What We're Reading:

China's Xi and Russia's Putin set for face-to-face at Olympics as Ukraine tensions flare. A summit between the two leaders, expected to take place on the day of the Opening Ceremony, comes at a pivotal moment for both sides, as the massing of Russian troops at the border with Ukraine fuels fears of an imminent invasion. (CNN)

Islamic State leader killed during US raid in Syria. The leader of the violent Islamic State group was killed Thursday, blowing himself up along with members of his family during an overnight raid carried out by U.S. special operations forces in northwestern Syria, President Joe Biden said. (AP News)

‘Take back life’: More nations ease coronavirus restrictions. The early moves to relax precautions, based on declining or flattening case counts in recent days, represent what could be another turning point in a nearly two-year pandemic that has been full of them. (Business Mirror)

Potential Russia sanctions rattle markets. International sanctions being prepared by the US and its allies for use against Russia if it takes military action against Ukraine would rock markets for several major commodities and unleash havoc in banking. (Global Trade Review)

U.S. weekly jobless claims decline further as Omicron wave subsides. The number of Americans filing new claims for unemployment benefits fell more than expected last week as COVID-19 infections subsided, suggesting that an anticipated slowdown in job growth in January was likely temporary. (Reuters)

As the Olympics open, China seeks the limelight but warns against criticism. The country wants the global spotlight so it can display its remarkable rise, yet Beijing is hypersensitive to criticism of human rights abuses at home and growing friction with countries abroad. (NPR)

Food prices hit two-decade high, threatening the world’s poor. Food prices have skyrocketed globally because of disruptions in the global supply chain, adverse weather and rising energy prices, increases that are imposing a heavy burden on poorer people around the world and threatening to stoke social unrest. (New York Times)

Venezuela’s oil exports fall to lowest since Sep amid returned cargoes. Venezuela’s oil exports plummeted in January to the lowest level since September amid loading bottlenecks caused by returned and rescheduled crude cargoes, according to internal documents from state-run PDVSA and tanker tracking data. (HSN)

Global tax deal would undercut U.S. tax breaks, businesses warn. The emerging global minimum-tax agreement would make domestic tax breaks less valuable for some U.S.-based companies, potentially limiting the effectiveness of incentives for research, exports and low-income housing, businesses are warning. (WSJ)

Inflation in 19 countries using the euro hits another record. Inflation fed by high oil and gas prices hit record levels in Europe for the third month in a row, extending pain for consumers and sharpening questions about future moves by the European Central Bank. (AP News)

Opec and allies agree further gradual increase in oil production. Opec and its allies on Wednesday agreed to boost the group’s production quota for the eighth consecutive month, even as data showed that some countries were struggling to keep up with the monthly increases in output. (Financial Times)

Shipping schedule reliability hits record low as supply chains continue to struggle. The continued global supply chain problems caused by blockages and delays within ports show no sign of improving currently, according to expert container consulting firm Sea-Intelligence. (Commercial Risk)

Fed nominees back its inflation-fighting agenda. Containing inflation running at its highest in decades must be a top priority for the Federal Reserve with Americans "suffering" under the rapid pace of price increases, U.S. President Joe Biden's nominees to the central bank's Board of Governors said on Thursday. (Reuters)

Italy’s 80-year-old president really wanted to retire. He’s just been re-elected amid political stalemate. Ahead of what turned out to be a long and drawn-out presidential election in Italy last week, the country’s incumbent Sergio Mattarella, at 80-years-old, had set his eyes on retirement and was reportedly set to move out of the Quirinale, the presidential palace in Italy’s capital, and into a rented apartment in Rome. (CNBC)

The political currents have been running against President Luis Lacalle Pou in recent months, despite favorable developments on the economic front that reduced the unemployment rate to a 30-month low of 8% in October and a sharp drop in new COVID-19 infections. The loosening of health restrictions made possible by the abatement of the COVID-19 threat has created room for the PIT-CNT to organize protests against Lacalle’s center-right government, and the unions also have worked with the opposition FA to force a national referendum aimed at repealing dozens of reforms approved by a fast-track process in June 2020.

The vote is scheduled for March 27, and the outcome is very uncertain. A poll conducted by Cifra in September found that only 44% of voters supported the reforms, but more than one-fifth of respondents were undecided. It is reasonable to assume that public opinion about the president will influence the direction in which undecided voters break as the plebiscite approaches, and the recent trend has not been moving in the president’s favor.

Political risks are compounded by the appearance of cracks in the unity of the so-called Multicolor Alliance, the governing coalition made up of Lacalle’s center-right Blancos, the centrist PC, and the far-right populist CA. Trouble erupted earlier this month when the CA joined forces with the FA to secure approval of a land-use bill that was immediately vetoed by the president. The breakdown of discipline within the coalition spells trouble for Lacalle, and is likely to become more pronounced if the gutting of the administration’s signature achievement contributes to a further erosion of the president’s popular support.

Fitch revised the outlook for Uruguay’s BBB- rating from negative to stable in mid-December, reducing the immediate risk of a possible downgrade of the country’s bonds to junk status. A combination of above-trend growth, stable revenues, and restrained spending are expected to facilitate the steady narrowing of the central government budget deficit to less than 3% of GDP by 2023, assuming the ramping up of production from the country’s recently completed second paper mill is sufficient to sustain real GDP growth of close to 2% over the next two years, following real expansion of 2.5%–3% this year.

Achieving even that pace of growth is far from assured, given the fact that annual real-terms expansion averaged just 0.9% in the five years prior to the pandemic. Downside risks include the possibility of a setback in the global battle to contain COVID-19 and Uruguay’s continued vulnerability to economic difficulties in Argentina and/or Brazil.

