This is the first part of a four-part series on the rise of hijack-and-ransom piracy off the coast of Somalia, and the costs it poses to the merchant shipping industry and, perhaps, global trade as a whole.

>>The Pirates' Toll: Part 2

>>The Pirates' Toll: Part 3

>>The Pirates' Toll: Part 4

The state trooper stood outside, his gun as yet undrawn.

"Stay in the car!"

The Englishman Reginald Taylor (not his real name) was slowly disobeying the state trooper by getting out of the car. The car, a silver Mercedes, was parked at the side of an exit ramp off the New Jersey Turnpike, somewhere between Newark and Hoboken.

The car's owner, James Christodoulou, the chief executive of a small merchant shipping company based in Connecticut, sat behind the wheel. He was cradling a cell phone tightly to his ear and listening to a man named Abbas accuse him, in angry broken English, of secretly transporting nuclear waste for the U.S. government -- or maybe also the Italian mob -- and dumping it off the coast of Somali. This, said Abbas, was why the pirates who'd hijacked Christodoulou's ship had become distressed. This was why he needed to pay the multimillion-dollar ransom, immediately. This was why, if he didn't pay, the gang of pirates might at any moment run the ship aground on a Somali beach and force its crew of 28 men -- at gunpoint, at knife point, hands on their heads -- down the gangway and into the bush.
Pirate Interactive Map

Minutes before, Christodoulou had taken the call while steering his Mercedes through the Turnpike traffic. He'd become distracted; he'd entered a cash lane when he'd meant to go through the EZ-Pass; he'd blown the toll booth, drawing the attention of this New Jersey trooper.

" Stay in the car!"

Now, watching the cop in the rearview mirror, the cell phone clasped to his ear, a recording device attached to the phone, Christodoulou held his left hand aloft in the high-stress gesture of: I can't talk.

His right-hand man, however, could. "I know this is going to be hard to believe," Taylor, the Englishman, said.

His accent was full Oxbridge. A professional kidnap-for-ransom expert, hired to advise Christodoulou through the hostage crisis by Christodoulou's insurance company, Taylor explained to the trooper that his friend couldn't, at the moment, hunt for his driver's license, since his friend was just then on the phone with pirates in Somalia. A little less than a month ago, they'd captured one of his ships and taken its crew hostage; his friend, Taylor said, was right now negotiating for their release.

"He really can't get off of the phone."

If the trooper didn't roll his eyes, he expressed something less than total credulity.

"I don't care if he's talking to Queen Elizabeth, I want license, insurance and registration!"

Taylor, his hands held where the trooper could see them, managed to convince the trooper to let him remove, very deliberately, from the back seat -- "Please, it will explain everything" -- a copy of a New York newspaper, one of the tabloids. Taylor held it up; emblazoned across the pages were photographs of Christodoulou's ship, the MV Biscaglia, swarmed with pirates.

The trooper, American law-and-order, glanced at an intense Christodoulou in the front seat. He looked at the newspaper photographs -- pirates, Kalashnikovs, hostages, Africa -- an alien shard of experience from the other side of the planet flashing into life on a New Jersey highway. The trooper got back in his car and drove off.

Christodoulou was left with his pirates.

>>World's Navies Respond to Pirates

If anything has brought the merchant shipping industry into the light of popular culture over the last two years it's been the pirates of Somalia, who have during that time hijacked 94 vessels, held an estimated 1,800 people hostage, and extracted something close to $200 million in ransom from ship owners around the world.

They've attacked virtually every type of sea craft there is -- polished European sailing yachts, dilapidated Vietnamese fishing trawlers, bone-white promenade-deck cruise ships sailing out of Miami, break-bulk stick freighters chugging out of the Port of Singapore, high-riding container ships owned by spruce Scandinavian industrial conglomerates, low-riding dry-bulk carriers, Ro/Ro car carriers and very-large crude carriers -- the VLCC supertankers that weigh more than 300,000 tons fully loaded -- owned by Armani-draped Athens shipping magnates.

The pirates are, by and large, fearless. Once, a gang had enough temerity to assail an American supply ship, the Lewis & Clark, then carrying fuel, ammunition and sailors' mail for the warships of the United States Navy. (The attack was thwarted.)

So dense is the action that the crew of one ship -- the MV Horizon -- witnessed the hijacking of a second ship, the MV Titan, while both vessels were navigating pirate waters in the Gulf of Aden in March 2009. Four months later, in July, as it steamed through on a return voyage, pirates captured the Horizon.

Nearly every major shipping company has experienced a run-in with Somali pirates of one kind or another: DryShips' ( DRYS) Saldanha, carrying coal to Slovenia, was captured in February 2009, released for some millions in ransom that April; Navios Maritime Partners' ( NMM) Apollon pictured above , hauling fertilizer from Florida to India, was hijacked in December, released in late February, about two weeks ago. Earlier this year, pirates held two ships managed by the unlucky Zodiac Maritime, a privately held U.K. concern, at the same time. Eagle Bulk Shipping ( EGLE), Excel Maritime ( EXM), Genco ( GNK), FreeSeas ( FREE), Frontline ( FRO), Maersk -- all have had ships attacked since Somalia-based piracy first burst into the headlines in 2005.

That so many dry-bulk-carrier and tanker operators have suffered attacks and hijackings should surprise no one. These ships are, in the nautical argot, slow and low. Their tonnages sink them into the sea, closing the distance from deck to waterline -- the freeboard. They move at a deliberate pace: 14 knots and slower. They present to pirates the easiest targets on the oceans, like fat antelopes to a pride of lions.

