War & logistics. The impact of the Russian aggression on Ukraine on transportation
Latest update from mid-August for the Baltic Yearbook 2021/22:
The following article was first published on LinkedIn on 29 March 2022, updated on 21 April 2022 and published in the 2/22 issue of the Baltic Transport Journal. The version below comprises the latest updating from mid-August 2022, with the additional information placed at the end of the read (intel on stranded seafarers and Ukrainian containers going via Romania and Bulgaria was added to the main body text):
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The article was updated on 21 April 2022
In all likelihood, the barbaric attack against Ukraine launched by the Kremlin on 24 February 2022, with Minsk’s willing complicity, will be remembered in schoolbooks as a defining moment for the entire world. The point of no return, if you will. As the Ukrainians and Ukrainian Foreign Legion are successfully fending off the aggressors, albeit at a devastating cost due to war crimes committed by the Russian army and their henchman, everyday and industrial activities are taking a hit, too, including the world of transport & logistics. Here is our round-up of the industry-related actions and events triggered by the aggression.
Shipping
The Norwegian-Swedish ro-ro and car carrier Wallenius Wilhelmsen was one of the first to react. On the day of the aggression, the company suspended all operations in Russia and Belarus. The shipping line halted bookings and rerouted Russia-bound cargo to other ports.
Other carriers also stopped taking in bookings for Russia and Belarus while suspending calls to Ukrainian seaports. These include CMA CGM, Evergreen, Hapag-Lloyd, Maersk, MSC, and ZIM on the container side (though there was no announcement of CMA CGM dropping its co-op with the Russian FESCO; e.g., the East Russia Express, incl. calling the port in Vladivostok, is still included in the company’s Line Schedule); the vehicle carrier Höegh Autoliners; and the ro-ro & ferry line Finnlines. Pre-war booked shipments continued, with the exclusion of sanctioned items. Forwarding goods that aren’t on the sanction list, such as pharmaceuticals, is still allowed.
That said, it might become difficult to ship them given the lack of haulage services, let alone to buy medical equipment and drugs, since the purchasing power of the rouble has nosedived. On that note, the Russian Ministry of Health said (week 21-27 of March 2022) that the country is stockpiled for three to 12 months and is looking for alternative supply sources, meaning India and China. Accordingly, the Indian and Chinese sellers are ramping up prices to capitalise on Russia’s no-other-option-in-sight situation.
Container-wise, COSCO Shipping Lines (CSL), the world’s fourth in terms of TEU capacity, is throwing Russians a life belt, not having suspended calls to the country’s seaports (and COSCO Shipping Tanker continues to transport Russian crude oil). However, CSL ceased taking bookings for Ukraine at the end of February, redirecting its ships to other harbours (more about Ukrainian ports later).
Box carriers also waived several fees, like detention and demurrage, and offered to take Ukraine-bound shipments to other seaports, such as Constanța and Piraeus.
“The leading sea carriers state that storage areas in hubs are already very full, while the war in Ukraine is creating additional problems apart from the existing disruptions in the global supply chain. Please note that a company acting as consignor or consignee, or being a holder of the Bill of Lading, or acting on behalf of such persons in accordance with the line carrier’s Terms & Conditions has the status of Merchant, i.e. bears all risks concerning cargo transportation to the sea carrier,” notes the Ukrainian, Odesa-based Interlegal law firm, specialising in transport, shipping, and international trade.
Shipping lines are also helping to channel humanitarian aid towards Ukraine. Several Baltic ferry lines – including Scandlines, Polferries, Unity Line, Stena Line, and Finnlines – have started offering complimentary services, transporting the Ukrainians fleeing the country or those going back to fight against the Kremlin’s aggression. Along with other transport firms, they are also organising various forms of help – crowdfunding to support NGOs and gathering supplies for the hundreds of thousands of refugees and those internally displaced.
This grassroots movement has amassed millions of euros and truckloads of humanitarian supplies in just days. For example, the CMA CGM Group put in motion its airfreight division, at no cost, flying 55t of electrical equipment, emergency shelters, IT and telecoms devices, and food from Paris to Warsaw. The Danish DFDS has given DKK1.0m to the country’s Red Cross to support emergency efforts in Ukraine, following up with an internal fundraiser that sees the company match each crown donated with two. Many other companies, big and small, are doing what they can to assist. The help goes on, and donations to charities wouldn’t be possible without mobilising logistics capabilities (importantly also warehouses, e.g., the French multinational GEODIS).
