In the first part we learned:
- when and how Somali fishermen became pirates
- why the arrival of warships at the Somali coast did nothing but make the problem worse, as an increase in the number of highjackings has occurred and the first deaths have been recorded.
- the story behind the most talked-about attacks between 2004 and 2008: the French commando operation and the liberation of the Faina ship, carrying a shipment of arms, in which the author was a direct participant.
- the pirates’ support network: insurance companies, security agencies, middlemen and other interested parties.
Somali piracy 2009 – 2011
First of all, some statistics. In 2009, 24 vessels were seized and 31 were ransomed (including those previously captured). The average ransom paid was $2.4 million.
In 2010, 31 vessels were seized and 17 were ransomed. The average ransom paid was $5.5 million.
In 2011, (as of 8 May) 19 vessels have been seized and 13 have been ransomed. The average ransom paid was $5.9 million.
Besides a rise in the ransom paid out, a few other important changes have taken place in the nature of the occurrence itself. Military actions carried out have forced the pirates to depart from the coastal regions of the Gulf of Aden and Somalia, venturing far out into the ocean and at present high jack vessels off the coast of Madagascar (in the south), Iran and Oman (in the north), in the Red Sea (in the west) and off the coast of India (in the east). Previously having used only little dhows and fishing boats as their floating bases, the pirates are now turning captured ocean merchant vessels and even gigantic supertankers into pirate ships.
The pirates’ tactics have become very flexible, and their efforts could be centralised, such as something similar to a general governing body. Meanwhile, the most unpleasant development has been the large amount of money used to bring in mercenaries; former military personnel, most likely from African nations, are now popping up among the pirates.
Of course, the pirates are a long way (for now?) from those technological or tactical capabilities that people tirelessly attribute to them. It is especially funny to hear about an alleged network of pirate informers in the world’s largest ports. Not a single such informant has yet to be found, nor will be found, because they are unnecessary. The region where Somali pirates are known to seize vessels is one of the world’s busiest shipping routes, and there is no need to know the exact details about when a ship will be passing by because they pass by one after another in endless succession. Naturally, the pirates have preferences, but informers and GPS systems have nothing at all to do with the choice of target.
The pirates’ armaments haven’t changed. They have no cutting edge missiles or lasers or guns or torpedoes: they use the same old AK-47s and rocket-propelled grenades. And the method of assault has remained the same – ladders and a good old-fashioned boarding… The following well-known fact bears witness to the pirates’ level of military prowess: for almost two years now the crews of the vessels under attack have taken to hiding in so-called “citadels” – premises that are difficult to access, which usually means the engine room. Special Service veterans say that the pirates could simply blow up the citadels with a minimal level of expertise and the necessary explosives, but they have yet to learn how to do that or to get their hands on any explosives.
It is true that the pirates are now using GPS, radar, and the AIS vessel identification system. Goodness knows, however, that this is nothing special: anyone who wants can get their hands these types of technology, even your retired, navigation challenged yachtsman, sailing around the world.
The most significant change, however, is in how the public has been excluded from finding anything out about the negotiations and ransom sums. The explanation for this is that, allegedly, it is dangerous to disclose the amounts because it could encourage other pirates to demand greater ransoms for vessels still being held. Though the pirates haven’t caught on to this themselves and easily name any amount, which is then included in the official statistics. Take note: all of the numbers being tossed around from report to report have come from the pirates themselves.
London insurance companies dominate the entire negotiation market and often are protected by legal offices. If a vessel has K&R (kidnap and ransom) insurance, the owner of the vessel, in accordance with the contract terms and conditions, has no right to carry out negotiations independently or to appoint his own negotiator: only the insurance company can do this. And if, let’s say, the ransom was three million dollars, then no less than one million dollars would be paid out for the negotiator’s services and delivering the of the ransom money.
Simple logic has it that keeping negotiations secret and increasing ransom sums is good for pirates, negotiators, deliverers of the ransom money and insurance companies. At the same time, London based insurance companies and lawyers are known to have contrived to carry out negotiations even in cases where there is no K&R insurance. But since they contrived to do so, we know nothing of the details of the negotiations or the true sums involved.
What is then coincidental is that at the same time the negotiations became concentrated in the hands of London-based companies, piracy started to become reminiscent of a well-oiled machine. Seizure – two months of negotiations – ransom – freedom – next seizure. Vessels no longer remain in captivity for six months or longer, as was the case not long ago (there are, of course, exceptions, but they only prove the rule). If previously the pirates lacked any talent for making deals and would sacrifice their capital turnover for obtaining a specific ransom, now they have somehow come up to speed: a quick turnover brings a far greater profit than holding boorish negotiations over each vessel. I have no doubt that someone has helped them learn their business ABCs, and I can even guess who, and think you too have no doubt guessed.
