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Navigating the impact of geopolitics on maritime trade

Geopolcast: Season 1 – Episode 7

January 8, 2024

In this episode of Geopolcast, we discuss how geopolitics has entered the maritime domain and the impacts of this new unpredictability for maritime trade.
Credit and Political Risk|Marine
Geopolitical Risk

In this episode of Geopolcast, Elisabeth Braw, senior fellow at the American Enterprise Institute, explores the impact of geopolitics on maritime trade with, Vice Admiral Andrew Lewis, Commander of the US Second Fleet and, Simon Lockwood, WTW’s Head of Ship Owners.

Recent geopolticial shifts have illustrated how dependent the world is on shipping functioning without disruption and the impacts vessels and shipping companies could face in problematic bodies of water.

Geopolcast – Episode 7: Navigating the impact of geopolitics on maritime trade

Transcript for this episode:

Geopolcast — Episode 7: Maritime Trade

ANDREW LEWIS: By the law of the sea and by rules of engagement we have, it's very difficult to play man defense, if you like, with these merchant vessels. We just don't have the assets.

ELIZABETH BRAW: A warm welcome to Geopolcast, the new podcast from WTW exploring geopolitics and its impact. My name is Elizabeth Braw. I'm a Senior Fellow at the European Leadership Network, and I'm also a columnist for Foreign Policy and for Politico Europe, where I focus on the busy intersection between geopolitics and globalization.

In each episode of Geopolcast, I'm joined by two expert guests, with whom I discuss subjects that matter to people in business and, in fact, everyone in the globalized economy. And today I'm delighted to be joined by two outstanding experts in the maritime sector.

Vice Admiral Andrew Lewis is the most recent commander of the US Second Fleet and also the most recent commander of Joint Forces Command Norfolk. He also served as deputy chief of naval operations for operations, plan, and strategy, vice director for operations, and director of fleet training at Fleet Forces Command.

Admiral Lewis is a naval aviator by background and has completed more than 5,300 flight hours and 1,500 arrested landings. That's the really difficult landing pilots perform on aircraft carriers. It's also the kind of thing that the rest of us watch on television and in movies and are blown away by. Since recently retiring from the military, Admiral Lewis has been serving as a maritime consultant.

Simon Lockwood is Head of Ship Owners at WTW. Today, that's not just a busy field but an incredibly tricky one since geopolitics has entered the maritime domain, which makes it even riskier and far more unpredictable to send ships around the world. And that's what I want to discuss today. Welcome, Andrew. Welcome, Simon.

SIMON LOCKWOOD: Thank you, Elizabeth.

ANDREW LEWIS: Thanks, Elizabeth.

ELIZABETH BRAW: Andrew, there are so many recent maritime and naval developments that we can discuss, but I want to start with the most recent really major one, which is the US deployment of not just one but two aircraft carriers to the Eastern Mediterranean. That's the waters of Israel and Gaza. And these aircraft carriers and accompanying ships are obviously there to deter a bigger conflict, but what exactly do they do on a daily basis?

ANDREW LEWIS: Well, on a daily basis, they're there doing their normal sea control missions, so they're operating in due regard in international airspace and international maritime spaces, so in the global commons, outside of 12 nautical miles from territorial waters. And they just operate day-to-day as a deterrence, and they strategically position them to where they can respond if need be.

But they're not intending to create a fight, if you like. They're there as a signal to anybody with who would think to attack them or do things that are acts of war that need to be responded to.

ELIZABETH BRAW: And just on a practical point, are they are they stationary?

ANDREW LEWIS: No. The beauty of a carrier strike group and their associated ships-- they normally deploy with half a dozen other ships, destroyers and cruisers. And they bring with them their own political and physical access. Because they operate in the global commons, they operate due regard throughout the Mediterranean, into the Red Sea, and so on and so forth.

So it's a very flexible, agile platform that we can move around to different areas, and that that's the beauty of the asset. It spends a lot of time at sea as a result, and it's pretty good sacrifice for the sailors on board. But it's a really good deterrence method.