It is also worth mentioning that customs clearance companies voluntarily provide aid with the necessary paperwork (crucial if we are talking about shipments from outside the EU, like UK donations). Some have even chosen to engage in specific, targeted assistance like the Polish Register of Shipping and Polferries. The two have purchased, pre-charged, and sent to Ukraine power banks, as having a working mobile can save lives. Phones are also instrumental in gathering intelligence (in light of the full-fledged information war) or footage of atrocities (because the International Criminal Court is already investigating war crimes).
Ports
Operations at Ukrainian seaports have come to a standstill. The 21mt/year capacity Mariupol – among others, home to Illich Steel and Iron Works, Ukraine’s second-biggest – has been under constant, indiscriminate bombardment by the Russians. Odesa, the country’s prime commercial seaport (40mt/year of capacity), ceased operations, with the city’s defence preparing to ward off the enemy landing.
The German HHLA, operator of Odesa’s container terminal (since 2001), has closed its facility and provided shelter for their employees (480 together with families – transporting the refugees to Hamburg via Romania). HHLA’s personnel in Germany offered asylum and served as contacts and chaperones for bureaucratic procedures. The HHLA Executive Board had also decided to pay employees their monthly salaries in advance so that they could stockpile goods.
Torben Seebold, the company’s Labour Director, said, “We stand together as HHLA family to take a common stance of solidarity and humanity. During this time, our thoughts are particularly with the employees who remained in Odesa and who are looking after security at the terminal or who have been called to military duty.”
Like DFDS, HHLA has opened its pockets: €1.0m in donations to provide humanitarian and medical assistance, plus its employees a further €60k (as of 24 March 2022). Additionally, HHLA’s Hamburg terminals stopped handling containers coming from or destined for Russia as of 1 March 2022 (in 2020, these totted up to 229k TEUs).
Combined with the booking ban imposed by container lines, one can speculate how the sanctions brought forward by the EU, US, and others will impact Russian container traffic – in the Baltic in our case. Last year, the country’s ports in the region took care of 2.51m TEUs: St. Petersburg – 2.04m, Kaliningrad – 437k, and Ust-Luga – 29k. Early reports spoke of the container carriers that imposed the bans as being responsible for over 50% of the traffic.
Russian Baltic seaports feed the country’s two largest consumer centres, the Leningrad and Moscow Oblasts. They also handle the supply & demand of the Kaluga Oblast, one of Russia’s most economically advanced territories, where many international corporations have decided to settle (Berlin-Chemie/Menarini, Citroën, Continental, GE, Mitsubishi, Novo Nordisk, Peugeot, Samsung, Volkswagen, and Volvo to name a few). These multinationals are either exiting the Russian market altogether or discontinuing production. Their decision will trickle down the supply chain, affecting the local workforce and subcontractors. Many other companies are also putting up the shutters (among them, major cargo owners like IKEA).
A list prepared by the Yale Chief Executive Leadership Institute (10 March 2022) specifies 325 entities, including the world’s Top 10 by revenue. “By Feb 28, only several dozen companies had announced their departure from the country. However, as public pressure continues to mount, that number has since skyrocketed as many companies feared the effect continuing to do business with Russia would have on their corporate image. Alongside the aforementioned sanctions, reversing three decades of investment has had a significant impact on Russia’s economy,” reads Investopedia’s Nearly 330 Companies Have Withdrawn From Russia. Their decisions affected existing assets, physical and digital, and future investments, especially those oil & gas-related, as Russia lacks the know-how and technology for manufacturing equipment needed for deep extraction/mining. It is worth reading such lists the other way around by ‘finding’ companies that have decided to stay and bank on filling the vacuum.
