What We're Reading:

Shunned oil piling up off China as Covid-19 outbreak worsens. Tankers carrying 22 million barrels of Russian, Iranian and Venezuelan oil are piling up off China, according to Kpler, as the country battles a virus outbreak that’s sapping demand and causing logistics problems. (BM)

Germany presents new Ukraine-accelerated renewables plan. Germany's vice-chancellor and minister for economic affairs and climate action, Robert Habeck, on Wednesday presented the Berlin coalition government's so-called "Easter Package" for renewable energy. (DW)

Congress votes to suspend Russia trade status, enact oil ban. Congress voted overwhelmingly Thursday to suspend normal trade relations with Russia and ban the importation of its oil, ratcheting up the U.S. response to Russia's invasion of Ukraine amid reports of atrocities. (U.S.News)

India’s richest state reviewing bids in large coal import tender. A utility owned by India’s richest state Maharashtra is reviewing four bids received in a tender to supply two million tons of imported coal and expects to finalize details next month, it told Reuters on Thursday. (HSN)

Global supply chain finance disclosure rules divide industry, investors. Proposed accounting standards that will require far greater disclosure of supply chain finance (SCF) arrangements in companies’ financial statements have been met with alarm by some in the trade finance sector. (GTR)

Stagflation scenario would have limited effect on infrastructure ratings. Global infrastructure ratings would be largely unaffected under a severe stagflation scenario, Fitch Ratings says. (Fitch)

Greece to ramp up coal mining to help cut reliance on gas, PM says. Greece will ramp up coal mining in the next two years as a “temporary” measure to help reduce a dependence on gas that has soared since last year and after Russia’s invasion of Ukraine, Greek Prime Minister Kyriakos Mitsotakis said. (HSN)

Credit, crises and infrastructure: The differing fates of large and small businesses. This essay sheds new light on the importance of credit creation infrastructure in determining who actually receives government support during periods of distress, and who continues to benefit after the acute phase of a crisis and the government’s formal support programs come to an end. (Brookings)

Why China’s CIPS matters (and not for the reasons you think). Payment systems are the plumbing of international finance. As the U.S. and its allies block Russia from a major part of global financial plumbing, China’s Cross-Border Interbank Payment System (CIPS) has been receiving increasing attention. (Lawfare)

EU backs Egypt with $109m to tackle global food price rise. The EU announced [April 6] its intention to provide €100 million ($109 million) to support Egypt, in the face of the repercussions of the Russian war on Ukraine, which has increased global food prices. (MEMO)

Dubai’s DIFC launches platform set to create 200 ventures, 8,000+ jobs within five years. The Dubai International Financial Centre (DIFC)—which is the leading global financial center in the Middle East, Africa,and South Asia (MEASA) region—has launched the world’s first venture studio platform that is exclusively focused on “ubiquitous finance” and digital asset technologies. (AB)

UK export finance eyes domestic hydrogen boost with new guarantee. U.K. Export Finance (UKEF) has agreed to guarantee a £400mn sustainability-linked facility for a developer of hydrogen technology, as the government works to strengthen Britain’s role in global clean energy supply chains. (GTR)

Business, mobility curbs lifting boosts February labor data. EASING of movement and business restrictions kept the unemployment rate at bay in February—at 6.4%, the same rate in January 2022, and slower than the 8.8% posted in February 2021—according to the latest data from the Philippine Statistics Authority (PSA). (BM)

The war in Ukraine is chipping away at an already fragile global economy, which has not yet fully recovered from the pandemic shocks. Global GDP as a whole is expected to lose roughly half of a percentage point this year from what was projected prior to the war.

Individual countries have revised down their GDP projections to varying degrees—depending on their exposure to Russia, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “That comes from the fact that Russia and Ukraine supply vital commodities in certain parts of the world and certain sectors,” she said.

Russia and Ukraine

Both Russia and Ukraine will experience the most economic damage, and it will likely last well after the war is over, Cutts said. “The damage to infrastructure in the Ukraine could mean, even if the conflict stopped today, that because of the damage to infrastructure, these issues will linger for a much longer time,” she said. "If we think about industries within Ukraine that existed prior to the war, getting those back up to full operation will take easily a decade.”

However, economic aid from Ukrainian allies could help accelerate the recovery process, she added. “I think we will see not only humanitarian relief, but direct assistance in rebuilding. The faster the world can get Ukraine back to some resemblance of itself, the better off we are.”

Russia has been hit with some of the toughest economic sanctions ever seen, and businesses may have to reimagine global trade without the country. Many news outlets have reported that Russia’s economy could be set back at least 30 years.