ELIZABETH BRAW: Just on a side note, I know that for a while-- and it still may be the case-- the US Navy operated an incredible program where executives got to come and visit for a very short period of time. But apparently, it was a huge success or is a huge success, and executives love spending a bit of time on an aircraft carrier, which is clearly an extremely unusual experience for those of us who don't serve in the US Navy or in the few other navies that do have an aircraft carrier.

Simon, I want to ask you a parallel question about the same issue, the conflict between Israel and Gaza. Because it has already had a tangible effect on shipping, I think one can tell even from just watching the news shipping has become riskier. Can you tell us what's happening, what the difference is for shipping companies, and what their thinking is regarding whether it's safe to call Israeli ports?

SIMON LOCKWOOD: Well, I think it's what sits behind all of this and, I guess, no different from commercial shipping to naval sort of planning that comes through all these issues as well is ultimately it's about the preservation of life and order. And shipping companies have to make a very planned decision around how they deal with incidents on a global nature because ultimately, you are putting human lives in the way of challenges.

Now, what we've seen recently with Israel-- and we can move that back through to what's happened in the Black Sea, which continues to happen in the Black Sea as well-- is that the world is dependent upon shipping for global trade. Every person you ask will tell you a number that's different. It normally sits between 80% and 90% of global trade is moved on board ships, and as a result of that and in order for that to continue to happen is that it has to happen in a manner that is safe, that is allowed to preserve life.

Now, we saw after the events of the Hamas invasion of Israel and the shock that was created as a result of that invasion as well is that we saw ports shut down. We saw shipping companies making decisions about whether or not they were going to continue to trade into those ports as well. We saw vessels that were actually caught within Israeli ports and decisions about whether they could safely move out over that period of time as well.

We saw large liner operators declaring force majeure on their contracts as well and decided not to call at ports. And Israel, as with so many countries within the Mediterranean but also within the Middle East as well-- hugely dependent on an inward trade of goods as well, and the consequences of what happens when shipping is interrupted is not just at a port level or national level. It has a huge global knock-on effect and impact on that one as well.

ELIZABETH BRAW: And Simon, for those who may not be familiar with war risk premiums, can you tell us where Israeli ports rank today in the expense involved or the amount of war risk premiums that shipping companies have to pay and how that compares to other countries that are experiencing conflict?

SIMON LOCKWOOD: So typically, the risks of war-- and it's not just a simple indicator on there as well of a physical strike on a vessel as well. There's rather more than that. It's some number of malicious act that might happen to a vessel as well. But for most vessels-- most owners that buy war insurance-- and most are required to buy war insurance as well-- is that it allows them to trade their vessels worldwide.

But there are certain areas that are designated as high-risk areas or higher-risk areas as well. Now, there will be parts of the Black Sea-- Israeli ports have typically been included in there for a long time-- Indian Ocean but for different reasons, predominantly because of the risk of piracy, which I guess we'll come on to that later. And Andrew, particularly you will take great pride of how the world's navies have had such a significant impact, positive impact on the reduction of piracy in the Indian Ocean or in [? the ?] eradication of piracy on the Indian Ocean.

But for those high-risk areas as designated-- and Israel has been so-- typically, war underwriters will have the ability to charge additional premiums to reflect the increased risk on there as well. Now, most Israeli ports were chargeable before the Hamas invasion, but what we've seen since then is a minimum of 10-fold increase in the rates.

ELIZABETH BRAW: And this, once again, illustrates how extremely dependent the world is on shipping functioning without disruption because Israel, for example, depends, as you said, Simon, heavily on shipping for its imports, in fact, almost exclusively on shipping for its import of food.

Andrew, I wanted to ask you about another problematic body of water, and that is the Strait of Hormuz, where four years ago there was a major incident where the Iranian Revolutionary Guards seized a commercial vessel, a merchant vessel. And, well, they detained it for a number of days, and eventually, it was released.