In response, marine insurance companies -- whose byzantine policies sometimes baffle even those who have spent careers deep inside their codicils -- have jacked their rates. The Gulf of Aden and an enormous swath of the Indian Ocean from the coast of East Africa to the Seychelles has been declared, for insurance purposes, a war zone.

This means that shipping companies, or the outfits that charter merchant ships to transport their cargos, must purchase a special kind of insurance at a premium -- in effect a kind of tax -- for each voyage through this "war risk" region.

Both the premiums and the area described by the zone were at the end of 2009 expanded once again, under the auspices of a junta of British maritime underwriters and syndicates and reinsurers and indemnity clubs called, ominously, the Joint War Committee. London is basically the world headquarters of marine insurance. (Though, somehow funnily, AIG ( AIG) has a very large practice in this area.) This makes sense. The business of underwriting insurance was pretty much invented in the seventeenth century in a London coffee shop, a ship captains' hang out where they traded gossip, gambled, and sold each other guarantees on the value of goods sailing on English ships throughout the world. The coffee shop was known as Lloyd's.

Prices for insurance depend on the size of the ship, the type of cargo, the number of potential piracy-induced costs you want covered, and "how good you are at negotiating with your insurance company," says Per Gullestrup, CEO of Copenhagen's Clipper Group, which had a chemical tanker abducted in the Gulf of Aden in 2008 pirates aboard the ship are pictured above . In total, shippers end up paying anywhere from $20,000 to $100,000 per vessel per voyage through the war zone. Multiply that times the number of merchant ships going through the area each year and the amount paid to the insurance industry by shipping companies approaches $1 billion per annum.

Directly and indirectly, the costs of piracy multiply. Ransoms suffer inflation, the average payout rising from the tens of thousands of dollars just four years ago to $1 million in 2008 to $2 million in 2009, according to figures collected from insurers and other sources by Roger Middleton, a Somalia expert at Chatham House, the foreign-policy think-tank in London.

Merchant mariners' unions push through hazard pay: crews now receive double their normal hourly wage during the time it takes to transit the war zone. Owners hire expensive security guards and station them on their ships -- Blackwater-esque former commandoes or Interpol-ish ex-cops, usually, who stand with flack jackets on forward decks while the ships sail through pirate waters, peering through high-powered binoculars and frowning. One imagines them in their cabins in the evenings, practicing their martial arts. A whole cottage industry of maritime-security specialist firms -- many of them, again, based in Britain -- arises to exploit the burgeoning demands of the skittish shipping executive.

Moves and countermoves: the bandits of coastal Somalia -- harassing the shipping lanes of global commerce -- have drawn the navies of the developed world, some 20 countries at last count. (Even Iran has freelanced a few battleships over to the region to keep an eye on things.)

Meanwhile, an international naval effort called Combined Task Force 151, led by the U.S., has morphed. Shifting world threats have caused its reassignment. Originally created not long after September 11 as one of the naval components to the war on terrorism, it now fights Somali skiffs powered by outboard motors a French warship flanks a pirate skiff in the photo above .

The success of Somalia's pirates has given rise to a certain kind of portrayal in the Western media. "Cutthroat Capitalism," reads the title for a piece in Wired. "They've come up with a good business model ... with a low cost of entry," writes the foreign relations expert in The Wall Street Journal. Piracy's "flashy new-money culture" has become "entrenched," declares a dispatch in The Washington Post. A new neighborhood of "huge homes" rises in an otherwise miserable hut-and-shack village in Somalia, reports The New York Times. The neighborhood is called "New Boosaaso" and the "minicastles" there cost "several hundred thousand dollars."

An intrepid Reuters' stringer goes into a pirate stronghold -- "stronghold," with its whiff of the medieval, being a favorite word to describe the places where Somali pirates live -- and comes out with the news that there exists a kind of bandit stock exchange; it's possible -- so the story goes -- to buy shares in a gang of pirates. If your company of corsairs returns to shore with a ransom: dividend yield.

Cutlasses, new money, strongholds, business models: it's difficult to resist, and likely unavoidable, this temptation to explain Somalia's pirates in the language of the rich-nation business world. It's a shorthand that allows us to convert the exotic and dimly understood into something familiar, to regain control.

And it is true: the pirate gangs of the Somali coast seen here in one of their craft have indeed developed a venture that has brought more money to these places than perhaps ever before. Somalia, after all, is arguably the world's most notorious failed state -- no central government, feuding clans, warlords, Black Hawk Down, Islamist insurrections, terrorist influxes, drought, refugee crises from nearby genocides -- all that is dysfunctional and tragic about Africa seems to be contained in our idea of Somalia. The people who live there are viewed now as the world's most trenchant have-nots.

The men in control of the country's pirate bands have, in a sense, with one of the world's busiest shipping lanes right off the beach, lit upon perhaps the most lucrative money-making scheme available to them. They've figured out a way to participate in a global economy from which they are excluded. Failed-state entrepreneurs, they are hijacking ships and disrupting world trade by taking -- literally, figuratively -- a toll on it.

This is the first part of a four-part series on the rise of hijack-and-ransom piracy off the coast of Somalia, and the costs it poses to the merchant shipping industry and, perhaps, global trade as a whole. Click here to read Part 2 of Pirates' Toll: Shipping in the Wake of Somalia.

-- Written by Scott Eden in New York


Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.

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