What We're Reading:

Banks ‘self-sanction’ amid Russia risk contagion: Banks and trading companies are increasingly engaging in “self-sanctioning” against Russian entities in the shipping and commodities sector to avoid trouble with regulators and public displeasure, industry experts say. (GTR)

Biden signs order on cryptocurrency as its use explodes: President Joe Biden on Wednesday signed an executive order on government oversight of cryptocurrency that urges the Federal Reserve to explore whether the central bank should jump in and create its own digital currency. (AP News)

UK faces hefty EU fine over Chinese import fraud: The U.K. faces a hefty fine for underreporting customs duties applied to Chinese footwear imports when it was still in the EU, according to a judgement on Tuesday by the European Court of Justice. (Euractiv)

Traders face ‘daunting task’ as West restricts Russian oil and gas imports: The U.S., European Union and U.K. are seeking to halt imports of Russian oil and gas, with financiers and traders urged to seek out new sourcing markets while upping support for renewables. (GTR)

China’s coal-price band to benefit power producers more than miners: China’s introduction of a new “reasonable” price range of CNY570-770 per tonne (t) for 5,500kcal/kg coal at Qinhuangdao (QHD) Port will benefit power generation companies (gencos) more than coal producers, Fitch Ratings says in a new report. (Fitch)

Indonesia tightens palm oil export curbs in new hit to global supplies: Indonesia will further restrict exports of palm oil from Thursday to increase domestic supplies, as authorities ramp up efforts to contain a surge in cooking oil prices, Trade Minister Muhammad Lutfi said. (HSN)

Russia’s war in Ukraine could be bad news for Moldova’s energy ambitions: As Russia wages war in Ukraine, ties between Moscow and nearby Moldova could also deteriorate, with the energy sector becoming a dangerous battlefield of its own. (DW)

Time to lift ‘unjust’ sanctions on Turkiye’s defence industry, Erdogan tells Biden: Turkish President, Tayyip Erdogan, told US President, Joe Biden, in a phone call on Thursday that it was past time to lift all “unjust” sanctions on Turkey’s defence industry, Reuters reports. (MEMO)

Middle East faces severe wheat crisis over war in Ukraine: Middle Eastern and North African countries rely heavily on wheat imports from Russia and Ukraine. The current war could lead to a severe food crisis in a region already under pressure. (HSN)

UAE in ‘favour’ of increasing oil production but stands by OPEC+ agreement: The UAE’s Ambassador to the US, Yousef Al Otaiba, on Wednesday said that his country will be calling on OPEC to increase production of oil. (Arabian Business)

U.S. push to export LNG amid Ukraine conflict slowed by climate concerns – sources: Early White House efforts to boost U.S. liquefied natural gas exports and cut Europe’s reliance on gas from Russia after its invasion of Ukraine are proceeding slowly because of concerns about climate change impacts, government and industry sources said. (U.S.News)

Will war transform global trade: As this article is being completed, the Heads of Government of the Caribbean Community (Caricom) will be entering the second day of its 33rd inter-sessional meeting in San Pedro, Belize, chaired by the Prime Minister John Briceño. (Trinidad Express)

Commission reaffirms commitment to EU’s green goals in first food security meeting: The European Commission stood firm in its resolve to forge ahead with the EU’s sustainable food goals in the first expert meeting on food security this week, despite growing fears around food shortages caused by the war in Ukraine. (Euractiv)

Russia is proposing an official order that would impose temporary restrictions on foreign companies exiting from Russian assets, according to Russia Briefing.  “The Russian state, according to [First Deputy Prime Minister Andrei Belousov], considers the mass exodus of foreign companies from the Russian market as a deliberate or intentional bankruptcy, entailing liability in accordance with Russian law.”

The proposal outlines three possible options for addressing the situation:

• Deliberate bankruptcy leading to assets Auction to repay creditors—law enforcement agencies would take over the management of these companies, which would be subjected to bankruptcy, and their assets sold at auction to other companies or the state.
• Operational administration—foreign companies could delegate management authority to entities in Russia. “In this case, foreign companies remain the nominal owners of the enterprises, but will share the profits with Russian companies, who will be placed in charge of the business administration,” the article reads.
• Normal foreign investor operations—foreign companies that continue normal operational activities and relations with the Russian government will remain intact and maintain the “same mutually beneficial terms continued.”

As of Thursday, President Vladimir Putin had endorsed the plan “to nationalize foreign-owned businesses that flee the country,” according to The Washington Post. As of press time, the Russian government was set to discuss the proposal on Friday. The White House responded with promises of “more economic pain for Russia” if the Russian government follows through and seizes these assets, the article reads.

