In the 17th and 18th centuries, piracy was a means of economic advancement and survival for the dispossessed or the opportunistic, depending. For most of the world, piracy has been relegated to the history books or made into caricatures in the movies. Pirates famously attacked the transports of their day, plundering important trade roots (mostly between the Caribbean and Western Europe), but today’s maritime and international laws have significantly reduced, almost extinguished, the treat of piracy. The gross exception to the reach of that law is off the Horn of Africa and Somalia where, in recent years, pirate activity has spiked, creating economic and political consequences in its wake.

In Somalia, a country where poverty has become a prominent and continuing affair, the word “grim” fails to describe the depths of the economic situation. As an estimated 74 per cent of Somalis live in general or extreme poverty as described by the UN and the average citizen earns only $600 a year, Somalia is one of the world’s poorest countries.

The surge in Somali piracy correlated with the collapse of the Somali government in 1991.  Since then, the country has been in a state of civil war, having no permanent government until 2004, which has survived but only by the thinnest of margins (having suffered from internal crises such as ministers quitting, a no confidence vote and tribal divisions). There are many dissidents, notably Abdinur Ahmed Darman, a Somali warlord who styles himself as the country’s president, who do not recognize the legitimacy of President Sheikh Sharif Sheik Ahmed and, as such, the country has zero in the way of a stable government.

Official statistics might not show the full extent of the problem because some attacks go unreported, but the International Chamber of Commerce International Maritime Bureau has recorded some 16,000 ships pass through the Gulf of Aden, off the Somali coast carrying goods and oil from Asia to European and North American markets, that are vulnerable to attacks. So, the chronic political instability in Somalia now threatens one of the world’s most important trade routes.

Somali pirates were always financially motivated but, initially, their actions were a response to illegal fishing off the Somali coast. Soon after the government’s collapse, the country’s tuna-rich waters were being decimated by massive commercial fishing fleets which were, in effect, robbing the country of its most profitable industry to the price of almost $300 million a year. Without a government to ensure coast guard protection, foreign countries could, and did, take advantage, depleting fish stocks which the local Somali fishery relied for their livelihood.

Somali fisherman turned vigilante, in some cases arming themselves and confronting illegal fishing boats and demanding that they pay a tax. In this respect, their actions are those of the desperate and downtrodden—a makeshift protectorship by those otherwise helpless to feed their families. In an interview done by the Chicago Tribune, Sugule Ali, a leader in these attacks, said “We don’t consider ourselves sea bandits. We consider sea bandits to be those who illegally fish and dump in our seas.” In essence, according to that logic, Somali pirates are conducting a forced trade of resources—$100 million a year from pirate ransoms in exchange for the $300 million of poached fish from Somali waters.

From there, according to Somali diplomat to Kenya Mohamed Osman Aden, “they got greedy. They started attacking everyone.” Whether greed, nationalistic pride, survival or combinations therein, piracy is as a result of lawlessness and the Somali state has no capacity to restore the rule of law sufficiently. Nevertheless, Somali piracy has become an industry of its own.  In 2008, Chatham House, a British think-tank, estimated Somali pirates gained $30 million in ransoms, while Kenya foreign ministers claimed they made up to $150 million in 95 recorded attacks, including the capture of a Saudi tanker carrying $100 million cargo of oil. These pirates generally use skips to pull alongside their target and board with ladders on the side. Once on deck, they hold the crew for ransom.

In the past few years, piracy has become endemic, with pirates regularly demanding—and receiving—millions in ransom demands. Attacks continue to this day. May 11, 2001, saw Somali pirates seize a Bulgarian-flagged ship in the Gulf of Aden. The following day, Somali pirates captured a Greek vessel in the Gulf of Aden.

The disturbing trend of theft has many repercussions outside the realm of marine trade, for instance, in emergency aid deliveries being suspended, and the environmental repercussions are equally dire to the country’s poverty. Both merit conversations of their own. But in terms of economics, piracy has had enormous impact on the country, as well as had a tremendous influence on international trade.

Boatloads of money

What happens when the pirates’ ransoms are paid? For one, to have suddenly millions upon millions of dollars flood an economy in draught causes the exchange rate to surge. Life for ordinary people has become more expensive because piracy pumps so much U.S. money into the economy. With more money chasing the same amount of goods, prices start to be driven up.  People ask for more of that money to buy the same thing, so the average Somali must now compete with the pirate money, which is impossible, to buy the same things they used to buy.

The Chairman of the Board of Trustees of Mogadishu University, Professor Abdurahman Abdullahi, believes the money gained in piracy is spent in every possible sector. Abdullahi says some of this money is paid to the needy families and relatives devastated by the civil war and displaced by the continuous wars. Others are invested for more sophisticated equipment and weaponry to be used for the continuation of their business. Others may be used for investment in the different sectors in Somalia. “It is a very difficult undertaking to trace the routes of the money,” he continues, which adds to the complexity of the issue.

The looting affects the global market in the same way. The capture of the aforementioned Saudi tanker was enough to cause the price of oil to jump by more than a dollar a barrel, costing additional billions of dollars in cost to international business.

Then there is the issue of insuring the boats that sail these targeted trade routes. In April of this year, a South Korean-operated Samho dream, which has the capability of carrying more than 2 million barrels of crude oil, was hijacked 1,560 kilometers east of the Somali coast. Increasingly brazen pirate activity has driven up insurance costs, forced some ships to go around South Africa instead of through the Suez Canal, and secured millions of dollars in ransoms.

Circumnavigating the problem

Companies have begun to circumnavigate the problem outright, taking the much longer, and therefore much more costly, route down around the Cape of Good Hope, instead of heading straight through the Suez Canal where boats are vulnerable to pirate attacks off the Gulf of Aden, where the majority of attacks take place.

The Suez Canal was built to lessen the cost of delivery, but with ships bypassing that route, the costs of goods and oil rise considerably and are passed on to the consumer. And as a major component of the Egyptian economy, the vitality of the canal is paramount to the business of parts all down the seaboard. Already, according to think-tank Chatham House, insurance premiums for the Gulf of Aden have increased tenfold, and diverting ships around the Cape of Good Hope, is a major concern.

International Community

The problem of piracy creates a myriad of problems, yes, and is also the result of a myriad of problems. The cost of delayed or lost cargo to a company is obvious. Top that with the price of paying ransom, and one scratches the surface of the economic effect of Somali piracy. The consequences increase exponentially when we consider the cost of increased insurance for ships that pass through the Gulf of Aden as well as the cost of choosing alternative routes.

Perhaps this will motivate the international community to intervene in Somalia’s political situation. Clearly, the lack of political stability and growing instances of piracy are not unrelated. In his paper “Addressing the maritime insecurity in Africa”, Roger Middleton states “The most powerful weapon against piracy will be peace and opportunity in Somalia, coupled with an effective and reliable police force and judiciary.” Governing bodies will be wise to see the pecuniary price of piracy as reaching beyond just the vessel hits to having a significant and immediate effect on world markets.

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