What We're Reading:

Sanctions will have a ‘devastating’ impact on Russia. The United States and Europe are using a powerful tool to try to push back against Russia and create consequences for its aggressions: an unexpectedly fast and powerful set of financial sanctions meant to shock the country’s economy and hamstring its access to financial resources. (Vox)

Commodities’ historic week sends shock waves around the world. Commodities are wrapping up a historic week as Russia’s invasion of Ukraine roils markets, with foodstuffs soaring, metals setting records, and oil in the throes of the biggest crisis for decades. (Bloomberg)

US added 678,000 jobs in February in sign of economic health. U.S. employers added a robust 678,000 jobs in February, another gain that underscored the economy’s solid health as the omicron wave fades and more Americans venture out to spend at restaurants, shops and hotels despite surging inflation. (AP News)

Financial screws turned on Russia as insurers exit. Banks, investors and insurers have in recent days ratcheted up that pressure by exiting investments in Russia and halting the provision of their services. (Reuters)

French President Emmanuel Macron declares run for re-election. French President Emmanuel Macron confirmed just ahead of the deadline that he plans to run for re-election next month, officially kicking off a campaign that the war in Ukraine has overshadowed. (WSJ)

Bank of Canada raises benchmark interest rate to 0.50%. The Bank of Canada on Wednesday raised its benchmark interest rate for the first time in over three years, and said more rate increases are necessary to curb inflationary pressures. (Market Watch)

Iran nuclear talks in final stages but ‘not there yet,’ coordinator says. Indirect talks between Iran and the United States on salvaging the 2015 Iran nuclear deal are in the final stages but “definitely not there yet.” (Reuters)

Russia’s credit rating is cut to junk, and the dollar hits a new high vs. the ruble. The financial fallout over Russia’s invasion of Ukraine struck another blow on Thursday, as Moody’s Investors Service dropped its long-term debt rating for the Russian government from Baa3 to B3—a six-notch freefall that leaves Russia’s credit firmly in the “junk,” or non-investment grade status. (NPR)

In China, fewer are willing to splurge as economic worries mount. Chinese leaders can’t convince people to spend more, threatening plans to reignite growth. (WSJ)

Profit margins hit hard as pricing tries to address supply chain disruption. A new study finds 87% of businesses said Covid impacted their ability to manage pricing, with 34% saying that can’t keep up with real-time price fluctuations in the market. (MH&L)

Sri Lanka’s apparel sector struggles with rolling power cuts. Sri Lanka is facing its worst financial crisis in a decade with foreign exchange reserves shrinking 70% to $2.36 billion in January. (Reuters)

Shipping’s Russian nightmare is becoming a reality. The shipping industry is faced with a logistical and legal nightmare, in the aftermath of the events in Ukraine. Russia and Ukraine have the potential to disrupt global order and set the world back a few decades. (HSN)

Months after pledge, India yet to submit emissions targets. Four months after India announced its “net-zero” target at the United Nations climate conference in Glasgow, the country has yet to submit its targets for cutting greenhouse emissions, underscoring the difficulty of overhauling energy policy amid a growing population. (AP News)

It has now been nearly two weeks since Russia invaded Ukraine, and countries around the world continue to impose severe economic sanctions in response to the ongoing conflict. Credit professionals need to stay aware of the complicated and fluid situation, said Nathan Hutton, CICP, global credit manager with Donaldson Company, Inc (Minneapolis, MN).

At the beginning of the conflict, Hutton was able to sell to Russian customers with prepayment, but the situation would change so much by the next day that the customer was not able to get euros from banks in order to pay for the goods. “It can be extremely treacherous trying to navigate and understand what you can and cannot do right now,” he said.

New sanctions against Russia are constantly being added as the situation escalates, making it difficult for credit professionals to find the most recent compliance information, said Fred Dons, director and head of CTF Flow at Deutsche Bank (Amsterdam, Netherlands). “The speed of which sanctions are rolled out causes most credit reports not to be up to date,” he said.

And the speed at which countries are imposing sanctions is not the only hurdle for credit professionals; the complexity also creates challenges. For example, the Office of Foreign Assets Control (OFAC) may have a bank or organization in Russia listed as sanctioned, but that entity could have 15 other names it uses.

Western sanctions on individuals also adds to the confusion credit professionals must try to navigate, Hutton said. “What is especially difficult this go around is it’s not just the companies being sanctioned. There is a responsibility to know who has ownership within these companies,” he said. “If a sanctioned individual has ownership of a company, or even sits on the board of directors, that means the company is sanctioned by default.”

Sanctions and export controls against Russia are not the same in every country. In the EU and the U.S., there is a winddown period of existing transactions, but not in the U.K. If your company operates in other countries, that means you need to understand and follow multiple sanctions, which may be more or less stringent. “While these sanction regimes share certain Russian targets, they vary in scope and require different compliance obligations for companies subject to their jurisdiction,” reads a Trade Matters article from Lowenstein Sandler LLP.

Third-party screening tools may be as unhelpful as credit reports right now to screen companies and individuals against sanctions because they may not be updated. The best way to stay ahead of sanctions is to have a designated global trade compliance team, but if that is not possible, “Google is your best friend,” Dons said. It may even be best to avoid doing business with Russia altogether, he added. “As a credit professional, assume that business with Russia will be near impossible for the foreseeable future.”

At Hutton’s company, they are not selling into Russia right now “unless it is 100% prepayment and they can prove that they don’t bank with any sanctioned banks and are not owned by any sanctioned individuals. You might be really tempted to get that $50k in revenue if you ship something over there; but on the flip side, your penalties might be worth millions of dollars.”

