time, entrepreneurs noted that containers with similar export cargo passed through other border crossing points according to the standard procedure – additional checks were carried out only in the ports of Greater Odesa.

According to Global Ocean Link (GOL), a logistics company, only a fifth of the approximately 700 export containers were cleared through customs during the preparation of the first MSC call. It became clear that the ship was simply not getting enough cargo, so the first voyage was canceled.

In the end, the Association of International Freight Forwarders of Ukraine (AMFU), which unites more than 150 leading freight forwarding companies, spoke up. “The reason was unreasonable cargo inspections and delayed customs clearance of export containers with agricultural products for an indefinite period, which blocked the cargo for an indefinite period and made it more expensive due to additional storage and demurrage costs (compensation for losses for vessel demurrage – Mind), which can reach $2000-3000,” AMEU said last week.

The association called on the authorities “to help solve this problem and prevent negative consequences for Ukrainian logistics and the economy.” This release made quite a splash in the national media. The very next day, industry leaders, including representatives of container lines, met with the head of Odesa Customs, Yuriy Cherdintsev.

After the meeting, the head of the customs office publicly assured that he would help solve the problem within the customs authority. And the head office of the State Customs Service tried to explain the reasons for additional inspections of export containers: “The concern of business representatives, and therefore the delay in submitting containers for customs clearance, is caused mainly by the fact that regulatory and law enforcement agencies are working on the facts of illegal export of agricultural products and cases of arrest of containers with such products.”

How will additional control measures affect container shipping?

In fact, the problem became the subject of public statements by some government agencies only when it rose above the “media waterline.” And when the focus of attention became the global business giant MSC, headquartered in Geneva.

Unfortunately, the first serious failure occurred a little earlier. In early June, the Turkish container line Akkon took the risk of bringing the container ship Elbe to the Black Sea seaport as part of the resumption of its service to Ukraine’s deepwater ports. Due to additional cargo checks and delays in procedures, the call was disrupted and the ship left the port empty. However, this scandal did not receive any media coverage at the time. Nor were there any public explanations from the relevant government agencies.

Similar problems were also reported by shippers in the Black Sea fishing port, which receives the Iteris Feeders service (Chornomorsk – Constanta), whose key partner is another container giant, the Danish Maersk. As a result of these complications, the service’s vessels were underloaded.

Why are additional checks of export containers made?

“The reasons declared by the state authorities for strengthening export cargo inspections are to ensure financial discipline, accounting and reporting, fulfillment of obligations to the budget by foreign economic entities, economic security, overcoming shadow mechanisms, de-shadowing and de-offshoring of the economy,” Konstantin Moryakov, attorney at law at ANK Law Firm, explains to Mind.

The relevant list was published by the Odesa Military Administration (OMA) and the State Tax Service of Ukraine in August 2023. The list is part of the development of the procedure for cooperation between Odesa Customs, the Main Department of the State Tax Service in Odesa region, and the Territorial Department of the BES in Odesa region. In matters of compliance with financial discipline by business entities in the field of foreign economic activity under martial law. In addition, an open memorandum of cooperation was announced between the Odesa Regional Office, state authorities, local governments and business entities, which is open to all interested parties.

“The said procedure, developed based on the joint order of the DIA and the military command dated 18.08.2023 No. 19, launched joint measures by the said state bodies regarding risky export operations of products from Ukraine, in particular agricultural products, verification of the legality of their origin, as well as imposing additional responsibilities on freight forwarders, port operators and other business entities involved in this process to submit documents, information, etc.”, explains Moryakov.

“It is interesting that the said procedure of interaction also involves the Main Department of the State Tax Service in Odesa region, which, among other things, now appears to be engaged in analyzing and verifying the source of origin of agricultural products, providing so-called analytical certificates with its conclusions, which generally falls within the competence of the customs, according to the Customs Code of Ukraine,” the lawyer adds.

How is the additional regulation realized in reality?

