What We're Reading:

Stoltenberg says chemical attack would change war. NATO Secretary-General Jens Stoltenberg says any chemical attack by Russia on Ukraine would change the course of the war but he is not saying whether NATO would take military action. (BM)

Is transatlantic trade back on the table? As the Russian invasion forces the EU to cut many economic ties with Russia, the US under president Biden presents itself as the obvious partner for the future. (Euractiv)

Germany unveils measures to tackle high energy prices. The German coalition government has agreed to a set of temporary measures to help people in Germany deal with the high energy costs that have been exacerbated by the Russian invasion of Ukraine. (DW)

US coal sector takes steps toward greener future. U.S. coal miners are experimenting with greener business projects as long-term demand for the carbon-intensive fuel collapses around them. (HSN)

Fresh compliance work for banks in EU human rights due diligence draft law. A proposed EU regulation on corporate due diligence, aimed at rooting out human rights and environmental abuses in supply chains, will make compliance efforts by the bloc’s financial institutions trickier, lawyers say. (GTR)

Geopolitical impact of ‘the hydrogen factor.’ Energy security has been at the center of the geopolitical conversation in recent weeks, as the invasion of Ukraine has shed a light once more on Europe’s dependency on Russian oil and gas. (GRI)

Russia sanctions create divestment challenges for EM ETFs. The removal of Russian bonds from major indices has led to divestment and liquidity challenges for emerging market (EM) fixed income exchange traded funds (ETFs), says Fitch Ratings. (Fitch)

Institute of Export & International Trade rolls out £1mn SME education boost. The Institute of Export & International Trade (IoE&IT) has opened a £1mn voucher scheme to help British businesses access help to export. (GTR)

PKN Orlen buys Norwegian crude to replace Russian Urals. Poland’s PKN Orlen will ship at least three cargoes of Norway’s Johan Sverdrup crude in March to the Lithuanian port of Butinge to supply its Mazeikiu refinery, Refinitiv Eikon data showed, as the refiner replaces Russian Urals oil. (HSN)

The NATO treaty does not give Congress a bye on World War III. On March 13, Russian missiles hit a military base in Ukraine, about 15 miles from the Polish border. Poland is a NATO member. (Lawfare)

Putin’s gas-for-rubles plan set to worsen EU energy crunch. With his demand for payments in the Russian currency, Vladimir Putin has dealt a surprise blow to Western countries still using large volumes of Russian gas for their energy needs. (DW)

Turkey warns Libya not to create new clashes as peace sustained. Turkey urged Libya to refrain from any steps that would recreate conflict and called on authorities to follow democratic processes, amid a crisis over control of executive power in the country, Turkish media reports. (Middle East Monitor)

Canada and the United Kingdom beginning negotiations on free-trade agreement. Canada and the United Kingdom are beginning negotiations on a free-trade agreement as the British government seeks preferential access to foreign markets following its exit from the European Union. (GlobeandMail)

In just one month, the Russia-Ukraine conflict has displaced millions of people, created volatile oil prices, disrupted supply chains further and shocked the global economy overall. But these issues won’t just disappear if the crisis miraculously resolves; the economic aftershocks will haunt businesses for years to come, said Jay Tenney, managing director at Trade Risk Group (Irving, TX), during this month’s FCIB Global Expert Briefing.

“Russia’s invasion of Ukraine changed everything as far as global credit and global trade,” Tenney said. “We are in uncharted territory because we haven’t seen anything like this since World War II. But it happened, and we can’t rewind, so now what do we do?”

According to a recent poll by Siena College (New York), 54% of respondents are worried about the long-term economic impacts the war could have on the U.S., including food prices (87%), cost of gas (80%) and the American dollar (71%).

But this conflict changes the risk profile for countries worldwide, Tenney said. “It doesn’t matter if you’re selling into Japan, England or wherever. This war increased risk across the board and as a result, underwriters are being more cautious.”

Developing countries will be most affected because they don’t have large foreign reserves to pay for higher fuel and food prices for very long. “You have to look at what a country’s exposure is to food imports,” Tenney added. “If it is not self-sufficient and can no longer import wheat from Russia or Ukraine, that could be a problem. Maybe not right now but definitely in the next year.”

Immediately following Russia’s initial invasion, oil prices skyrocketed. Prices have since come down, but “what you’re seeing now is a reflection of oil that was already flowing from Russia beforehand,” Tenney warns. “But the amount of oil coming out of the ground in Russia has dopped already because there is not the U.S. technical expertise to help extract the oil.”

