The global economic crisis, a simultaneous occurrence of several economic catastrophes since the summer of 2007, is arguably the most significant global economic slowdown since the fall of the communist bloc. As discussed below, the current crisis should not be categorized as a normal recessionary phase along the business cycle, but rather as a turning point in more than a few economic processes and lines of thought. Furthermore, several sectors and regions were struck much severely than the average. Needless to say that every specific economic situation differs from the other, and thus it is imperative to separate the aggregated numbers and the global actions from the conditions, which should bring about a positive change in the near future.
Although many economists praise the actions taken by US Federal Reserve Chairman Ben Bernanke and report that the world’s largest economy is about to end its recession (Izzo), and other major European markets (such as Germany and France) are recovering as well (Herbst), many economies around the world are far from seeing the light at the end of the tunnel. Some of the best known examples are Russia and other Eastern European countries (most notably Ukraine), whose economies have shown a gradual recovery from the financial crisis that struck the region in 1998. This paper analyzes recent trends and prospective of the Russian port industry, while paying special attention to Russia’s major port on the Black Sea, namely the port of Novorossiysk in the south-western territory of Krasnodar Krai.
The Contemporary Economic Crisis
The course of economic events throughout the past two years has already received more than a few nicknames. Some call it “financial crisis” or the “credit crunch,” while others use economic terminology such as “recession,” “slowdown” “subprime crisis” and so on. In fact, as indicated in the introduction, the definition of a crisis would arguably best fit this situation, as it comprises negative aspects from all the economic concepts described above.
The Reasons for the Economic Crisis
It is widely agreed to link the current crisis, which is defined by leading economists as the worst since the “great depression” of the late 1920s (Business Wire), to several main causes:
- First, as observed by Richard Freeman already in 2002, the US housing market experienced long years of overbuilding, which exceeded not only the ability of people to buy houses, but also the population natural growth rate. This has led to two major results – devaluation of houses and, as described next, loose credit policies that ignited the burst of the so-called “housing bubble” (ibid.).
- Second, in order to encourage purchase of houses, financial institutions increased their share in the so-called subprime mortgage market, which is simply lending activities with borrowers whose ability to pay back the loan is questionable. The underlying assets, namely the purchased houses, served as collateral for the loan. Moreover, these asset-backed loans were sold and resold as debt in the bond markets, creating a paradoxical situation, in which houses were leveraged many times more than the original value of the asset.
- Third, due to the devaluation of houses and widespread default among borrowers, all those financial institutions, which took part in the lending chain, suffered heavy losses and many of them collapsed one after the other. These events, which became highly noticeable in late 2007 and throughout the first half of 2008, trembled the financial markets, bringing about a slowdown in most sectors of the economy, first in the US, and shortly afterwards in the rest of the world.
The Global Recession 2008-2009
Without going too deeply into macroeconomic principles, it is clear that difficulties in the financial markets have vast direct and indirect effect on the rest of the economy. Such effects can be observed, for example, by looking at consumption patterns, national product and income of individuals, companies and whole countries. A state of recession, which is formally defined as “a six-months fall in gross domestic product” (Rutherford, 492) and thus serves as an important marker for an economic slowdown, was declared in the US by the National Bureau of Economic Research in December 2007. The International Monetary Fund (IMF), which declared global recession in 2008, expects the world economy to contract by 1.3% in 2009, although it should start a slow recovery process in 2010 (xii).
But beyond all these figures and many others, the most important issue is the effect on individuals in developing as well as developed countries. Lower income, higher unemployment and other difficulties such as higher risk and more expensive credit for businesses are the facts, which build together the aggregated growth and income figures. Unlike the “great depression” of the 1920s-1930s, governments and international economic institutions have engaged in actions to improve market conditions and to encourage growth. These actions included, among others, government guarantees for bonds, open market operations (e.g. buying General Motors stocks), low- to zero interest rates and financial support plans for extremely weak economies such as Ukraine and Iceland. All these actions and others seem effective, and justify the optimistic perditions given above.
The Impact of the Global Crisis on the Port Business
Seaports provide transition services for imported and exported goods. The improvement of global transport; the opening of the former members of the USSR (together known as the Commonwealth of Independent States) to the west; and the removal of many trades and barriers on international trade, have all contributed to the development of the port business in Russia. In addition, years of positive growth in Russia brought about growing demand for Western imports, as well as demand for Russian minerals and energy products, many of which are transported through the Black sea to or from Western Russia.
Under the same logic, every change in one or more of the factors discussed above leads to a contraction in the port business. Equally problematic is the inability of clients to pay their debts to the ports, leaving the latter with considerable amounts of bad debts. Finally, the rivalry among the different seaports in the region and the rivalry between seaports and other transportation services (air, rail and trucks) force price competition, which may decrease revenues and profitability.
Before discussing the specific areas in which the global economic crisis can affect the port business, it should be also noted that the seaport activities are not limited to the port itself. In fact, not only the port’s employees and its shareholders are affected, but also many other people and businesses. These secondary effects influence many other activities, including the land transportation from and to the port, fuel for ships and trucks, state customs and so on. Moreover, due to decrease in port-related income, port cities (especially those cities whose residents’ main source of income is the port) should suffer greatly from people’s inability to spend on products and service, to pay local and national taxes and to provide decent living for their families. Finally, unemployment in such cities is expected to rise, putting additional pressure on the public welfare services.