Lowenstein Sandler recommends the following steps to ensure compliance during this time:

• Businesses should institute blocks on Russia and Belarus as needed
• Update restricted parties' searches and conduct sanctions checks on a regular basis
• Assess potential implications on any payments involving accounts with Russian financial institutions
• Closely monitor changes to applicable export control laws related to Russia
• As the Russia-related sanctions continue to broaden and evolve in scope on a daily basis, organizations should consult with OFAC counsel to ensure compliance

The Russian-Ukraine war is putting more strain on various markets in the global supply chain and may bring more inflation to the economy. It also has caused many businesses to halt operations in Russia.

The war will likely cause inflationary prices to rise, especially for fuel, copper and aluminum, as cargo ships surrounding the region have been halted or delayed, said Ken Simonson, chief economist for the Associated General Contractors of America, in his weekly Data Digest newsletter. Simonson will be speaking with NACM Economist Amy Crew Cutts, Ph.D., CBE, about the challenges facing the construction industry at 3 p.m. ET on March 14 during NACM’s U.S. Construction Outlook.

Wheat prices have spiked to record highs due to concerns that “exports from the Ukraine, known as the breadbasket of Europe, could slow to a trickle or even halt altogether,” according to Foreign Policy. And amid export disruptions in Russia, the world’s top wheat producer, as international companies cut ties with the country due to massive Western sanctions.

Price increases for wheat will hit hardest the import-reliant countries, including the Middle East and North Africa, per Foreign Policy. Additionally, the trading of fertilizer has been impacted by supply bottlenecks and rising costs of natural gas, according to Bloomberg Businessweek. If disruptions continue, farmers will be hit with higher costs that will trickle down to more food inflation.

Wells Fargo expects the Russia-Ukraine crisis to have a moderately negative impact on global GDP growth. Projected growth could drop 0.25% during 2022 due to the effects on direct trade exposure and oil price channels. However, the crisis could have a greater impact on global inflation, causing the global consumer price inflation forecast to rise from 5% to 5.75% by the end of 2022, Wells Fargo said.

Business in Russia is already experiencing strong limitations and the value of Russian currency has fallen by a third, according to The New Yorker. Furthermore, the Russian Central Bank more than doubled its key interest rate from 9.5% to 20% and ordered exporting companies to sell foreign currencies and buy rubles.

“[Russian] currency has plunged, which will bring more inflation,” said Sujata Rao, deputy editor for markets and financial services at Thomas Reuters, during a Reuters Editors Briefing. “Money transfers from Russia have become increasingly difficult, especially from Russia to the West.” Currently, there is roughly $2 billion of Western assets stuck in Russia, added Dmitry Zhdannikov, EMEA energy editor at Thomas Reuters.

The U.S. Treasury Department also has prohibited U.S. businesses from engaging in transactions with Russia’s Central Bank, finance ministry or sovereign wealth fund, per The New Yorker. In addition, the EU, U.K., Japan, Switzerland and Australia have imposed sanctions against Russia causing major corporations from multiple industries to cease operations in the country, according to CNN, including:

• Automotive—General Motors, Ford, Volkswagen
• Aviation—Boeing, Airbus
• Technology—Twitter, Apple, Facebook, Netflix, Spotify, Roku, YouTube
• Energy—BP, Equinor, Exxon, Shell, TotalEnergies
• Finance—Mastercard, Visa
• Media/Entertainment—DirecTV, Disney, WarnerMedia
• Retail—H&M, Ikea
• Shipping—Maersk

“People won’t touch Russian exports,” Rao said. “This is due to more exposure risks that companies would take on in dealing with sanctioned businesses.”

Trade credit and political risk insurers are withdrawing coverage on businesses exporting to Ukraine and Russia due to the risks of sanctions, high claims or missed payments, according to multiple news sources. The move puts more pressure on Russia following the barrage of Western sanctions and shunning by a growing list of companies, Reuters said.

“Many companies won’t do business without trade-credit insurance,” The Wall Street Journal reported. “That could freeze trade with Russia, another blow to an economy that is reeling under the impact of sanctions of historic proportions, industry brokers and executives said.”

The global trade credit insurance market underwrites nearly $3 trillion USD in trade receivables and billions of dollars’ worth of construction, services and infrastructure, according to the International Credit Insurance & Surety Association.

"In this last week, trade credit insurers will have paused supporting new risk for Ukraine and Russia," said Nick Robson, global leader for credit specialties at Marsh, per news reports. This will impact food, textile and electronic exports to Ukraine and Russia, and those providing products to the Ukrainian agriculture or Russian energy sectors, he continued.

The impact of the Russia-Ukraine war will increase the risk of Ukrainian businesses defaulting on goods that were purchased from the West, raising risks for trade credit insurers, Reuters said. Also, restrictions on payments between Europe and Russia raise questions as to whether exporters will be paid.

Russia’s financial isolation intensified when the London Stock Exchange suspended trade in its last Russian securities Friday, Reuters said. In addition to trade credit insurance, political and sovereign risk insurance coverage could be moderately affected, according to recent note from Moody’s to Reinsurance News.

“Political and sovereign risk insurance covers overseas assets against expropriation, political violence including war and terrorism, currency inconvertibility, contract frustration due to political events, border closures, nonpayment by foreign governments on cross-border loans or contracts, among other coverages, depending on the specifics of the policy,” Moody’s said. Although several international insurers have direct exposure to Ukraine and Russia, it is relatively small in comparison to the size of the insurer’s global operations, Moody’s explained. Furthermore, Moody’s states that specialty lines of insurance—plans that are made specifically for businesses that require an unusual line of insurance—will likely suffer moderate losses.

 

Week in Review Editorial Team:

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