Riskology by Infortal Episode 18: Houthi Terrorism, The Red Sea and Global Shipping

Introduction:

Companies operating in today's global economy really need to get an understanding of the international geopolitical risk landscape. At Infortal Worldwide, we work with our clients on solving risk. Before it starts, welcome to the Riskology podcast, where we're looking at managing business risk globally and really understanding the geopolitical risk landscape. 

Chris Mason:

Welcome back to another episode of Riskology by Infortal™, where we dive deep into the world of geopolitics, economics, business, and really any type of situation worldwide that can impact your business operations, either here in the United States or around the world. 

As we kick off 2024, there is a lot to discuss, a lot on the horizon. 

Of course, we've mentioned elections in the past, and we're looking forward to diving into some of those as we move forward. But one of the things that's really bubbled up throughout the course of the last few weeks and looks to be a situation that will require some attention in 2024 that could have a massive impact around the world is what's going on in the Red Sea. 

I'm sure most of our listeners have at least seen some of the headlines in terms of what's going on, but the shipping has been severely impacted based upon attacks coming from Yemen, coming from a group known as the Houthi Movement. 

And we thought it would be good to dissect a little bit about the history and the makeup of the conflict in that region and then talk about what that means for business going forward this year. 

So I'll pass it over to my colleague here, Dr. Ian Oxnevad, to give us some background on the Houthi Movement and the conflict that's taking place in and around the Red Sea. 

Ian Oxnevad:

Thank you, Chris. So it's a wild ride going on in the Arabian Sea and the Red Sea. 

If you look at shipping now, it's being rerouted. What you're actually seeing is a recreation of the shipping routes that existed prior to the construction of the Suez Canal and a re-routing around Africa that has not been economically viable ever since. But we're going to jump into this. 

The Houthis is, it's pronounced in English, or Al Huthiyun, also known as Ansar Allah. It's a group in Yemen. This group has been around for some time. It's been around since the early 2000s. But you’re gonna have to talk about Yemen to sort of understand why this group is even viable. 

So Yemen has been in a state of civil war for, well, centuries, really. So Yemen's never really been a state. It has a flag. But historically it's been essentially a tribal society since it was known as a region. No outside entity or even internally has ever been able to make it a modern state. 

So you have these tensions between north and south, but even more specific than that, you have sectarian and tribal politics that predominate in Yemen. In the 1990s, you had Yemen try to essentially unify as one cohesive state. And the Zaidi Shias, predominantly in the northwest and within the Houthi tribe in northwest Yemen, they essentially rejected that. And you've had this insurgency that's been modeled on Hezbollah at least since 2004, in the northwest. And what's happened is this group has attacked Saudi Arabia in the past and actually basically defeated Saudi Arabia. 

But to kind of put this in perspective, this area we're talking about, the Ottoman Empire, tried to take this area and colonize it unsuccessfully. The Egyptians have been there in the past. And it's interesting, you can actually look back during the Vietnam war and commentators were comparing the US experience there to Egypt's experience in Yemen. That's what you're looking at. You're looking at a middle eastern version of that. 

So this area has never been really controlled by the central government and has defeated Saudi Arabia in the past. It's defeated Egypt and outside actors for centuries. And tribal politics is interesting in the sense that you don't have any real central authority to negotiate with. 

Tribal politics is much more fluid and you have sort of varying degrees of control and authority that are nested within each other in tribal politics. And that's what dominates in Yemen. 

More recently, a shift to kind of talk about the geopolitical risk of this. The MV Chem Pluto, which is a chemical tanker owned by Japan, registered in Liberia but Dutch operated, was hit 400 miles off  the coast of India. And as a response to this, India needs the oil and most oil that India gets on its west coast from the Middle east goes through the Red Sea. The Indian navy has sent three naval destroyers to sort of guard these oil shipments. 

And now the US, you've had Operation Prosperity Guardian, which is a coalition of sorts to sort of guard the shipping in this region. You've had the the Eisenhower carrier strike group just in the last few days, the day after Christmas, shot down twelve drones and three anti ship missiles in one day. So this isn't like the Somali pirates. This is a very aggressive attack on international shipping in this region. Now Arab states are helping Israel quietly, and Saudi Arabia has done this by shooting down missiles that have been launched to southern Israel from the Houthi controlled areas of Yemen. 

So you're seeing the IMEC basically being tested under fire with this. 

Chris Mason:

Thanks, Ian, for the overview of the region. 

It's really, I think, important to understand what's happening in Yemen and with this emerging group. But I think one of the things that will be important to talk about is the actual conflict that's going on. So we have certain ships that have obviously been attacked and it's really had a chilling effect on the shipping lanes through the Red Sea. 