But that case sent shockwaves around the world because it seemed like any vessel could face such a situation, and indeed there have been more than 20 cases since then of merchant vessels in the Strait of Hormuz being harassed or attacked, mostly by Iran, and that's prompted the US Navy and Marine Corps to send a force of around 3,000 sailors and Marines a few months ago, in August, to the Strait of Hormuz to try to keep order and protect shipping.

And so the question, I think, is what those sailors and Marines can do in the Strait of Hormuz. How exactly are they meant to deter aggression against merchant shipping, considering that if they cross a certain line, which we don't know what it is, then there will be retaliation against them? So Andrew, what are they doing? What can they do to make shipping safe in the Strait of Hormuz, which is obviously a major crucial shipping lane for global shipping, especially for oil?

ANDREW LEWIS: Yeah, so first of all, Elizabeth, it goes much further back than four years ago with these attacks, and these attempted boardings and so on and so forth. And Simon referred to the counter-piracy efforts of NATO navies, US coalition of the willing in the Middle East that has really patrolled those waters quite effectively over time.

And the only one who really can shut down the Strait of Hormuz, in reality, is industry, if industry decides not to go through the Strait of Hormuz because the risk is too high to the master, to the crew, to the cargo. And that's where these insurance-- and they're liable and responsible for the crew and the cargo from a legal perspective, so the master is.

So that's something that is very-- we're very aware of as in charge of trying to protect them. We can't, by our rules of engagement, be a direct shield between potential threat to a merchant ship. That said, there are things that can be done with embarked security teams that are allowed for.

In the case of US Marines and sailors, they'll be on US-flagged vessels. I'm sure Simon can talk to this much better than I can. The vast majority of the merchant fleet globally has that capability to deter-- initially, we saw this a lot with piracy. The vast majority of shipping had no problem with piracy. It was just-- they were able to defend themselves.

And the same goes true for what amounts to terrorist attacks or terrorist boardings. The vast majority of shipping-- they can deal with that. They're good seamen. They know what they're doing. They know how to operate in the maritime. That's the biggest defense you can have against-- the personnel, the military personnel, we can do certain things with the assets that we have stationed permanently in the Middle East, which is more and more.

This is the first time in two years that we've had an aircraft carrier strike group in the Middle East. And they're not around over into the Indian Ocean and into the Arabian Sea now or Arabian Gulf, so we don't know when they're going to go back there. We have usually a couple destroyers and some smaller patrol craft there. And the Brits have a good number of ships, and the French do. And we work together in that regard. And it's a collection of the willing there, for sure.

ELIZABETH BRAW: It certainly is, but isn't the challenge in deterring state-backed attacks, that there is a lot less you can do compared to deterring pirates because the pirates-- they can't do very much to escalate if you try to defend a merchant vessel against their attacks, whereas a state-backed force can obviously escalate, and that is the risk.

ANDREW LEWIS: Yes. However, I think there's-- there's a right of self-defense that a ship is going to have, regardless if they're a gray hull ship or a white shipping. They have a right of self-defense in the maritime, and within their-- a big VLCC, a very large crude carrier or-- they're big ships, and these small boats that are state-backed-- they don't have a lot they can do to them.

When I was-- I was the operations officer for Naval Forces Central Command in 2010 and '11, and this was kind of at the height of piracy too. And there was an attack in the Strait of Hormuz on a VLCC, Japanese-flagged VLCC. And it was a suicide boat, and it put a little ding in the side of the ship. And they were repaired in about five weeks and underway again.

I actually rode them out of the Persian Gulf. These go to the professionalism of mariners, and that's something that is really important. And by and large, operating by the internationally-recognized laws of the sea, whether you're a signatory or not but operating by them-- and that's the expectation.

Whether you're a navy person or a professional mariner, that's how people operate. And the vast majority of people operate that way is what I've seen in my time. Simon, if you would agree with that or not, but.

ELIZABETH BRAW: And Simon, I wanted to ask you about the other side of this equation very quickly before we move on to the Black Sea, which is obviously an area of great concern at the moment. So Simon, how has the harassment of merchant vessels in the Strait of Hormuz affected shipping? And has most recent US presence there that arrived in August-- has it improved the situation?