The analysis above is taken from the December 2021 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

The U.S. has repeatedly threatened “severe” sanctions on Russia should President Vladimir Putin order troops to invade Ukraine. The European Union also is ready to impose some sanctions on Russia, but officials from the EU said they need to be more cautious than the U.S.

"Energy dependency makes a deal more difficult for the EU than for the United States,” a senior EU diplomat told Reuters. “Getting political agreement is harder. We have a deep relationship with Russia so there will be economic pain, and for some more than others."

Meanwhile, senators negotiating a sanctions package said they had hoped to have a deal in place last week, according to Bloomberg. “We’re hopefully finalizing a couple of elements that we have to get agreement on and we can move forward,” Foreign Relations Chairman Bob Menendez, a New Jersey Democrat told the news outlet.

The Senate is struggling on whether to impose preventative sanctions or only if Russia invades Ukraine. Some senators suggest holding the harshest measures in the event of war and imposing less-severe sanctions now.

Biden Administration officials did not give many details, but said part of the plan would be to damage the country’s technology industry. The U.S. also could remove Russia from the SWIFT financial system, freeze assets, impose travel bans or target state-owned banks (Russia's two largest banks, Sberbank and VTB, are at risk).

Because of the various scenarios that could unfold in the following weeks, it is best to err on the side of caution and prepare as much as possible, said Mark Regenhardt, managing director of the global client group with Marsh USA. “If you have a local sale within Russia, the cross-border political risk may be lower. But when you’re selling to Russia from an outside country, then the government can freeze currency, prevent payments and restrict shipments whereas they are less likely to do that within their own borders.”

It is a challenge for businesses to prepare for every possibility, especially when it is not completely clear what actions Russia, Ukraine, the U.S. and the EU will take. “It always ends up still being a bit of a scramble, because there’s only so much you can do in terms of planning,” a U.S. Treasury spokesperson told the Wall Street Journal in an email. “There’s contracts and arrangements that are of longer tenure, and so you can’t just walk away or cancel those. And once the sanctions are imposed, you have to figure out what you’re going to reap. Then you have to put a different plan in place.”

However, trying to prepare somewhat now is better than not at all. According to Lowenstein Sandler's Global Trade & National Security Newsletter, companies should take the following steps now:

• Identify outstanding debts from Russian entities or individuals and promptly pursue collection activities.
• Check sanctions screening policies and procedures and screen customers and business partners in real time against global sanctions lists.
• Identify contracts with Russian entities or individuals and review them for compliance with law clauses, notice clauses and termination provisions.
• Identify beneficial owners of Russian trading partners. If an entity is owned 50% or more by one or more SDNs, that entity is also treated as if it is on the SDN List and subject to blocking and asset freezes.
• Identify items or technology being exported to Russia and any transactions with Russian entities that have ongoing or continuing obligations. You may need a license for the export.
• Consider alternative sources for any supplies or services being sourced from Russia.
• Identify outstanding debts from Russian entities or individuals and promptly pursue collection activities.

Trade credit insurance also may be a useful tool, although it may be difficult to get coverage for debt when a country is already at high risk, Regenhardt said. It is key to have coverage in place before you start to worry.  “We have various clients who already have insurance and are selling into Ukraine and Russia, and they still have their limits in place and are still being supported by their insurance because they have long-standing relationships.”

To hear more from Regenhardt and other experts from Marsh and Atradius regarding the most recent developments in B2B credit, be sure to register for NACM’s webinar, Trade Credit Insurance: Market Update & Latest Innovations.

The strong rebound in GDP across most of the world may prove to be more of a bounce than a movement. Purchasing power—bolstered in many cases by government intervention—was strong in 2021. Despite strong product demand, supply chain issues have left factory shelves depleted and driven inflation sky high.

In the U.S., the inflation rate hit 4.6%, the highest of the developed markets, and is expected to remain relatively high at 4.0% in 2022. Eurozone inflation hit 2.5% and is forecast to remain close to this level at 2.3% in 2022. This could dampen demand in 2022 and 2023 leading to slowing growth rates and rising insolvencies.

Inventory Indexes at Historical Lows

With new more contagious covid-19 variants driving infection rates to record highs, the visual impact of the pandemic is readily evident with new lockdowns resulting in lower traffic levels, closed stores and hospitality businesses, less travel, still-understaffed offices and less-crowded downtown areas. Despite this, demand for consumer durables products in particular has been good. Getting these goods to market, however, has been an issue.

The pandemic has triggered a number of supply chain bottlenecks that have delayed shipment of raw materials and finished products, depleted stock levels and driven up freight costs. With these factors driving prices higher and skyrocketing fuel prices due to OPEC production caps and gas shortages, despite the surge in demand, slower GDP growth is anticipated in 2022 and 2023.

Record High Shipping Costs

Although the spike in inflation is eroding purchasing power, we expect global GDP growth to slow, but remain positive. Despite the rising inflation, consumer savings have accumulated and should offset inflation to a modest extent. Supply chain disruptions should abate in the second half of 2022 and in 2023. This, along with monetary policy mainly in advanced markets, should create some inflation relief.

“Our current take on the situation is that current levels of inflation are temporary and will not persist,” said John Lorié, Atradius chief economist. “Inflation pressures will largely fade in the next two years as the current phase reflects an abnormal situation. Wage pressures are still relatively low, and inflation expectations remain well anchored. We do see that high inflation is gradually forcing central banks to start monetary tightening, but more so in the U.S. than in the eurozone." 

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations