What We're Reading:

Russia makes some debt payments in dollars, report says, as it seeks to avoid historic debt default. Russia successfully made at least some of the payments on its sovereign bonds in dollars, according to reports from Reuters, appearing to avoid a historic debt default. (CNBC)

Oil sheds most of its Russian war premium. Oil prices have entered a bear market, having shed most of the gains made after Russia’s invasion of Ukraine, as concern about a supply crunch appeared to ebb and international diplomacy efforts made a release of Iranian oil more likely. (Business Insider)

Blinken sets a standard for lifting sanctions: an ‘irreversible’ Russian withdrawal. Secretary of State Antony Blinken says that merely stopping the invasion of Ukraine may not be enough for Russia to gain relief from Western economic sanctions. The U.S. also wants an assurance that there will never be another such invasion. (NPR)

China’s Covid-19 outbreak explained as 37 million people now in lockdown. Tens of millions of people are living under lockdown in China, as the country battles its worst Covid-19 outbreak since the early days of the pandemic. (CNN)

Japanese companies close factories after earthquake in north-east. Companies have been forced to close factories in north-eastern Japan after a powerful earthquake struck off the coast, killing two people and reviving memories of the devastating 2011 tsunami that left 20,000 dead. (Financial Times)

ESG metrics in credit agreements. The U.S. market may soon receive guidance related to the environmental component of ESG that many participants have been seeking: The Biden administration has signaled a “whole-of-government effort to tackle the climate crisis,”3 and all eyes are on the SEC for anticipated rulemaking relating to climate-related disclosures. (National Law Review)

Fed begins inflation fight with key rate hike, more to come. The Federal Reserve launched a high-risk effort Wednesday to tame the worst inflation since the early 1980s, raising its benchmark short-term interest rate and signaling up to six additional rate hikes this year. (AP News)

Western companies’ pullback from Russia marks end of an era. Businesses flocked to the former Soviet Union in its lurch to capitalism, but the relationship was never easy. The Ukraine invasion has brought it all to a crashing halt. (Wall Street Journal)

UK’s Johnson fails to secure public oil rise pledges after talks with Saudi, UAE. British Prime Minister Boris Johnson held talks about energy security on Wednesday with the de facto leaders of Gulf oil exporters Saudi Arabia and the United Arab Emirates but secured no public pledge to ramp up production. (Reuters)

Macron, barely campaigning, leads French presidential race. As he runs for re-election next month, French President Emmanuel Macron released unusual pictures of himself working nights and weekends at the Elysée palace, where he is spending most of his time focusing on the war in Ukraine—while avoiding traditional campaign activities. (AP News)

Majority of SMBs expect to return to pre-pandemic profitability. Small and mid-sized businesses (SMBs)—which represent two-thirds of global jobs remain resilient and confident in the face of current market challenges, according to a new survey. (MH&L)

Japan’s import surge points to fallout for households. The ongoing surge in Japanese imports is clearly bad news for households in the world’s third largest economy, but across the world similar repercussions are likely to be felt by consumers as the war in Ukraine continues. (Bloomberg)

From offshore to shipping, it is people that drive successful digital transformations. The shipping sector is under greater pressure from its customers and investors to demonstrate sustainability—and these people represent one aspect of the human element story that is shaping decarbonization and digitalization. (HSN)

The global market is rarely stable, but lately it has been more volatile than usual. That is partly due to the uncertainty surrounding the Russia-Ukraine conflict and how it will play out. The U.S. Securities and Exchange Commission warned on Monday that market participants should “remain vigilant to market and counterparty risk that may surface during periods of heightened volatility and global uncertainties.”

The volatility of foreign exchange rates, commodity prices and sanctions are major issues, said Ron Shepherd, CICP, director of business development and membership for FCIB. “That in turn increases the risk for EU banks that are very involved in the Baltic states and Eastern Europe.”

Wild swings in the prices of raw materials, like oil for example, generated “more margin calls at clearing houses and trading firms, forcing counterparties out of the money to stump up liquid collateral they must pledge to secure their trades,” reads a Reuters article.

Now, banks are slamming the brakes on loans as the U.S. Fed starts to hike rates and the war in Ukraine boosts inflation worries, according to Bloomberg. The Fed likely won’t be as aggressive in hiking rates because of the war because that could cause a recession. But not raising interest rates as quickly also means bank profits won’t grow as fast. “It’s a razorblade,” Shepherd said. “The Fed is walking on a razorblade.”

Banks could struggle to offload the billions of dollars of riskier transactions they have left to sell. “It’s hard to price risk when the market is moving up or down half a point every day,” Lauren Basmadjian, head of U.S. loans and structured credit at Carlyle Group Inc., told Bloomberg.

Initially, after the invasion of Ukraine, JP Morgan and Chase bank stocks dropped about 10% on average, UBS dropped 16.5% and Deutsche Bank stocks dropped 27%, Shepherd explained. “There is a lot of nervousness regarding the lack of transparency about who is really exposed to the heightened risk. There is concern of contagion in the banking community.”

European banks were not as aggressive in boosting capital after 2008, and the smaller European banks, specifically in Southern Europe, still have nonperforming loans on the books, he added. “With those smaller banks, it is more difficult to know where exactly the risks are.”

Creditors have a few tools available to help mitigate counterparty risk. Some export credit agencies “offer short-term trade credit insurance policies generally offering protections against country risk and commercial risk,” said an Export-Import Bank of the United States spokesperson.

Diversification is another way to reduce counterparty risk. “By trading with multiple counterparties, there won’t be a single counterparty with significant exposure, which will facilitate a single counterparty,” reads a Wall Street Mojo article.

Fallout from Russia’s attack on Ukraine spread beyond the borders of Ukraine as merchant ships find themselves caught in the crossfire—the effects of which are being felt worldwide.

The Black Sea is a key route for oil and food exports, and the closure of Ukrainian sea ports have struck down wheat exports sharply, among other goods. Ukraine’s Port of Odesa accounts for 75% of Ukraine’s sea trade, according to an Inside Logistics article.

“Russia's invasion of Ukraine isn't only jeopardizing the lives of Ukraine's citizens,” NPR reported. “The war is also on track to cause a surge in severe malnutrition and even starvation around the world.”

“There are quite a few countries that are heavily dependent on Ukrainian wheat, such as Egypt, Turkey, but also areas of global crisis such as Yemen and Lebanon, where the main grain silos were destroyed in the 2020 explosion,” according to Brink News. “In a normal year, the [World Food Programme] gets 50% of its wheat from Ukraine, and it’s now estimating that their costs will rise by around $700 million, due to the crisis in Ukraine.”

The port is also the central hub for rye, corn and barley exports. Combined Russia and Ukraine account for nearly 70% of wheat imports to Turkey and Egypt, and Ukraine is one of China’s top corn importers, Inside Logistics reported.

In addition, the rise oil prices as a result of sanctions and disrupted shipments will have a wide reach. For example, “About 20% of the coal at the [Port of Rotterdam], 20% of the oil products, 25% of the liquefied natural gas and 30% of the crude oil come from Russia,” Ship & Bunker reported. Due to the quantity, getting the supply elsewhere could lead to bottlenecks and higher prices. Overall, about 15% of the port’s cargo activity was related to Russia—imports and exports.

“As of mid-March, around 100 merchant ships are said to be in Ukrainian waters, with 2,000 seafarers on board,” reported Automotive Logistics. “All Ukrainian ports are closed, and carriers have been advised to avoid the region. The number of vessels trying to get out of the area by the Kerch Strait is building up by the day. Meanwhile cargo is stuck at the now closed ports of Mariupol and Odessa.”

Russia naval forces have blocked access to the Sea of Azoz in the Kerch Strait “and a significant number of merchant ships remain anchored either in the Kerch Strait or at its approaches,” according to a European Journal of Internal Law blog. The blockade combined with the dangers of being caught up in the conflict have caused many shipping companies to reroute vessels.

“The International Chamber of Shipping warned on [March 10] that the supply chain disruptions are set to be worsened by a shortfall in shipping crew due to the war,” CNBC reported. “Ukrainian and Russian seafarers account for 14.5% of the global shipping workforce.”

Russia may have averted what would have been its first default on foreign-currency debt since the Bolshevik revolution. (The country defaulted on domestic debt in 1998.) According to news reports, it paid interest payments of $117 million to investors.

The payments were made from Russia’s frozen assets, sanctioned after its attack on Ukraine. A U.S. Treasury spokesman acknowledged the payments would be allowed to go through, CNBC reported. The funds were received and processed by correspondent bank, J.P. Morgan, and were passed on to Citibank—a paying agent to Russia’s foreign bondholders, according to Reuters.

More payments, however, are on the horizon. “A much larger $2 billion payment scheduled for early April could create even bigger headaches for Moscow,” CNBC said. Sanctions against Russia have blocked the majority of its gold and foreign exchange reserves in an attempt to cut off Moscow from the global financial system.

FCIB recently surveyed business-to-business credit professionals doing business in Russia. The March International Credit & Risk Management Survey shows about 60% of the creditors were on average experiencing payment delays of 20 to 40 days beyond terms.

“As we can see from the most recent events in Russia and Ukraine, the region is volatile and trading terms can change rapidly,” said Louise Hodgkiss, ICCE, director of global credit and collections for Hitek Power Limited (Dudley, England). “The most recent changes have been related to sanctions. If we had shipped and billed in that region on open account terms, we would not be able to receive any funds.”

Common issues around payment delays were related to:

• Billing disputes
• Unwillingness to pay
• Cash flow issues
• Customer payment policies

Payments in currency other than Russian rubles require approval from the bank, which can only be granted when all required documentation is provided and is matching the order.

The March 2022 International Credit & Collections Survey also covers France, Germany and the United Kingdom. FCIB members can access the full results of the survey as well as the survey archives via the FCIB Knowledge Center. Nonmembers who participated in the survey will receive the results via email. Participation in the survey guarantees you will receive the results whether or not you are a member and furthers the collective knowledge of global credit professionals by sharing real-time credit and collection experiences. The monthly survey is open to all credit and risk management professionals.

The next survey will open March 21 and will cover Australia, Canada, Mexico and the United States. 

 

Week in Review Editorial Team:

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