Another change has occurred, this time in the escalation of violence. There had been practically no bloodshed as late as the second half of 2008, though as soon as military forces appeared in the region, casualties became just a question of time. At first the military, of course, tried to control itself, though the further things went, the more it got out of control. Shootings became an everyday occurrence. Endless firing on pirates and those suspected of piracy, secret murders and, finally, irresponsible punitive (there is no other way to call them) measures have led to at least 10 hostages being killed this year alone. And only the pirates are being blamed for these murders, in spite of the glaring evidence to the contrary.
Here is one example: the death of three sailors on the German dry cargo ship Beluga Nomination. The vessel was seized on 22 January of this year and departed for Somalia, though it was overtaken by warships from Seychelles and Denmark in an attempt to free it. The warships could see that pirates were in control of the vessel and that the use of force would put the sailors’ lives in danger, but they opened fire anyway. They were unable to free the vessel, three crewmembers (one Russian citizen and two citizens of the Philippines) and one pirate were killed. The sailors’ deaths were immediately blamed on the pirates without any evidence being provided. And no one, including the concerned countries – Russia, the Philippines and Germany – asked why the warships had attacked the captured vessel. What’s more, neither Seychelles nor Denmark had any ties to the ship or its crew.
Let’s imagine that plain bandits, not terrorists, high jack an airplane and the hostages are held for ransom. Let’s also say that nearby there happen to be soldiers from countries that have nothing to do with either the passengers on the plane or the plane itself. The soldiers decide, without first consulting with anyone, to storm the plane. Some of the hostages and some of the bandits die as a result, and the plane still remains in enemy hands. Would no one be surprised or try to find out why the tragedy had occurred?
A multibillion-dollar distortion
The American One Earth Future Foundation presented its own research, called The Economic Cost of Piracy, during a solemn presentation in London at the beginning of this year that drew world-wide attention. The international media sources have put the economic damage piracy is having at $8-12 billion annually, pirates ransom profits at $177 million in 2009 and $238 million in 2010. International authorities the world over, from the UN to international maritime organisations, officially acknowledge these numbers, and how could they not if they initiated (and sponsored) the report themselves?
The research is staggering, although it is not damages making the biggest impression, but rather the level of distortion that can be found in the openly accessible data. In just a matter of days, I, for example, was able to prepare and publish my evaluation of this report (“Study of Somali piracy falsifications”), for the distribution of which I received help from a few associates, including the well-known news agency Ecoterra Intl and certain American military experts. The work turned out to be larger than the material being researched because it contained not only conclusions, but also numbers, facts, photographs and diagrams. Here are just a few examples of the most glaring distortions.
First off, the ransom sums. Researchers made 2009 the base year for calculating the average ransom sum paid out to pirates, which came out to be $3.4 million, with 52 vessels were ransomed, in the end equalling $177 million. In reality, though, $3-3.5 million were record sums for that year, paid out for the supertanker Sirius Star, Faina with its tanks, and a couple of other vessels. The average ransom was $2.4 million, meaning that these researchers were using the record sums as the average, putting a wooden dhow with a couple hundred tonnes of rice on the same level as a supertanker filled to the brim with oil, or the Faina, filled with tanks and ZSU-23-4s.
The “counter-pirate coalition” has long been manipulating statistics, and the dhow, unchanged since the times of Sinbad the Sailor (with the exception, perhaps, of a fuel engine) has become simply irreplaceable in this regard. No one knows how many dhows are captured in reality: they are regional vessels that are not registered with international services and directories, and as far as international shipping is concerned they simply do not exist. What makes the dhows so good is that there are so many of them. Research shows that 52 vessels were ransomed in 2009, when in reality there were only 31, the difference being that dhows were included in the statistics without even batting an eye, even though we know of only isolated incidents of these small vessels being ransomed, and that for tens of thousands of dollars, not millions. Most often they are simply freed, or robbed, or used as pirate vessels.
It would seem, however, that dhows alone were not enough. The researchers also included among those ransomed for US$3.4 million, vessels that were not even hijacked. In other words, they were seized by pirates but freed a few hours later by military forces.
One example is the tanker Moscow University, included by researchers in the ransomed vessels list. If we are to believe the report, it was not courageously freed but rather ransomed for at least $5.4 million (the average ransom for 2010, according to researchers). In 2010, however, military force freed about a dozen vessels were freed from pirates control, just as the Moscow University was. The foundation, nonetheless, included them all in the “Pirate Profits” graph. This is the sort of arithmetic that leads to the breathtaking $177 million in ransom. In reality, however, the pirates have never received more than $75 million in ransom, and that includes the record breaking years of 2009 and 2010.
