On 26 June 2024, K2 Integrity, Fieldfisher, and Al Tamimi & Company hosted a webinar discussing the far-reaching consequences on global trade, security, and economic stability of the Red Sea shipping crisis. The conversation included Sabrine Hassen, senior managing director, Investigations and Disputes, K2 Integrity; Bilal Sabbagh, director, Investigations and Disputes, K2 Integrity; Andrew Hood, partner, Fieldfisher; Ahmed Al Barwani, partner and head of office, Oman at Al Tamimi & Company; and Marc Armas, counsel at Walden Macht & Haran. To watch a recording of the full webinar, click here.
The shipping crisis in the Red Sea has had a wide-reaching impact on regional and global trade, affecting shipping, energy prices, security, and the military. This disruption is part of a broader context of global instability, as reflected in the Russia-Ukraine war and U.S.-China trade tensions. The reduction in trade through the Suez Canal, estimated at about 50% for Britain, has resulted in increased costs for fuel, insurance, and rerouting.
Most Red Sea ports have witnessed a sizeable reduction in trade activity since the start of the crisis, with a few outliers. Ports down the East African coast have seen a surge in activity due to the diversion of trade, though some ports do not have the capacity to accommodate the added traffic. All regional shipping companies have been affected by the increase in freight rates, insurance costs, and added journey times. Below are some regional impacts:
- Egypt: The Suez Canal, a vital source of foreign currency for Egypt, has seen a 15% reduction in traffic, exacerbating pre-existing economic issues. Egypt’s economy, already struggling due to the COVID-19 pandemic and the war in Ukraine, faces a critical shortage of U.S. dollars and mounting debt reaching $29 billion in 2024. This reduction in hard currency might have played a role in the UAE’s decision to pour $35 billion into Egypt by purchasing a lease to Egypt’s Ras al-Hikma Mediterranean resort town.
- Saudi Arabia: Contrary to expectations, Saudi Arabia has managed to increase its oil exports to Europe, leveraging its well-developed infrastructure, including pipelines and expanded export facilities on the Red Sea coast. This is partially due to reduced Russian oil and gas supplies.
- Djibouti: Djibouti has experienced an increase in port traffic, underscoring its strategic importance for trade along the East African coast.
- Oman: The Port of Salalah has benefited from increased traffic as shipping routes adjust. For example, Asia is shipping crude through Oman to get to Saudi Arabia, Europe, and the United States. Alternatively, Oman depends on shipments from Europe and the United States, and retailers have faced delays in receiving goods, leading to contractual disputes and renegotiations.
Exacerbating the crisis, Houthi rebels have attacked merchant vessels in the Red Sea and Gulf of Aden, killing innocent civilians and causing damage to commercial ships. These attacks against international shipping endanger mariners, intentionally disrupt the free flow of commerce, and interfere with navigational rights and freedoms. The United States and other G7 countries have taken actions to address the crisis, including adjusting supply chains, enhancing regulatory frameworks, and increasing maritime security to counter threats like piracy and terrorism. The United States has designated the Houthis as a terrorist group and imposed economic sanctions on entities supporting them. The U.S. Justice Department has charged foreign nationals for attempting to traffic weapons to the Houthis and other terror groups.
Amidst the crisis, there are opportunities for growth. Despite contributing to increased trade costs, the global trend towards re-shoring, near-shoring, and friend-shoring (i.e., reducing the size and complexity of supply chains by bringing production closer to home and increasing the portion of the supply chain located in closely allied countries) presents opportunities for countries geographically close to major economic blocs like the European Union and the Gulf states. Such countries could include the various North African states, from Morocco to Egypt; Turkey; Jordan; certain West African countries potentially (for Europe); and certain East African countries (for the Gulf).
There is also a growing visible interest in combined air and sea transport. There is an upward surge in demand (and a corresponding increase in freight rates) for air cargo transport of high-value shipments from Asia to Europe, particularly from the Middle East to both Europe and the United States. For example, Freightos reported that the average air freight cost on the Middle East to Europe route increased 35% to USD 2.03 per kg in the period between mid-December 2023 and mid-January 2024. By including air transport in the supply chain, some delays and uncertainties can be avoided. The additional cost of expensive air freight solutions is outweighed by the severe risk of production stoppages or empty shelves.
The Red Sea shipping crisis is a complex issue with significant global, regional, and local impacts and is not likely to end anytime soon. It underscores the interconnectedness of global trade and the need for adaptive strategies to manage uncertainty.