Traffic is now rerouting basically to historic routes that are extreme distances, putting an extreme burden on the shipping and logistics companies. 

But let's focus in on for a minute to make sure we give our listeners an understanding of the conflict itself. And obviously we're talking about drone attacks, we're talking about missile attacks from Yemen into the Red Sea, and think there's not quite a coalition that's formed yet. The US has really tried to put a coalition together. They've launched Operation Prosperity Guardian just a few weeks ago or a few days ago, and they're really trying to bring some coordination to the effort. And it seems like the US is struggling to get people on board with that. 

I know a lot of the European countries have sent battleships into the region, but they're not coming together and forming a coalition. And the rationale given is that this is seen as supporting one side versus another in the Gaza conflict. I wonder if you have thoughts about how this might take shape as we move forward? 

Ian Oxnevad:

So that's an excellent observation. It's true, this coalition to guard international shipping is not quite forming the way that you would expect it to. So the Europeans have been hesitant to get involved, and I think there's more to it than just them not wanting to appear blatantly pro Israel. 

If you look at Europe, it's more vulnerable now to oil flow disruptions because of the war in Ukraine. And at the same time, they don't necessarily want to have a whole lot of military assets far away in the Arabian Sea when they may need them in the Mediterranean or around northern Europe to help deter Russia. 

So I think there's more to it than just the optics of being too pro Israel. Europe doesn't have the global naval presence that the US does. So I think that that has something to do with it. 

Now, to sort of put this in perspective, if you think about the maritime routes connecting India through the Suez Canal to the Mediterranean, if that's blocked, combined with the war in Ukraine and sanctions in Russia, you've essentially cut Europe off from Asia for all intents and purposes, without circumventing all of Africa or going around the Americas, you're isolating Europe by doing this. And I think that on the part of Iran and Russia, that's intentional. 

Chris Mason:

I think some of the statistics have started to come to light in terms of how impactful this has been on shipping. And I think I saw it quoted somewhere, that routing your ship so that it has to go all the way around the Horn of Africa ends up costing an additional $1 million in just fuel alone for that pathway. So once you start multiplying that out, the costs are going to be staggering here. 

Now, something else that this is starting to cause, because the traffic is starting to reroute through some historical positioning around the world.  Some of the other ports and some of the other passageways are now becoming more congested. And so that could have a knock on effect as well in terms of rising costs, I don't think the true impact has been felt yet. 

In terms of silver lining, I think Maersk, one of the big operators, has said that they are planning to continue to operate in the region. But what do you think this means for shipping worldwide, Ian, as we head. 

Ian Oxnevad:

Into 2024, to be frank, from a shipping standpoint, this is disaster for shipping. If you look at the traffic going through the Suez Canal, 50% of it is now rerouting around Africa, and this is double the rerouting than just even a week ago. 

So you're talking about 25% longer shipping times for containers to reach Europe. By going around Africa from East Asia, they have to go through the Straits of Gibraltar. And what this is going to do is this is going to create massive inflationary pressures on consumer prices, not only in the Middle east, it's going to disrupt food shipments as well. 

But you're looking at a potential cut off of the Mediterranean that hasn't existed for 150 years. 

So you're talking about massive price increases in Europe, the Middle east, oil disruptions. The Suez Canal has lost 45% of its transits between December 22 and December 26. 

And adding to this problem is the fact that the Suez Canal, this artificial, man made sort of crisis, is being coupled with a drought in the Panama Canal, which is affecting shipping there. 

So you're looking at a reemerging sort of 19th century or even 18th century style shipping routes sort of reemerging just because of these choke points. 

Chris Mason:

Yeah. Some of the statistics that are starting to come to light are pretty staggering, especially with that 47% figure that you just mentioned. 

What's interesting, too is that as we head towards the spring, it's a critical time in the shipping industry for re upping annual contracts in terms of logistics for the next year. And so this will undoubtedly have an impact on those contract negotiations. I think the insurance costs are already under consideration, especially if you're planning to go through the Red Sea. 

Obviously, it will have an impact worldwide. We've had major supply chain, major logistics problems that have plagued the world economies in the past couple of years. 

Of course, everyone's familiar with what happened during COVID but I think it's easy to forget that once one region of the world is impacted, there's a knock on effect in other regions of the world. 

So this will start to impact all economies, not just regionally near the location of the conflict here. So that's why it's really important that we get a handle on how to control and mitigate the threat.  