The second distortion has to do with evaluating expenses incurred from vessels changing their routes. Allegedly, because huge piracy threat, many ship owners re-route their vessels around the Cape of Good Hope and all of Africa, instead of passing through the Suez Canal. Researchers calculate correctly that if a fully loaded supertanker or mega container ship with a capacity for 10,000 standard 20 foot containers were to avoid the Suez Canal, the added time would equal 10 days and $9.5 million for a supertanker and $1 million for a mega container ship. And they are absolutely correct.
Further on, however, researchers conjecture that the entire international merchant fleet is comprised solely of supertankers and mega container ships, modestly excusing themselves by saying that they are trying to be as careful as possible with their calculations, for which reason they concluded that no more than 10% of those ships that annually travel through the Suez Canal in fact changed their route on account of piracy, elevating all of these ships to the rank of supertanker and mega container ship and claiming annual losses of $2.4-3.0 billion.
Some 20,000-30,000 vessels pass through these pirate infested waters annually. In 2009, the international merchant fleet was comprised of 47,867 vessels with a capacity of at least 500 gross tonnes. By the end of 2009, the international fleet of supertankers was made up of 545 vessels. The international fleet of mega container ships with a capacity for at least 10,000 containers was made up of only a few dozen. Even if we were to gather all supertankers and mega container ships together in one location, they would not be able to account for such a loss. But the most ridiculous thing is that supertankers have never passed through the Suez Canal with a full load. It’s too small. Mega container ships, in turn, have never avoided the Suez Canal since they are considered the most invulnerable to pirates on account of their great size and speed, comparable to that of an express train. In order to highjack one, you would need a helicopter.
Not long after my publication, the real figures started to appear in military and high ranking officials’ statements: $75-85 million annually in ransom paid to pirates. The numbers 177 and 234 million have disappeared completely from the radar screen. At a conference not long ago in Dubai, one of the key reports delivered came from the consulting agency Geopolicity, and was on the economics of piracy. I was compelled to get into a debate, and the head of the agency and main author of the report, Mr Middlebrook, and I began a correspondence, from which the following came out: he had no doubt that One Earth Future Foundation’s had distorted statistics, indeed no one who knew anything about the matter did, and he said so precisely in as many words.
The Economics of Piracy
Piracy is believed to cost the global economy because of:
- vessel seizures;
- re-routing vessels;
- vessel security expenditures (from barbed wire to armed guards);
- steeply rising insurance expenses;
- naval protection in the region;
- criminal proceedings against the pirates;
- carrying out various conferences, symposiums, round-tables and so forth, on piracy, including research financing, such as for the One Earth Future Foundation.
Vessels seizures – I repeat: pirates have never received more than $80 million in a year. Ransom, however, accounts for only a third or, in the best case scenario, half of the losses incurred by the owner of the captured vessel. One must not forget about demurrage – the worst thing that can happen in shipping. Neither must one forget about the cost of a mediator, delivery of the ransom, ensuring a satellite connection, and so on and so forth. On the whole, direct losses resulting from the seizure of a vessel can be valued at around $200-250 million annually.
Losses from re-routing a vessel – For the sake of brevity it is enough to say that they are insignificant. In most cases it is simpler and cheaper to hire security than to redirect the vessel all the way around Africa.
Losses from security costs are much more substantial than the pirates’ revenues. We’re not talking about barbed wire and other methods of passive defence, more in keeping with the spirit of our glorious time, like acoustic cannons and lasers. This is also a matter of millions of dollars, but it is a drop in the bucket in comparison to what one must pay for the only reliable security guarantee for any vessel – private armed security on board. The cost of such security doesn’t depend on the size and type of vessel. The average cost of a standard team of 4 equipped with small arms is $40-60,000 for one trip, depending on the route. If the company’s vessel is constantly travelling in dangerous waters, it is possible to conclude a long-term independent contract at a discount, naturally. There are most likely no less than 30,000 vessels travelling through dangers waters annually, including routes moving east-west (Suez Canal) and north-south. If each trip is to be equipped with a security team at an average cost of $40,000, that amounts to $1.2 billion – an enormous and very attractive market. At this point in time, we are still very far from that, of course. It is doubtful that more than 20% of all vessels travelling through dangers waters hire security, but even $240 million is nothing to sneeze at.
These expenses are direct losses borne by the global economy as a result of Somali piracy – about $500 million annually, and not $8-12 billion.
The most “interesting” losses are, of course, are from the rise in insurance costs. As has already been said, London insurance companies, with one stroke of the pen, declared the entire northern section of Indian Ocean an area of military risk and began to levy the corresponding fees. If you take the average cost of insurance for one passage – $20,000 – and conjecture that no less than half of the vessels from already mentioned 30,000 have to take out insurance, you get something in the area of $300 million.
