Monday, September 14, 2009

Sign of pirate ransom demands going up?

MV Irene E.M. (photo: Roberto Smera/Associated Press)

After being held by Somali pirates for five months, reports say that a Greek-owned bulker and her crew of 21 Filipino mariners have finally been set free. The MV Irene E.M. was seized on April 13 while sailing through the Gulf of Aden and then held off the northeastern coast of Somalia as negotiations dragged on to release the vessel and her crew. The capture of the bulk carrier occurred just one day after the dramatic rescue of the Maersk Alabama's captain, Richard Phillips, by US Navy forces. Unfortunately for the Filipino crew of the Irene, no special forces teams were able to effect a rescue mission, so the mariners had to endure a lengthy period as prisoners in conditions that must have been abysmal. (Photo below was released by the pirates in mid-August and comes from the blog Unheard No More!, one of a number of sites that tried to keep the crew's plight in the public eye.)
According to Reuters, the Somali pirate gang that held the Irene netted a ransom of about $2 million, a sum that places this incident in the upper echelons of amounts paid to free a vessel and its crew. By comparison, the captors of the supertanker MT Sirius Star - freed last January after being held by pirates for two months - received a ransom of about $3 million. But the supertanker was a much more valuable target than the Irene in terms of the value of the vessel and its cargo of crude oil (the Sirius Star itself was worth about $150 million and the crude another $100 million).

News that the crew of the Irene is finally free is, of course, most welcome. Yet the hefty ransom that was reportedly paid to the pirates may be an ominous sign that future demands will be higher than previously seen. If a somewhat older bulker like the Irene can garner $2 million for criminal gangs, what of a newer vessel, a container ship or another tanker? Granted there's a bit of supply and demand going on here: Somali pirates have only been holding a handful of vessels these last few months, so they may have asked for more in this case because they had few other prospects (see the Reuters FactBox here for an update on vessels currently believed to be in pirate hands).

On the other hand, we could be seeing initial signals that inflation has seeped into the local pirate economies in the Horn of Africa. About five years ago, the MV Irene would likely have been freed for a far lower sum, perhaps $100-250,000; two years ago, maybe $500-750,000; last year, probably a million dollars, at best. Looking at this particular incident and others from earlier this year, it seems entirely conceivable that we'll see an incident in the near future - before Christmas - in which someone will end up paying $5 million to pirates in order to secure the release of a ship, and its hostages.

The only saving grace in all this is that every economic boom eventually undergoes a "correction", as so many people around the world have witnessed in the last year (September 15 marking the one year anniversary of the collapse of Lehman Brothers). At some point, the bubble must burst, and this is as true for Somali pirates as anyone else. One scenario could see so many vessels being held captive in the coming months that their overall bargaining value diminishes for the pirates, though there is a quantitative aspect, too: Even if you have to reduce your demands for a vessel similar to the Irene to just a million dollars, having a few more prizes under your control can still make the economic bottom line pretty profitable.

Still, for the short term things appear rosy for pirates and greed will drive them to resume their seagoing operations off the Horn of Africa and demand ever more exorbitant pay-offs. The worry here is that a shipowner will eventually refuse to accede to those demands and someone will get killed - most likely a seafarer. This in no way condones the paying of ransoms, but is merely a harsh assessment of what may come to pass as pirates resume their operations off East Africa.

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