Going back into sort of the military or militaristic thinking in the conversation.  Ian, how do you think this can be resolved? I know we're in a very defensive posture at the moment in terms of trying to mitigate and shoot down any rockets or missiles that are coming in. But what do you think the long term solution is in this situation? 

Ian Oxnevad:

Again, we've talked about this, like with the IMEC in the past, sort of BRI, China's Belt and Road initiative versus the IMEC, and then what's going on with Russia and Ukraine. 

This is a battle for Eurasia. This is a battle for the Eurasian economy that's taking place. And it looks regional, but it's really not. 98% of maritime shipping between Asia and Europe goes through this route. 98%! 

And if you're talking about Russia sanctions as well, you're talking about a choke point over land. It's going to be very difficult for goods and services to get from East Asia to Europe and vice versa now, because of these two merging conflicts that have always been related, and I don't think businesses have a really good idea of how to deal with this yet. 

From the military side, deterrence on the part of the west doesn't exist anymore. That went out the window with the withdrawal from Afghanistan. 

So while you may have shipping being protected by naval assets to a degree in the Red Sea and the Arabian Sea, the only way deterrence is going to be re-established is if Iran is attacked directly at this point. And I don't think that the will is there on the part of the west to do that. 

You already have a war and a half going on right now that's sort of taking up resources and attention. I don't think there's an appetite there to hit Iran directly. 

Unfortunately, that deterrence is not going to be reestablished until something changes on the ground in Iran. Now, that could happen internally, there's been a restive population there against the Islamic republic, the regime there, the theocracy in charge. 

But until there's some sort of change on land that affects Iran and its support for the Houthis, this is not going to change. 

Now, the Houthis, from their standpoint in northwest Yemen, they're idealistically and just perfectly located to choke off shipping in the Red Sea. So without massive intervention there, I don't see that changing either. 

So this is really just kind of a band aid that we're looking at. 

From a longer term standpoint in 2024 for shipping is going to be rough. Logistics is going to be very rough. But there are opportunities to get around this, that some of them are pretty exciting. 

Chris Mason:

Yeah. Let's talk for a minute what companies can do to get through this situation, but also just generally speaking, what are some good practices to place your company into a stronger position to deal with these types of situations? And I was reading that one company was highlighted. Sweden's Electrolux was actually setting up a task force, basically to find alternative routes up into northern Europe. And I think that's really great. That's definitely something that needs to happen. 

But when I think about supply chain risk, especially given the recent history and all of the different types of disruption, I really think it's important for companies to have a few contingency plans in place for a breakdown in conflict or a breakdown in supply chain because of things like conflict. 

So I was wondering if maybe you could elaborate on how a company can go about setting up those contingency plans, especially when you don't know for sure what's on the horizon. How can a company really go about doing something like that? 

Ian Oxnevad:

You bring up an amazing point here, and I think before answering that, you kind of have to look first at what companies are in the US. Since this is probably a predominantly US based audience, hopefully we have listeners elsewhere. 

If you look at Egypt alone, we have companies ranging from GM, Hines, Xerox, Procter Gamble, American Automotive, major fast food conglomerates. You're talking about Egypt, for example: the US is its largest trade partner in most industries. So this is going to affect us companies, at very least on a portfolio investment side, the value of these companies, because this could affect operations regionally, not just in the Middle east, but also potentially in India, in southern Europe, and in specific countries in East Africa like Egypt. 

So you're talking about a potential massive disruption to established companies who are just trying to operate and are going to be negatively impacted by this. 

But to talk about how companies can react, it's interesting that you have not only the IMEC, which is not even six months old as an idea, and startups moving into this space, you have a very risk tolerant sort of industry emerging, thanks to the IMEC and thanks to the Abraham Accords that are going to be tackling this. So to kind of give you an example, the Israeli startup company Trucknet Enterprises, rather, it's a logistics company based in Eilat. It signed a contract with the UAE company and Dubai ports world to create overland routes that connect ports in the UAE to Israel to get basically goods overland through Saudi Arabia and Jordan. But that's not the only one that's going on. 

You also see Saudi Arabia and Trucknet working with a company called WWCS in Alexandria, Egypt, to facilitate management of container flows and track these overland routes to sort of reach Egypt as well. So what you're seeing is the region's startups not only working across geopolitical barriers that just two years ago were there, they're not only jumping into this space to try to mitigate this challenge, but you're having just startups in general jumping in to try to fix this. 

So you're seeing these sort of companies you've never heard of before, and institutions like the IMEC you've probably never heard of before, and collaborations from Egypt to the UAE to Israel to Saudi Arabia. Whoever thought that would happen five years ago? That's what's happening. 