One can also be sceptical about alternatives, particularly the New Silk Road (NSR). In 2021, China-Europe container rail traffic summed up to 1.46m TEUs, already encountering problems with capacity and delays. Next, the NSR wasn’t meant to facilitate China’s trade with Russia, by far less significant than that with the EU ($84.2b vs $573b in 2018). The sanctions imposed by Western economies also target Russian and Belarusian railways and their affiliates. While European buyers mainly contract their Chinese partners, who then arrange the logistics, including the procurement of the rail leg to the EU border, NSR traffic has decreased in the wake of the Russian aggression (leading to faster transit times, as bottlenecks clear, for those still taking the Eurasian Land Bridge). Companies are wary of having to do anything, in- or directly, with those whose assets and infrastructure have been used to prepare and propel the aggression. Some simply deem it morally wrong to continue using rail services the Russians and their accomplices from Belarus offer.
At the same time, there are rail alternatives for European companies along the NSR, though significantly limited. Nevertheless, there are parties already exploring the options. For instance, the Finnish Nurminen Logistics and Kazakhstan Temir Zholy (KTZ; the country’s national railroad haulier) partnered in mid-March 2022 to trial rail shipments along the Middle Corridor. The two plan to run trials in April-June 2022, sending China-Europe train sets via Kazakhstan, Azerbaijan, and Georgia. If successful, the companies intend to establish a commercial offering till September 2022. In addition, Nurminen Logistics and KTZ will cooperate on the former’s China-Finland services. Specifically, they want to use Kazakhstan-registered & owned wagons to avoid falling under sanctions imposed on Russian rail companies.
That said, the Middle Corridor is constrained by having to transship the cargo onto vessels crossing the Caspian and Black seas, not to mention the recent reports that sea mines are drifting in the latter and heading towards the EU’s shores. However, going over the Black Sea can be avoided, too (especially as the Russian naval forces fired at merchant ships, hitting Banglar Samriddhi near the Ukrainian Port of Mykolaiv on 2 March 2022, killing one crew member and forcing others to abandon the vessel; earlier, the Estonian freighter Helt was used by the Russians as a floating human shield near Odesa, with the vessel sinking after a mine explosion). The Dutch Nunner and the Chinese Tiedada have set up a Middle Corridor connection that goes via Georgia to Istanbul for transhipment onto a vessel going to the Port of Trieste, from which it is distributed to Duisburg.
Speaking of the German dry port, duisport has taken the decision to get rid of its interests in Belarus: 0.59% stake in a development company behind the Great Stone Industrial Park (a major Chinese investment in the country) and 38.9% in Eurasian Rail Gateway (a bimodal terminal).
On the whole, one can just wonder what the Chinese are thinking about the Kremlin jeopardising the NSR. After all, local authorities have greatly invested in linking their cities and regions with Europe. Farther Asia-Europe connectivity has already been compromised. The war has resulted in withholding Vietnam’s link with Belgium (the Vietnamese Ratraco was about to launch a second service to Liège – from Da Nang on behalf of IKEA). Maersk’s ban includes rail services; the company’s AE19 routed cargoes from several Chinese, Japanese, and South Korean ports via Vostochny for rail forwarding to St. Petersburg. The connection in question has been set up in co-op with Global Ports; Maersk’s landside arm, APM Terminals, has decided to divest its stake (30.75%) in the Russian terminal operating company (which runs several sea and inland facilities in the Baltic).
Although important, the container business in Russia is almost nothing compared to the country’s oil & gas industry. Exports of liquid hydrocarbons tot up to one-third of the Russian budget. Banning the purchase of Russian oil & gas (and coal, too) would seriously add insult to injury. In the Baltic alone, bulk goods accounted for 81% of the country’s port turnover last year (135mt of liquid and 75mt of dry bulk, respectively).
Depending on an economy’s exposure to Russia’s hydrocarbons and its capacity to change the supplier, some find it easier and others more challenging to opt for the cut-off. For instance, the Finnish Neste has severed its crude oil imports virtually overnight. Orlen Lietuva, the Lithuanian subsidiary of the Polish oil & gas Orlen that runs a refinery in Mažeikiai, has said it too would stop importing Russian crude oil. Poland can replace pipeline gas, getting its demand through the under-upgrade LNG terminal in Świnoujście, the Baltic Pipe (gas from Norway via Denmark), and domestic production. Polish seaports also have the wiggle room to take in more liquids. Lithuania has come to a decision to buy the floating storage and regasification unit Independence until recently chartered (and later, all three Baltic States proclaimed a cut-off from Russian gas, encouraging others to follow in their footsteps).