But it’s not so much a matter of the exact size of the losses incurred, as the essence of being insured from military risk. That type of insurance presupposes the risk of travelling under military conditions, the risk of being damaged or sunk by artillery and rocket fire, by mines and torpedoes. Not one of the hundreds of thousands of vessels travelling through dangerous, pirate-infested waters in all the years that Somali piracy has existed has ever been sunk by pirate fire. The reason is very simple: it is technically impossible. An AK-47 or even a grenade launcher is incapable of sinking a modern freight ship, no matter how much they might want to. But they don’t even want to do that because their goal is to seize the vessel and return it whole to its owner after the ransom is paid.
Is it possible to damage a vessel with automatic machinegun fire in such a way as to completely destroy it? Sure it is. While freeing the tanker Moscow University, conscripts riddled the bridge of the vessel so efficiently that photographs were banned from publication (according to unverified claims, the bridge and superstructure were showered not only with machineguns and grenade launchers). Other vessels freed by navies from different countries have also received their share of fire. Some were even sunk, though only the Indian Navy can boast of such “victories”. All other vessels to come under attack from pirates, if the navy didn’t get involved, got off with dents from bullets and shattered portholes. There were a couple of exceptions, but they were definitely exceptions. If you gather together all of the vessels that have been subjected to fire from pirate ships, you get no more than a hundred or two hundred, and remember this is out of 30,000.
So what is the shipping industry paying insurance policies that have risen infinitely for? Nothing. It is tribute that insurance companies have imposed upon obedient shipping companies. For those who may not have completely understood: military-risk insurance doesn’t cover losses related to the seizure of ships by pirates or possible losses resulting from the misappropriation or damage of goods. There is another type of insurance for this: the so-called K&R (kidnap and ransom), fortunately, not yet obligatory, and still unpopular. While insurance for military risk, something non-existent in Somali piracy, is obligatory.
Why is it obligatory? To understand, just recall the words from the famous song: “Rule, Britannia! Rule the waves”. England continues to be the financial, insurance and legal shipping centre. Not only are the main financial, legal and insurance institutes of the shipping industry in London, but so are all of the main international maritime organisations. London insurance companies have weaved their web of shipping insurance for hundreds of years, and thanks to their tireless labour, there is no doubt that no other sector of the economy is so tightly wrapped in the web of obligatory insurance. Most of the world’s ports will be closed for vessels lacking any of the obligatory types of insurance. A vessel owner who refuses to pay for insurance is immediately put out of business – his ship simply cannot work, unless he looks into contraband. For this reason what the insurance companies say is law. There is the so-called Lloyd's Joint War Committee, which makes decisions on whether to include one or another region of the world’s oceans in its list of military risk zones.
Therefore, I can state with certainty: pirates have been used as a pretext, and under this pretext several hundreds of millions of dollars of tribute are collected every year. Notice that all other types of losses and profits bear an objective, physical character. In order to receive ransom, pirates risk their lives and, as far as it is possible to say so, work. The vessel owner pays a ransom and bears a loss from the demurrage period. For quite reasonable compensation private security guards take their places on the vessel and do their job, often risking their lives. It is only the military risk insurance that is baseless, bearing neither risk nor expense. It is pure profit without any effort.
So a valid question arises: are we right to blame these losses on piracy? And one more: why is no one interested in the nature of this insurance? For it would seem that not a week goes by without there being some conference on the pirate problem, and at the highest levels too. But no one asks a thing about the legality of this insurance. Why?
The most important reason for not resisting evil with force - in the present case resisting insurance companies – can be found in the nature of shipping, a cruelly competitive activity, in a way comparable to the nightmare of the first amassing of capital. Structurally, it is a crowd of ship owners, each of which is looking out for himself. Even the general interests and problems of them all are unable to unite them even for a time. Shipping – owners and sailors - without prior arrangement delegated the defence of its interests to various different organisations and doesn’t exercise any control over them at all.
To return now to the economics of piracy, let us look at other sources of profit for insurance companies, on the share of the mediation business and the active expansion of insurance companies into the market of security services. We don’t know, and possibly never will know just how much the insurance companies make from mediation, and what the mechanisms and scales are for this business on the whole. If we are to speak of the security business, we can say that the insurance companies are working very actively. The insurance companies already have their system of security services and include their security in the insurance packages. Private security agencies contend that the price is much higher than the price of regular services. But even that is not enough: insurance companies are creating their own private navy, and according to their plans, it is to be funded by the European Union…
So it is that the system of marine insurance, under the cover of piracy, has begun to receive for nothing, out of thin air, profits many times higher than those of the pirates themselves. And the system bears no losses as a result. Regular life experience tells us about the insidious nature of money when it is unexpected and in large quantities. It begs the question then of whether the system of marine insurance, the people defining its work and policies, sincerely desire the elimination of piracy? Let’s assume that the system, in complete agreement with all of the laws of nature, doesn’t.
Then we are presented with another question: can this system, supported by profits received from piracy, somehow impede a real, efficient battle against the threat of piracy? Is it possible? And does it have any allies?