Chris Mason:

Yeah, it's really interesting. Whenever there's a breakdown like this, especially on this scale, it always seems as though there's somewhat of a frenzy. Some companies will set up, like we mentioned before, a task force to really look at what's going up and look at what's going on and come up with a game plan. But there's also sort of like this increased competition for the best path forward and the resources that might be stretched. There's a lot of competition to grab at what's left or what's know. 

We saw that during the pandemic here in the United States. There was a huge competition for warehousing, as an example, just south of the border, to try and shore up supply chains. 

If you think about it from an operating standpoint, you really want to get ahead of that, if you can. So you're not caught up in the frenzy and that you have a game plan, a resiliency or contingency plan in place that your team can follow, so that you're in a stronger position to really move forward with the plans that you had previously thought out. 

Something that I think is also maybe not immediately apparent to everyone operating in these spaces is the fact that, and I think you mentioned it, Ian, there's a lot of new operators and new companies that will pop up to try and help out in these situations, particularly in these regions. 

That presents a whole set of risks because these are not operators and companies with a huge track record. And so you really have to be careful to understand who you're doing business with. Maybe you can elaborate on sort of how companies can tackle that dynamic. 

Ian Oxnevad:

What you've seen with this attack on one of the major arteries of the global economy is, again, a repeat of lessons of COVID in that the efficiency model that companies have been probably accustomed to since the 1990s, it doesn't work anymore. 

Efficiency in this era, it not only generates laziness, but it also generates potential disaster. When you're looking at trade flows, logistics lines, et cetera, that were perfect five years ago, you have to look at alternatives. But that requires looking at new operation models. That requires looking at potentially new business models. 

How do you move to different economies, maybe for mergers and acquisitions, to get around these challenges? 

How do you build up survivability and redundancy as opposed to efficiency? 

And that can be done, but it requires knowing where to do business the right way, how to do business the right way when you're there, who to partner with. And that requires due diligence. It requires intelligence, and there's really no way around it. 

You need boots on the ground experience and knowledge to do that. And this is the conundrum facing companies as they try to jump around this sort of area that's now essentially controlled by the Houthis, because they're dictating how logistics and other countries are interacting in the Red Sea and in the Arabian Sea now. 

And until that changes, that's what's required. You're going to need intelligence and boots on the ground, due diligence and knowing who you do business with, because you're talking about startups, you're talking about new locales where you don't have a lot of potential contacts. And that's something that we specialize in at Infortal. 

And that's something that ultimately companies are going to have to jump into in order to build that survivability. Otherwise they're going to sink with the current sort of efficiency model that they have. 

Chris Mason:

So I think today's discussion has really been a great illustration of how quickly supply chains can break down and how important it is to be prepared. 

And so just to recap, it's important to assess your supply chains on an ongoing basis. You really need to come up with a contingency plan that will allow for resiliency through these situations. And then you also need to have an ability to quickly conduct due diligence on the new companies or the new players that may be jumping into the picture that you might not have the same track record of doing business with, so that you don't end up in a situation where you're unwittingly or unknowingly doing business with someone that may be sanctioned, may show up on some lists that you do not want to be associated with, particularly as the DOJ is looking more closely at enforcing corporate compliance through the national security lens. 

So really taking a step back. It's about that planning that you do as a company ahead of time that places you in a stronger position. 

Any final sort of closing words, Ian, as we close this episode, just to. 

Ian Oxnevad:

Sort of hammer this home. If you look at how the Red Sea crisis is affecting costs, it's not only a million dollars more per container for shipping, but it's a four week delay. 

So if you're looking at holding your breath, if you're a company that's dependent on this or on this Red Sea route working, even if you're not shipping yourself directly, maybe you're a consumer driven industry in Europe that's going to be negatively impacted by this because your imports go through this route or your exports do, you're looking at a delay of four weeks. Companies that move into this space aggressively with the intelligence and the good due diligence are going to wind up having the market share that's going to be lost by the companies that are waiting. This is an opportunity. 

It's not just a risk. Every risk is an opportunity. 

Companies need to start thinking with that mindset that every time a sort of chessboard gets flipped over, that's a chance to pick up the pieces so that when it gets put back stable again, you have those pieces in your corner and you have the ability to move them. If you're interested in this kind of thing, you're listening, we have courses on this on our website. 

We have a certification program. Self paced, it's very affordable. So if you want to start to integrate the skills needed to sort of navigate these crises. Please give us a call or please check out our courses. 

Like I said, every crisis is an opportunity, and right now, that whole region is full of them. 

Chris Mason:

Great way to end it, Ian. Please join us again for another episode of Riskology by Infortal™ soon.