On the other hand, it will be more difficult for Germany to disconnect. For example, Rosneft is responsible for about 12% of the German crude oil refining market. At the same time, Gazprom owns the LNG storages, with record low utilisation ahead of the aggression, probably meant to be used as a political bogey. However, the government in Berlin has decided to scrap Germany’s existing policy towards Russia.
The pivot will see the erection of two LNG terminals on the North Sea coast: in Brunsbüttel and Wilhelmshaven. Interestingly, the Germans want to feed two birds with one scone by designing the new facilities so they can also handle green hydrogen and its derivatives, such as ammonia. Markus Krebber, RWE’s CEO, said in this regard, “It is now more important than ever to think of climate protection and security of supply as one.” Alongside the Dutch Gasunie and Germany’s state-owned investment and development bank KfW, his company will work on the 8.0b m3/year LNG terminal in Brunsbüttel and the adjacent hydrogen-ammonia facility (initially 300kt/year of ammonia imports as of 2026, up to 2.0mt/year after expansion).
In early March 2022, Tree Energy Solutions (TES), founded by the Belgian investment company AtlasInvest, announced it would accelerate the set-up of its facility in Wilhelmshaven. Once fully commissioned, it could cover 10% of Germany’s energy demand. The 25 TWh of yearly capacity Phase 1 is to be ready by winter 2025, making it possible to import & produce 0.5mt of hydrogen. The full-scale Wilhelmshaven Green Gas Terminal will comprise six tanks and six berths. Its capacity will rise to 250 TWh/5.0mt of hydrogen by 2045. TES intends to produce green hydrogen in countries with a renewable power mix and combine it with CO2 to create an energy carrier transported to Wilhelmshaven by a purpose-built fleet. The ‘load’ will be converted back to hydrogen in the German port, with the CO2 captured for reuse in a closed-loop production-transportation system.
In the meantime, apparently not wanting to wait for the outcome of cabinets’ calculations on the closure of EU ports for Russian vessels, several grassroots/activist movements have decided to step in. For instance, The Guardian has reported on dockworkers at the Ellesmere Port refinery in Cheshire refusing to unload Russian oil, joining their union fellows from Kent, whose actions diverted a Russian gas tanker. “The government must act immediately to [...] stop Russian goods continuing to arrive in the UK under the cover of another country,” urged Matt Lay, National Officer for Energy at the Unison labour union. Such means are undertaken to counter the imperfection of a law, which would allow for the uninterrupted handling of Russian oil & gas. Niek Stam, FNV Havens’ Spokesperson (the largest Dutch dockworkers’ union), said after port workers in Rotterdam refused to handle Russian hydrocarbons, “There is blood on this oil, blood on this coal and blood on the gas.” Labour unions are preparing to tackle legal claims from oil companies and shippers following the boycott. The law is in the making, but the UK has even taken action to allow detaining Russian ships.
Canada has banned such vessels from entering its waters. Unionists from the US West Coast dockers union ILWU have said their members won’t handle Russian tonnage. Similarly, the Swedish Dockworkers Union has given prior notice to the employers’ organisation Ports of Sweden that industrial action will be taken against vessels going to and from Russia, likewise Russian cargo in Swedish harbours. Iceland has revoked the derogation for Russian vessels catching redfish, prohibiting the entry of these ships into Icelandic ports.
At the same time, Greenpeace activists have blocked Rosneft’s refinery in Schwedt, confronted oil tankers from Russia in the Baltic Sea, and launched a Twitter service that tracks Russian tankers. Greenpeace Nordic’s Executive Director, Mads Flarup Christensen, commented, “While people suffer in Ukraine and people in Russia take to the streets pleading for peace, Putin’s oil and gas is still arriving at European ports, contributing to his war chest. Supertankers crossing our seas with Russian oil and gas are still delivering fossils to Europe. If we want to stand for peace, we must stop this and urgently get off oil and gas.” He furthered, “This war is, as so many wars before it, funded and fuelled by fossil fuels. To end this, we must end the dependency on oil, gas and coal. We have the solutions, all we need is the political will to rapidly switch to peaceful sustainable renewable energy. This will not only create jobs, lower energy bills, and tackle the climate crisis, it will also cut our dependence on imported fossil fuels, fuelling conflicts in the world.”