SIMON LOCKWOOD: Well, I think-- if I take you back, I think, to the incident you were talking about four years ago, which was the Stena Impero, which was seized by Iranian National Guard, claiming that the vessel had gone into Iranian national waters.

And there was a period of time very shortly after that-- I got a-- I happened to get a call from one of our clients, who had a tanker, who was approached similarly, happened to be a British-flagged tanker. And they were concerned about what they should do, and fortunate for them, there happened to be a Royal Naval vessel that was in proximity. And that defused the situation as well.

Now, the challenge with this one as well and for the opportunity that is-- on the security that is created by having friendly naval forces in locality is a positive thing as well. But the sea's a big place, and the gulf's a big place as well. And the ability for those actors to come in and have an impact on that one in a relatively short period of time that is the real challenge here. And these are easy targets.

But these have been issues for shipping in perpetuity because if you look at-- you back to the Iran-Iraq War, the Tanker Wars of the '70s and the '80s. Vessels were continuing to trade up into the gulf normally with their navigation lights turned off, with everything else turned off, not AIS in those days but radar and everything else to go as dark as possible in order to continue a trade, again, to keep the lights on, the irony of keeping the lights turned off on a ship to keep the lights turned on in the rest of the world as well. So these are the proportionate risks that get dealt with from shipping and globally.

Now, clearly, as we saw in and reference, there was that sort of piracy which was a much easier one to control as well, particularly the use of convoys escorted by naval vessels as well. But whilst the opportunity to have naval forces nearby or in proximity to commercial ships-- but let's face it. This is British taxpayers' money, US taxpayers' money, French taxpayers' money to look after Panamanian-flagged vessels or Monrovian-flagged vessels and the challenges with that one as well, just how you manage these things on a global scale.

ELIZABETH BRAW: Indeed, and I think it's safe to say, Andrew, not even the US Navy is big enough to be able to escort every vessel that may need escorts. Simon, I wanted to ask you first about the Black Sea, which is clearly a body of water that is particularly problematic at the moment, not just because of the war but because shipping has to happen in order for Ukrainian grain to get out and get to the world. It's indispensable.

And since Russia pulled out of the grain deal with Ukraine, Ukraine has established a grain corridor of its own, and some shipping companies are willing to take the risk to sail along this corridor and bring grain out to international ports. Simon, what kind of shipping companies are doing this, and what kind of insurance coverage do they have?

SIMON LOCKWOOD: So they are commercial shipping companies, a number of Greeks, which is obviously such a significant global shipping market or shipping providers as well, but those that will see the opportunity, there's an enhanced risk, a clearly enhanced risk. And very sadly, I've seen reports today of a commercial ship being allegedly hit by Russian rockets. A Ukrainian pilot's being killed, and a number of crew members have been injured as a consequence of that, ironically a vessel that was actually seen to be carrying iron ore rather than grain.

But the realities are such that those risks are very real, and this is all the way down in Odessa, where the-- or around the Odessa ports, which is seen as safer end of Ukraine relative to those ports, such as Mykolaiv, where vessels have still been trapped since the start of-- since the start of the war in February last year.

So if you look at the importance of not just Ukraine but also the Russian grain and fertilizer and its ability to feed the world as well, when all of that has to come out of the Black Sea or there is no other sort of practical solution at scale as well to deal with and to support things like the UN World Food Programmes that-- issues on that one as well, so a real challenge.

So the risk is very real and evident today, if the reports that are in the trade press are correct, that the vessels are-- commercial ships are being attacked and resulting in fatalities. And what's that going to do to the average seafarer?

Now, Andrew and his colleagues very bravely signed up to do a job that had the potential for them to get involved in conflicts. Commercial mariners don't do that. That wasn't-- and they took a-- they took a different path. And how often have they been caught up in these situations?

ELIZABETH BRAW: Indeed, and I was going to ask you, Andrew, about the Russian threats where Russia has been saying, we may attack ships in this-- merchant vessels in this Ukrainian corridor. And I have been overtaken by events because if the news reporting is correct, a merchant vessel in this corridor has now been attacked.