Putin issued on March 5 another decree entitled, On Temporary Order of Discharge of Obligations Towards Certain Foreign Creditors, which allows Russian debtors (government or citizens) to repay hard currency debt owed to foreign creditors deemed creditors from unfriendly states with rubles at the official exchange rate of the Central Bank of Russia (which is likely to be lower than the market rate of exchange), according to a Morgan Lewis Lawflash. As of March 8, the list included the United States, Canada, the European Union, the United Kingdom, Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, North Macedonia, Japan, South Korea, Australia, Micronesia, New Zealand, Singapore and Taiwan.

“The debt subject to the restrictive measures includes loans, credits and financial instruments,” according to the Lawflash article. “Technically, prepayments under export contracts are not mentioned in the decree, although it remains unclear whether this decree will apply to the debt arising from the commercial prepayment transactions.”

The Russia-Ukraine conflict has triggered turmoil in the financial markets, and drastically increased uncertainty about the recovery of the global economy. The world has shifted and so have the risks.

• Higher commodity prices intensify the threat of long-lasting high inflation, which increases the risks of stagflation and social unrest.
• Certain sectors such as automotive, transport or chemicals are more likely to suffer.
• Coface forecasts a deep recession of 7.5% for the Russian economy in 2022 and downgraded Russia’s risk assessment to D (very high).
• European economies are most at risk: At the time of writing (March 7), Coface estimates at least 1.5 percentage point of additional inflation in 2022, while GDP growth could be lowered by 1 percentage point. Together with a complete cut of Russian natural gas supply, this could cost at least 4 points of GDP, thereby leading EU GDP growth close to zero—more probably in negative territory—in 2022.

The Conflict Threatens to Squeeze Energy and Commodities Markets Further

Russia is the world’s 3rd oil producer, the 2nd natural gas producer and among the top 5 producers of steel, nickel and aluminum. It is also the largest wheat exporter in the world (almost 20% of global trade). On its side, Ukraine is a key producer of corn (6th largest), wheat (7th) and sunflowers (1st), and is among the top 10 producers for sugar beet, barley, soya and rapeseed.

On the day the invasion began, financial markets around the world fell sharply, and the prices of oil, natural gas, metals and food commodities surged. Following the latest developments, Brent oil prices breached USD 100 per barrel for the first time since 2014 (125$/b as of March 7), while Europe’s TTF gas prices surged at a record EUR 192 on 4 March.

While high commodity prices were one of the risks already identified as potentially disruptive to the recovery, the escalation of the conflict increases the likelihood that commodity prices will remain higher for much longer. In turn, it intensifies the threat of long-lasting high inflation, thereby increasing the risks of stagflation and social unrest in both advanced and emerging countries.

Automotive, Transport, Chemicals Are the Most Vulnerable Sectors

The crisis is obviously strongly impacting an already strained automotive sector due to various shortages and high commodity & raw material prices: metals, semiconductors, cobalt, lithium, magnesium…Ukrainian automotive factories supply major carmakers in Western Europe: some announced the stoppage of factories in Europe while other plants around the world are already planning outages due to chip shortages.

Airlines and maritime freight companies also will suffer from higher fuel prices, airlines being the most at risk. First, fuel is estimated to account for about a third of their total costs. Second, European countries, the U.S. and Canada have forbidden Russian airlines access to their territories; and in turn, Russia has banned European and Canadian aircrafts from its airspace. This means higher costs because airlines will have to take longer routes. Eventually, airlines have little room for rising costs, as they continue to face lower revenues due to the impact of the pandemic.

Rail freight also will be impacted: European companies are forbidden to do business with Russian railways, which will likely disrupt freight activity between Asia and Europe, transiting though Russia.

We also expect feedstock for petrochemicals to be more expensive, and the soaring prices of natural gas to impact the fertilizer markets, hence the whole agri-food industry.

Deep Recession Ahead for the Russian Economy

The Russian economy will be in great difficulty in 2022, falling into deep recession. Coface’s updated GDP forecast for 2022 stands at -7.5% after the recovery experienced last year. This has led us to downgrade the country's risk assessment from B (fairly high) to D (very high).

Sanctions notably target major Russian banks, the Russian central bank's, the Russian sovereign debt, selected Russian public officials and oligarchs, and the export control of high-tech components to Russia. These measures put considerable downward pressure on the Russian ruble, which has already plummeted, and will drive a surge in consumer price inflation.

Russia has built up relatively strong financials: a low level of public external debt, a recurrent current account surplus, as well as substantial foreign reserves (app. USD 640 bn). However, the freeze imposed by Western depositary countries on the latter prevents the Russian central bank from deploying them and reduces the effectiveness of the Russian response.

The Russian economy could benefit from higher prices for commodities, especially for its energy exports. However, EU countries announced their intention to limit their imports from Russia. In the industrial sector, restricted access to Western-produced semiconductors, computers, telecommunications, automation and information security equipment will be harmful, given the importance of these inputs in the Russian mining and manufacturing sectors.