According to another NGO, Transport & Environment (T&E), Europe still spends up to $285m/day on Russian oil. On 3 March 2022, the International Energy Agency (IEA) published A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas. The Agency wrote, “The 10-Point Plan is consistent with the EU’s climate ambitions and the European Green Deal and also points towards the outcomes achieved in the IEA Net Zero Emissions by 2050 Roadmap, in which the EU totally eliminates the need for Russian gas imports before 2030.” William Todts, T&E’s Executive Director, tallied by saying, “[...] we should not simply swap Russian oil for Saudi oil. It’s time to greatly improve transport efficiency and turbocharge the electrification of transport to drive down our oil consumption. [...] The EU must rewrite its energy security strategy to include oil. [...] Any energy security strategy that ignores oil isn’t worth the paper it is written on.”
The European Commission (COM) has unveiled its proposals to cut the block’s reliance on Russian gas by two-thirds – as quickly as by 2022-end – towards complete independence. The REPowerEU plan assumes boosting energy production from renewables (extra 80 GW to the 900 GW of wind and solar by 2030) and quadrupling the current 2030 targets for green hydrogen supplies (15mt atop the 5.6mt). Various clean energy associations have welcomed the COM’s proposal. In the words of Frans Timmermans, the COM’s EVP for the European Green Deal and European Commissioner for Climate Action, “It’s hard, bloody hard. But it’s possible.”
Russia’s aggression also threatens the agricultural industry, particularly the grain and vegetable oil markets. In the record marketing year of 2021-2022, Ukraine has produced 107mt of grains, legumes, and plant oils (the country is the world’s biggest producer of sunflower oil and a major exporter of canola oil). Out of the 84mt of grains and legumes, some 60mt were exported – 95% through seaports. The country’s rail system doesn’t have the means to compensate for the closure of Ukrainian harbours.
Next, while the winter sowing went according to the plan (including a 40% year-on-year increase in canola acreage), 52%, 43%, and 32% of wheat, barley, and canola crops are at risk of wastage. Spring sowing is also at risk – because of direct military action and the lack of fertilisers and fuel. Experts from Green Square Agro Consulting say that the sowing acreage can be lower by 48% for barley, 44% for sunflower, 36% for corn, and 24% for soy in the worst-case scenario. As such, wheat harvest can go down from the expected pre-war of 27.3mt to 18.6-9.6mt (the lower range would be the lowest in 20 years; Ukraine’s internal demand for wheat accounts for some 7.0mt). Barley harvest can drop as low as 1.4mt (domestic demand: 3.8mt).
Axed crops and no exports would seriously impact Ukraine’s budget. The country’s agricultural goods were mostly shipped to the Middle East and Africa. Russian aggression may result in starvation in the afflicted countries (the EU and US have announced they will help nations if they face problems with food supplies). For example, Benin and Somalia are 100%-dependent on Russian and Ukrainian grains, and insider knowledge speaks of probability bordering on certainty that civil war will break out if supplies won’t be delivered before autumn. Meanwhile, Russia, the world’s largest exporter of wheat, is hoarding its crops, further adding instability and enhancing wheat prices. More precisely, the Russian regions are holding on to their stocks (e.g., no domestic sugar exports from Stavropol Krai), seemingly putting the interest of their people ahead of the Kremlin’s.
On top of that, the National News Agency of Ukraine has cited the authorities of the Zaporizhzhia Oblast that Russians have stolen five dry bulk carriers loaded with tens of thousands of tonnes of Ukrainian grain from the Port of Berdyansk.
Other
The suite of sanctions imposed on Russia and Belarus by Ukraine’s allies has hit other branches of the transport & logistics business. The Russian Maritime Register of Shipping (RMRS), among others, has been proscribed. The country’s class has also been ejected from the International Association of Classification Societies. The American Bureau of Shipping (ABS), DNV, and Lloyd’s Register have cut their ties with Russia, ceasing to provide services to Russian-owned, -controlled, and -managed assets. The European Council has restricted the export of maritime navigation goods and radio communication technology to Russia and subjected RMRS to financial restrictions. Without classification and certification, it will become infeasible to operate Russian tonnage.