And as the Russia oil and gas industry starts to shrivel over time, “we will see more shortages and price increases no matter where you are around the world,” he added. “All this inflation is causing people, and by extension businesses, to divert their money to other areas. So, you need to be really careful and look at what your customer is selling and how critical it is in the demand chain.”

China continues to battle an outbreak of a new Omicron variant across multiple provinces, according to news reports. “As some parts of China reopen, others are imposing new Covid-related restrictions, reflecting the challenge government officials face in controlling the worst outbreak since early 2020,” CNBC reported.

On Monday, China’s tech hub city of Shenzhen reopened after a seven-day lockdown, but cargo flows could take weeks to recover, according to The Loadstar. “Some suppliers had moved to other ports and paid the price of additional haulage, but most had decided to wait-out the lockdown, not least because it was increasingly difficult to predict where the next Covid flare-up would occur.”

With China’s zero-Covid policy expected to initiate more lockdowns in Chinese cities in the coming weeks, trucking and container depots will likely experience more delays to orders being queued for shipment, per The Loadstar.

China’s “’zero-Covid’ strategy relies on lockdowns and mass testing, with close contacts often being quarantined at home or in a central government facility,” ABC News reported. “The strategy focuses on eradicating community transmission of the virus as quickly as possible, sometimes by locking down entire cities.”

“When disruptions take place in China, it is significant because about a third of the world's entire manufacturing capacity is based in the country,” per the BBC. The closure of Shenzhen followed by other major cities and provinces such as Shanghai, Jilin and Guangzhou send “shockwaves through the world’s businesses,” the BBC said.

The number of ships sitting at some Chinese ports have already increased, according to the BBC. It has been reported that the Port of Yantian, a key port to Europe and the U.S., has seen a 28.5% increase in vessels waiting for shipment based on information from project44, a logistics solution provider.

“The United States and Europe will face manufacturing issues as many raw goods and materials cannot be shipped out of Yantian, affecting, in particular, the agricultural market—the largest exporting market from China to the U.S. and Europe,” according to Global Edge. 

“If China continues with its zero or close-to-zero Covid strategy, it may be China's economy and the global consumers it supplies, who will feel the real pain,” the BBC said. “There are signs that it is enacting longer term costs, making some companies re-think their positions in the Chinese market.”

Confident that the threat posed by COVID-19 has been contained, UAE officials have focused their attention squarely on advancing the long-term project of positioning the federation as a global hub for business and finance. Under the so-called Fifty Economic Plan (FEP), the emirates are looking to attract $150 billion in [foreign direct investments] through the end of the current decade, and in September unveiled the first batch of 50 new initiatives designed to create a more attractive climate for foreign investment.

In mid-February, the UAE and India concluded a comprehensive economic partnership agreement CEPA that is expected to boost bilateral trade from $43 billion last year to $100 billion by 2026. The government is counting on the CEPA with India and a trade agreement with Indonesia that could be signed as soon as next month to bolster the UAE’s ability to compete with Saudi Arabia for export-oriented foreign investment. The deals will also strengthen the UAE’s role as an entrepot for trade with countries in sub-Saharan Africa and western Asia.

Unfortunately, the early weeks of 2022 have also been noteworthy for the emergence of a new security threat that has potentially negative implications for the government’s economic development plans. Beyond the immediate danger posed by the attacks, the Houthis’ attempt to expand the conflict zone complicates the UAE’s effort to establish a cooperative relationship with Iran, which is viewed by Abu Dhabi as essential to creating the secure and stable conditions that are among the country’s key selling points to investors.

Market behavior suggests that investors are at least for the time being content that the threat is contained, and with oil prices soaring amid the outbreak of war between Russia and Ukraine, there is little reason to expect that security risks will have an adverse impact on overall economic performance in the near term. That said, the uncertainty created by the first major incident of armed conflict in Europe in nearly eight decades could contribute to general risk aversion that has a negative impact on investment in the UAE.

There is also some debate about the impact that a new corporate income tax might have on the UAE’s attractiveness to investors. Defenders of the tax reform have noted that the 9% standard rate is still very competitive compared to the tax burden in Saudi Arabia. However, skeptics argue that a new Saudi requirement that foreign companies must establish a physical presence in the kingdom to qualify for state contracts has significantly altered the competitive balance in a way that will amplify the disadvantage created by otherwise minor deterrents to investment in the UAE. Government officials have assured that the impact of the tax will be mitigated for smaller startups by the elimination of many remaining business fees.

The analysis above is taken from the February 2022 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.

 

Week in Review Editorial Team:

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

Annacaroline Caruso and Bryan Mason, Editorial Associates