European Economies Are the Most at Risk

Because of its dependence on Russian oil and natural gas, Europe appears to be the region most exposed to the consequences of this conflict. Replacing all Russian natural gas supply to Europe is impossible in the short to medium run, and current price levels will have a significant effect on inflation. At the time of writing, with the barrel of Brent trading above 125$ and natural gas futures suggesting prices durably above 150€/Mwh, Coface estimates at least 1.5 percentage point of additional inflation in 2022, which would erode household consumption and, together with the expected fall in business investment and exports, lower GDP growth by approximately one percentage point.

While Germany, Italy or some countries in the Central and Eastern European region are more dependent on Russian natural gas, the trade interdependence of Eurozone countries suggests a general slowdown.

On top of that, we estimate that a complete cut of Russian natural gas flows to Europe would raise the cost to 4 percentage points in 2022, which would be bring annual GDP growth close to zero, more probably in negative territory—depending on demand destruction management.

No Region Will Be Spared by Imported Inflation and Global Trade Disruptions

In the rest of the world, the economic consequences will be felt mainly through the rise in commodity prices, which will fuel already existing inflationary pressures. As always when commodity prices soar, net importers of energy and food products will be particularly affected, with the spectra of major supply disruptions in the event of an even greater escalation of the conflict. The drop in demand from Europe also will hamper global trade.

In Asia-Pacific, the impact will be felt almost immediately through higher import prices, particularly in energy prices, with many economies in the region being net energy importers, led by China, Japan, India, South Korea, Taiwan and Thailand.

As North American trade and financial links with Russia and Ukraine are fairly limited, the impact of the conflict will mainly be felt through the price channel and through the slowdown of the European growth. Despite the prospect of slower economic growth and higher inflation, the recent geopolitical events are not expected to derail monetary policy in North America at this stage.

As a credit professional, two of your main responsibilities is to protect and improve your company’s cash flow. But what if you could reduce risk and accelerate cash flow simultaneously? Discounting letters of credit could be the key to doing just that.

When you discount a letter of credit, your bank will take a fee based on the risk level of your buyer’s bank and then release the balance of the funds to you immediately—even if the buyer has not paid yet. Think of how Venmo charges a small fee to transfer funds immediately into your bank account instead of you having to wait three business days.

“As soon as the shipping documents have been presented to the buyer’s bank, and accepted by it, your bank can release the payment to you,” said John Loy, managing partner at Invre Capital LLC, a specialty advisory firm in cross border and structured finance (Chicago, IL). “Then, your bank will wait to collect the money from the importer’s bank.”

Discounting letters of credit has two main benefits—to improve working capital and lower risk. Loy recommends doing this as often as possible to avoid payment delays and to shift the risk to your bank. “There has always been a reluctance to ask banks to discount a letter of credit because historically it has been perceived as an expensive paper-intensive process,” he said. “But over the last 10 years, it has become easier and more digital.” Even excluding the credit mitigation advantages, the pricing often makes it a good source for freeing up working capital.

The amount your bank will charge to discount a letter of credit depends on the creditworthiness of your buyer’s bank and the financial strength of the country in which it is located. If the credit risk is fairly low, then you can get the cash quickly and at a good price. Typically, the rate can range from less than 1% to 15% of the total invoice value, depending on the risks and term, Loy said. So, check with your bank for your specific transaction.

If the credit risk is high, the bank will charge more for discounting letters of credit, or not offer it. However, paying the fee may be worth it because discounting eliminates more risk than just the risk of the import bank paying alone, he added. “If you get an LC issued out of a foreign country, there is still risk involved because that bank may not be able to get access to currency (usually USD) to pay the LC, or its government may limit foreign payments in general or add other restrictions. If you add in this volatility of credit and political risk, discounting gets rid of all of the payment risks involved with trade transactions.”

But there is a point where credit and political risks becomes too high and banks may not offer discounting, Loy explained. “There are certain countries where banks will not discount letters of credit because they do not have credit capacity for the bank in that country or they do not trust the government that controls the bank. For example, discounting a letter of credit out of South Korea, which has generally stronger banks and a stable government, [may be easier and much less expensive than] getting a bank to discount a letter of credit issued out of Guatemala, which is viewed as higher risk.”

The ongoing crisis in Ukraine also could impact the price and chance of discounting letters of credit in any of the surrounding Baltic states, said Ron Shepherd, CICP, director of business development and membership for FCIB. “Now there is a big question if banks will even confirm those LCs, so there is a wrinkle in the whole LC process because it is unclear exactly where the risks lie.” A confirmed LC is a bank credit letter where the payment guarantee of the seller or exporter is backed up by a second bank or a confirming bank. In simple words, in case the first bank defaults to pay, then the payment will be covered by the second bank.

Discounting letters of credit is just one way of eliminating risk. To learn about other risk mitigating tools, be sure to attend the session, Identifying and Mitigating Risk for More Accurate Cash Receipts Forecasting, at NACM’s 126^th Credit Congress from June 5-8 in Louisville, KY.

 

Week in Review Editorial Team:

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