While numerous organisations worldwide have already severed their ties with Russia, storm clouds have begun thickening over the head of Young Tae Kim, Secretary-General of the International Transport Forum (ITF), an agenda of the Organisation for Economic Co-operation and Development (OECD). The Ukrainians have asked ITF to suspend Russia’s membership. ITF’s Secretary-General has played ostrich in response, saying that rules do not allow for such action. The situation has been left hanging (since February-end 2022) until an extraordinary meeting of ITF’s Transport Management Board on 4 May 2022, with the agenda including items such as possible crisis response measures to the Russian invasion of Ukraine and the legal and practical mechanisms to implement those. This inaction has prompted criticism of the Secretary-General, faulting him for the lack of leadership, strategy, and political sensitivity, not to mention putting ITF’s good name at risk. It has also led certain members, among others Latvia, to threaten to walk out on the OECD’s agenda altogether and set up an alternative. ITF’s stance is puzzling; OECD itself was quick to react by condemning the Russian aggression and ruling out any involvement with Russia. The ITF faces now serious reputational damage and possible organisational turmoil. All of this is deeply unfortunate as the organisation has put much insightful effort into surfacing, e.g., the negative consequences of market consolidation across the container shipping business.
Sanctions also target the country’s shipbuilding and repair industries, meaning finishing the under construction and starting new projects may be impossible. Moreover, the Dutch Damen Shipyards has decided not to deliver the Russian vessels they have in the pipeline – despite this action taking a significant toll on the company’s bottom line. Clarksons has reported that it concerns five tugboats for Rosatom (due for delivery this October) and several workboats and trawlers in the order book.
Russia’s attack has also made it difficult for ships to change crews, with approximately 15% of the global 1.89m seafarers being of Russian (198k) and Ukrainian (76.4k) nationalities. Wilfred Lemmens, Managing Director of the Royal Belgian Shipowners’ Association (RBSA), commented, “It will be a major challenge to find sufficient seafarers worldwide if the war continues. That could cause a huge disruption to the entire global maritime transport.” RBSA also quoted Oleg Grygoriuk, President of the Ukrainian trade union for maritime transport workers, that 55-60% of Ukrainian seafarers are currently at sea, wanting to go back to take care of their closest ones and take up arms.
“Meanwhile, the growing isolation of Russia makes it increasingly difficult – if not impossible – to pay the wages of the Russian seafarers, due to the severe restrictions to the country’s access to Swift, the main international payment system. At the same time, it is becoming harder to get them to where they are needed, due to the closure of many air connections to and from Russia,” RBSA also highlighted.
Reports speak of at least 140 vessels located in Ukrainian waters, with an estimated 1,000 seafarers aboard. Some were successfully evacuated, like the Filipino crew of the oil tanker MTM Rio Grande (left stranded off the Ukrainian Nika-Tera Port).
Lastly, line and point infrastructure is being destroyed. It is mainly done through Russian shelling, now in a cost-imposing strategy of massive destruction after the lightning onslaught-turned-fiasco. At the same time, Ukrainians are blowing up bridges and flyovers to inhibit the movement of the enemy forces.
It will take billions and billions of dollars and euros to rebuild the country. Cynthia Cook, Director, Defense-Industrial Initiatives Group and Senior Fellow, International Security Program at the Center for Strategic & International Studies, said in this regard, “It is difficult to talk about recovery while civilians are still under attack, while hospitals are being bombed, and where cities have lost power and water, but thinking about recovery means envisioning a post-conflict future, and that links to the twin messages of hope and the necessity to keep fighting.”
Ukraine’s recovery won’t be just ‘build back better’ – it will be of strategic, geopolitical importance, not to mention an act of humanitarian aid not seen in Europe since the end of WWII (think of the millions of refugees and traumatised).
“Ugly attacks continue almost without ceasing, and the pictures of the devastation are heartbreaking. We can hope that it is darkest before dawn, that soon the violence will cease, and that Ukraine will continue to exist as an independent and democratic nation embarking on an inspiring and effective national recovery,” Cook summarised her thoughts on the country’s future.
There are also voices pointing out that postwar Ukraine might to a large extent replace Russia as the EU’s economic partner, given the country’s vast and largely untapped resources. Trading with a free and democratic nation instead of brokering deals with a murderous regime should be a no-brainer.
The article will appear in the spring 2/22 issue of the Baltic Transport Journal. Before publishing, its current version (21/04/2022) may undergo adjustments, among others, to incorporate new events and intel. Any feedback on how to improve and supplement the article will be greatly appreciated!