Case Study: The Port of Novorossiysk, Russia
General Company Information
Novorossiysk Commercial Sea Port (NCSP) is a supplier of stevedore and port services, which operates 97% of the services in the port of Novorossiysk on the Black Sea. The company, whose shares are traded at the London Stock Exchange as well at the Russian Trading System, is rated “BB+” and “ruAA+” by Standard & Poor’s and “Ba1” by Moody’s. The port is the biggest in Russia and the fifth in Europe in terms of cargo turnover (NCSP, “Annual Report 2008” 3).
Despite its focus on port services, the company has built a wide array of technical abilities, which allowed NCSP to be a rather diversified company within the port services sector: according to The Winthrop Corporation, NCSP offers “shipment of oil and oil products, other liquid cargo, dry bulk cargo and general cargo, […] tug, towing and mooring services for vessels in and around the port, and also provides emergency, hazardous materials response and waste management services at the Port.” As of 2008, NCSP reported it has 7,382 employees, with an average monthly wage of USD 1,183.
The Implications of the Economic Crisis on the Port
As expected, the sea transportation business and port services experience significant slowdown in terms of volumes and revenues. A recent report by AXS Alphaliner, an information platform for the shipping business, sheds light on the negative trends within the industry. The low operational results, which the source links to both overcapacity and reduction of demand for shipping, can be demonstrated through several facts:
- The number of idle (i.e. unused) container carriers is 2.2 times higher than in 2008, and accounts to 6.5% of the entire global container capacity.
- As of February 2009, total orders for shipping was accounted for only 43.6% of the existing capacity.
- As opposed to their forecasts before the outbreak of the crisis, JP Morgan analysts forecast the growth of demand for container transportation by only 2.6% in 2009 against earlier forecast at 7.6%.
- All of NCSP’s major competitors within the Black Sea Region, such as the current market leader portConstanta from Romania and several ports in Ukraine, have seen a decrease in container transshipment from the end of 2008.
Interestingly, both AXS Alphaliner and NCSP (“Press-Centre”) report an increase in the port of Novorossiysk, which raised its monthly throughput by 67.6% compared to January 2008) and reported a total turnover increase of 8.4% between January-July 2009 compared to the same period one year ago. Nevertheless, as can be seen in Table 1, the growth in tonnage is not equal among all sectors of the business. Perhaps the most important decrease was registered for the container turnover, which declines sharply by 58% within a year. Furthermore, the implications of these mixed results are not clear yet; for example, despite a growth in its oil and petroleum cargo turnover, the recent fall of oil prices may also imply lower surcharges for this cargo, which may reduce the revenues compared to last year or even show a negative figure.
In conclusion, although the company shows relatively good operating results so far, the future is not necessary so bright for NCSP. The reasons for making some changes in the company are twofold:
- First, as discussed above, the overall economic environment is unclear, whereas the situation in Russia is still rather difficult. Hence, there are many reasons to believe that NCSP’s business volumes will decline and/or will not grow enough to employ its immense capacities.
- Second, the company’s individual risk is still high. For example, its net debt in 2008 was almost USD 400 million, which accounts for more than 100% of NCSP’s EBITA (NCSP, “Annual Report” 5).
Moreover, the company’s workforce in 2008 was smaller by 500 employees, or about 6%, compared to 2007 (ibid., 49). It would rather sound to assume that more layoffs are expected in the future.
The port business is complicated, large-scale and highly responsive for external events. In order to remain competitive and to thrive, NCSP executives should consider several managerial steps:
- First, the company should aspire to cut its overhead costs as much as possible. This includes, among others, revaluation of all administrative and managerial positions, termination of unnecessary business units and unification of others. For example, functions such as security, accounting and engineering can be outsourced to specialized suppliers.
- Second, due to the current reduction in container transport, which accounts to about a half of the port’s turnover, the company should consider temporary shutdown of at least one of the terminals at the port. If the management will be flexible enough, it will be able to use the current excess capacities of the terminal only as a response to short- or long-term increase in demand.
- Third, NCSP should continue to diversify its portfolio. Prospective services, which can be developed and/or expanded in the near future, are to be found in the current capacities of the port. For example, the port can offer highly competitive prices for the shipyard services (which convince shipping companies to fix their ships in this port); it can sell towing services to other ports; and it can use its proven managerial abilities (as can be seen from the port’s strong position against its competitors on the Black Sea) to offer consulting and/or management services.
After long years of growth, Russia struggles to break free of the recession in the country, which came as a direct result of the global economic crisis. The sea transport sector in general, and the ports along the shores of the Black Sea in particular, suffer from drastic decrease in volumes, revenues and profits.
Under these circumstances, NCSP shows fairly good operational results, at least for the time being. Although many economists believe that the world is about to recover from the recession, it is imperative to reexamine the port’s current operations and to look for ways to improve its efficiency.
Using maritime terminology, the crisis should be referred to as a storm. It will end sooner or later, but when it will, the shores may look very different from what they were earlier. Therefore, the port should follow the recommendations described earlier, which focus on its ability to remain flexible, to use its capacities wisely and to outsource its current unnecessary units and operations.
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