So what happens now? Is there anything any Western navy can do to help protect shipping in this corridor? Obviously, no Western navy will get involved in a direct conflict with Russia in the Black Sea, but is there anything anybody can do to help protect shipping in this vital corridor?

ANDREW LEWIS: It's a difficult situation. The thing about the Black Sea that makes it even more complicated is the Montreux Declaration, and from a warship restriction perspective there-- because it restricts our ability to operate with a warship and certain tonnage and capability aboard a ship, which is-- we're not going to bring out an aircraft carrier into the Black Sea anyway.

And there are similarities with the-- if you flip it up to the north, northwest, to the Baltic, there's physical limitations operating in the Baltic, and it's not-- we kind of need to look at that in the same-- the Baltic and the Black Sea in the same way because there are the same restrictions and the same challenges that merchant vessels have and that the Russians can employ violence or at least threats of violence against merchant shipping.

Without a direct declaration of hostilities by a Western navy on Russia in this case, there's some real challenges and just like Simon highlighted, too, that merchant mariners-- they're the ones who are going to shut it down because of what their obligation is to their crew. That's going to be the bigger challenge. It is, who's going to be taking those risks on behalf of the companies? When it comes to that, that's when it becomes serious, I think.

And I don't mean to belittle it, but that's a very hard decision that will need to be made by the leadership and the industry and then supported where we can by military vessels. But by the law of the sea and by rules of engagement we have, it's very difficult to play man defense, if you like, with these merchant vessels. And we just don't have the assets.

ELIZABETH BRAW: It is, and the risks, as you say, Andrew, are already increasing and will only continue to increase. And in related news, China has said that the United Nations Convention on the Law of the Sea is outdated and needs to be replaced. Well, that's the only proper framework we have for maritime activities today, so if that were to be scrapped or disregarded, then the risks would absolutely accelerate even further than they are already accelerating.

We'll have to discuss shipping, again, in the very near future because there's so much happening, but for now, thank you, Admiral Andrew Lewis. Thank you, Simon Lockwood. Thank you to our producer, Robin Pegg. And above, thank you all for listening to Geopolcast.

In upcoming episodes, we'll examine ESG and much else, and yes, we'll examine shipping again. To get the episodes as soon as they are released, make sure to subscribe to the Geopolcast via all the usual channels, and please recommend us to your friends and colleagues. Until next time.

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Disclaimer

WTW offers insurance-related services through its appropriately licensed and authorised companies in each country in which WTW operates. For further authorisation and regulatory details about our WTW legal entities, operating in your country, please refer to our WTW website. It is a regulatory requirement for us to consider our local licensing requirements.

Podcast host

Elisabeth Braw
Resident fellow at the American Enterprise Institute (AEI)

Elisabeth is a Geopolitics expert who has been consulting with the WTW Research Network since 2019, specifically exploring grayzone aggression and looking at its implications for risk managers. This work forms part of a wider research programme on geopolitical risk, including the importance of China and security impacts of climate change.

Elisabeth is a resident fellow at AEI, where she focuses on defense against emerging national security challenges, such as hybrid and grayzone threats. Concurrently, she is a columnist with Foreign Policy, where she writes on national security and the globalized economy, and is a member of the National Preparedness Commission (UK).


Podcast guests

Vice Admiral Andrew Lewis
Commander of the US Second Fleet

Admiral Lewis is the most recent commander of the US Second Fleet and also the most recent commander of Joint Forces Command Norfolk.

He also served as deputy chief of naval operations for operations, plan, and strategy, vice director for operations, and director of fleet training at Fleet Forces Command. Admiral Lewis is a naval aviator by background and has completed more than 5,300 flight hours and 1,500 arrested landings.


Simon Lockwood
Head of Ship Owners at WTW

Simon is WTW’s Head of Ship Owners, spending the past 30 years working in the marine insurance industry. Simon works with major international shipping companies, to design and place innovative insurance solutions.

Simon is also the Chairman of the Marine Executive Committee of the London.


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