“We often hear from our clients that, under the guise of the above reasons, all export containers are subject to a continuous inspection, customs declarations are not issued (even after the inspection), cargo loading orders are not approved, cargo is seized, searches and seizures are carried out, etc.,” says Moryakov.

Thus, on the one hand, the state encourages foreign business to work in Ukraine, assuring it of favorable conditions. On the other hand, the state complicates the conditions by creating additional regulation, using exclusive powers during martial law, increasing the number of state bodies involved in inspections, etc.

“Foreign shipowners are also becoming hostages of the situation, as they make a difficult decision to resume ship calls to Ukrainian ports and are faced with the fact that due to lengthy inspections of export containers and, often, seizures of the cargo contained in them, they are forced to leave the port underloaded or even empty, as a result of which they suffer losses and reconsider their decisions to operate in Ukrainian waters,” the lawyer notes. “Frankly speaking, we hear from our clients about pressure on them, which in some cases is accompanied by signs of corruption, forcing them to take measures to protect their rights and interests,” emphasizes Moryakov.

What can solve the problem?

According to the lawyer, despite the “traditional” delayed reaction of government agencies, the meeting between industry representatives and the management of the Odesa Customs proved that a dialogue between the state and business is possible, and even more so, necessary.

“Perhaps, if such a meeting or a meeting, for example, at the Odesa Customs, between business and government representatives had taken place before or after the agreement on the procedure for interaction and new requirements based on a frank dialogue and the search for the optimal format of cooperation, this scandal could have been avoided,” the lawyer said.

“I believe that it is necessary to draw conclusions from the current situation and move forward by implementing modern practices of high-quality dialogue between the state and business to prevent negative consequences for the state in the future, to maintain a balance of interests for the sake of the common goal – the growth of the Ukrainian economy,” Moryakov summarized.

How did MSC react to the Ukrainian problems?

These complications forced the world’s largest container carrier to respond appropriately to changing circumstances. After the first voyage was canceled, the company has postponed the date several times. At the time of publication, the first call was scheduled for July 7.

During the period of uncertainty, the carrier even changed the vessel to operate the service twice. However, the latest update of the schedule again features MSC Levante F.

Obviously, the final decision on the main parameters of the service will be made by MSC only after the situation in Odesa has actually improved. Therefore, the updated call date has effectively become a new deadline for testing our country’s capacity to operate. The preparations for the rescheduled voyage are finally going well: the second call of the Turkish Akkon container ship Elbe to the Black Sea port took place last week, with the vessel delivering containers to Constanta.

How does the rescheduling of the MSC impact the market?

“The biggest problem is the reputational risk, which can greatly affect the market,” GOL Commercial Director Volodymyr Guz told Mind. ”The first direct call of the largest global container line to the ports of Greater Odesa was supposed to take place – it was a landmark event. Unfortunately, our state authorities did not take this fact into account – due to bureaucratic procedures, Ukraine does not look good abroad.”

At the same time, Guz is convinced that MSC will resume ship calls to Odesa. “There will definitely be a second call, but if this happens again, we will face serious issues with the possibility of resuming container shipping to the ports of Greater Odesa. This story has a negative impact on the plans of other container lines to return to Ukraine,” adds GOL’s commercial director.

In addition, the detention of containers did cause material losses to shippers. Additional costs may force market participants to refrain from using Ukrainian deepwater ports for now. “Why work directly through the difficult situation in the ports of Greater Odesa when there are alternatives, such as Constanta and Gdansk? These destinations are now equivalent or even better in economic terms than Greater Odesa. So why bear the additional risks of calling at Odesa, considering delivery times and other factors, and not receive any financial benefit? These are the questions that service users may ask themselves,” Guz reflects. “Yes, the resumption of ship calls to Greater Odesa is good news, but if the economy is not considered, no one will use the services regularly,” he added.

“ Thus, it is difficult to overestimate the resumption of regular container traffic to the ports of Greater Odesa by global players. In addition to a direct increase in exports and the gradual stabilization of our maritime container market. The return of ship calls will give confidence to the maritime and port industries, allow us to keep logistics and infrastructure costs within the country, etc.