Current Affairs in Russia and How it Could Affect Supply Chain
Since Turkey shot down a Russian fighter jet that strayed into its airspace one month ago, the world has been watching the tense relationship between Turkey and Russia. Shippers and carriers especially should pay attention, as the conflict has and will continue to have implications for the global supply chain.
A Significant Region
As unhappy as Russia is with Turkey, they are heavily reliant on Turkey for its only warm water route out of the Black Sea and to the rest of the world.
Historically, Russia has always struggled with its lack of warm water port access. With North America surrounded by water on all sides, it’s hard for Americans and Canadians to understand Russia’s frustration with its lack of port access, especially seeing that the country is largely surrounded by water. However, Russia’s Northern coastline is frozen over for 6 to 9 months of the year, severely limiting use for trade or military transit. As such, the Bosporus and Dardanelles (Turkey’s two straits out of the Black Sea) are essential to Russia’s supply chain, both for commercial and military purposes.
Russian tension over sea access is nothing new. The Russo-Turkish war of 1877 to 1878 was fought over strait access, as well as World War I’s battle of Gallipoli, and many others throughout history.
Peter the Great believed in the power of a strong navy, saying that “any potentate with a land army has one hand but he who also has a fleet has two hands.”
Of course, shipping by sea is also far more economical than shipping by ground or air, so Russia has many reasons to care about sea access.
Slowing Down the Fastest Route
According to the international agreement established at the Montreux Convention of 1936, Turkey must allow commercial vessels freedom of passage through the Bosporus and Dardanelles. During peacetime, they must also allow warships, with some restrictions. Therefore, Russia has access to these straits according to international agreement, but they do not have direct control over them.
The Montreux Convention is renewed or revised every 20 years, with the next date set for 2016. However, any country who wanted to cancel the agreement would have had to give notice two years prior to the expiration date – otherwise, the agreement will renew automatically.
According to many experts, there will be no issue with the renewal of the agreement. However, relations between Turkey and Russia have been tense since the incident with the Russian aircraft. While Turkey has said it does not intend to make revisions to the agreement, Turkish Foreign Ministry spokesman Tanju Bilgic has recently said that "anything could be subject to assessment due to developments."
Regardless of changes to the treaty, articles 20 and 21 of the Montreux Convention allow Turkey to shut down the passage to warships in a time of war, or if Turkey feels threatened by war. (This article does an excellent job explaining how that might happen).
Even if Turkey doesn’t make the provocative move to close the straits, they can make passage more difficult for Russia. They have already forced Russian cargo ships to wait for hours before being allowed passage. They could also increase red tape, such as requiring notification of warships’ arrival to the straits 15 days in advance.
Any of these measures could drive up shipping costs and delays for products shipping to or from the region.
They would also have serious implications for Russia’s actions in Syria. If the straits were closed down, the alternative sea route is through the Gibraltar strait, between Spain and Morocco. Using the Turkish straits, Russia can get to Syria in a few days. Using the Gibraltar strait, it would take a few weeks.
Last Minute Rush
Shortly after the jet was downed, Russia responded that they would be placing sanctions against Turkey. However, the sanctions would not be immediate, in order to keep its own prices stable. Russia is now following through with an official sanction on several imports of fruits and vegetables from Turkey, effective January 1st. As a result, there is currently a major rush to move Turkish product to Russia before the January 1st deadline.
While most of the world, including the USA, Canada, and the EU have put sanctions on Russia for the annexation of Crimea, sanctions have focused on financial measures and asset freezing, rather than embargo on import and export of goods. Therefore, the current state of affairs may bring opportunities to businesses outside of Russia and Turkey.
This rush to ship goods to Russia presents an opportunity for carriers with free capacity. This also presents an opportunity for foreign fruit and vegetable producers to fill the gap in Russian grocery stores. Foreign produce buyers may also have an opportunity to buy from Turkish producers with an abundance of stock.
Moving Production & Grounding Tourists
The clothing brands Zara, Mango, and H&M may move production out of Turkey due to issues with the Russian sanctions. Meanwhile, Russia has banned citizens from vacationing in Turkey. In both cases, transit between Turkey and Russia will slow, with an increase in routes to and from other destinations.
If these companies move production out of Turkey, this will free up a labor force that could be utilized by a company looking to increase production, as long as access to the Russian market is not needed.
The geopolitics of the Black Sea region is currently in a dynamic state. Shippers and carriers must pay attention in order to prepare for the business disruptions that sanctions, shipping delays, and increased shipping prices may bring. However, smart businesses may also find new opportunities brought by these disruptions in the market.