Europe

Second to Russia and Ukraine themselves, the rest of Europe is highly exposed to economic fallout from the war partly due to how trade among the countries is so intertwined. “Europe gets most of its gas from Russia so it will need to decide whether it will diversify away from that or continue the relationship,” Cutts said. “For that reason, you’ll see Europe greatly impacted, and certain parts of Europe impacted higher still.”

According to a recent report from Economist Intelligence, France revised GDP growth for 2022 to 3.4% (4.1% pre-war), Germany 2.5% (3.3% pre-war) and Italy 3.4% (4.4% pre-war). “The spike in global commodities prices (not only for hydrocarbons, but also for metals and grains) will add to already high inflation and supply chain disruptions, weighing on the post-coronavirus recovery,” the report reads.

Other Emerging Markets

Emerging markets can expect to see some fallout from the war in Ukraine because their economies and reserves are not established enough to handle the rising costs of raw materials, Cutts said. “Lower income countries are more susceptible to inflation that will be brought about by rising commodity prices versus places that have higher GDP per capita to begin with.”

Africa is particularly vulnerable because it relies heavily on wheat imported from the Russia-Ukraine region. “Record wheat prices are particularly concerning for a region that imports around 85% of its supplies, one-third of which comes from Russia or Ukraine,” reads a blog from the International Monetary Fund (IMF).

China is facing more Covid lockdowns, which adds an extra layer of difficulty to navigating inflation and supply chain issues caused by the war. However, “The Chinese government’s neutral political stance toward the Russia-Ukraine war may also yield economic payoffs if China becomes more important to Russia without overly offending major Western trading partners such as the U.S. and Australia,” reads an article from Kellogg Insight.

North America

North America is slightly more protected from any economic ramifications of the conflict because direct trade with Russia and Ukraine is somewhat limited. However, North American businesses should expect to see higher inflation.

“The United States has few ties to Ukraine and Russia, diluting direct effects, but inflation was already at a four-decade high before the war boosted commodity prices. That means prices may keep rising as the Federal Reserve starts raising interest rates,” the IMF blog reads. “Saudi Arabia along with other OPEC countries could easily increase production and reap the windfall of higher energy prices.”

Incoterms help determine when risk and transportation costs transfer from the seller to the buyer. It can happen at several different points between the origin of the goods and the final destination.

Under normal conditions, it may make sense for an exporter to be more lenient about where risk transfers and how much in transportation costs they want to pay, said David Noah, president of Shipping Solutions, an export documentation and compliance software company.

Exporters’ capabilities and shipping quantities combined with the sophistication of the buyer impact terms, Noah said. “In some scenarios, exporters may want to keep the responsibility as long as possible because they might have really good shipping rates and can get the product to the destination cheaper.”

According to trade.gov, the seven Incoterms® 2020 rules for any modes of transport are:

• EXW - Ex Works (insert place of delivery)
• FCA - Free Carrier (Insert named place of delivery) 
• CPT - Carriage Paid to (insert place of destination) 
• CIP - Carriage and Insurance Paid To (insert place of destination)  
• DAP - Delivered at Place (insert named place of destination)  
• DPU - Delivered at Place Unloaded (insert of place of destination)  
• DDP - Delivered Duty Paid (Insert place of destination)  

And the four Incoterms® 2020 rules for sea and inland waterway transport are: 

• FAS - Free Alongside Ship (insert name of port of loading) 
• FOB - Free on Board (insert named port of loading) 
• CFR - Cost and Freight (insert named port of destination) 
• CIF - Cost Insurance and Freight (insert named port of destination) 

As a general rule of thumb, if an exporter thinks it can do a better job getting the goods transported to another country, it will most likely use an Incoterm where the responsibility falls to it—like one of the C terms—CFR, CIF, CPT or CIP. If the buyer has more experience and can negotiate better rates, then an F term—FCA, FOB or FAS—will most likely be used, he added.

But when war, labor shortages and supply chain issues make global trade riskier, it may be worth trying to transfer responsibility of the goods as soon as possible no matter the cost, Noah said. “In this current chaotic situation in Ukraine, [an exporter] may want to have responsibility shift more quickly in the process than normal.”

Incoterms are just one part of the puzzle and make up only a portion of an export sales contract. “They don’t say anything about the price to be paid or the method of payment,” reads a report from Shipping Solutions. “Furthermore, Incoterms don’t deal with the transfer of ownership of the goods, breach of contract or product liability; all of these issues need to be considered in the contract of sale. Also, Incoterms can’t override any mandatory laws.”

With the situation between Russia and Ukraine, for example, settling on an Incoterm does not mean you are allowed to ship to Russian customers en masse, Noah said. “Regardless of what Incoterm you use, you still need to do research on where the goods can and cannot be shipped,” he said. “Incoterms don’t protect you if you are selling where there are export restrictions.”

Incoterms also don’t help if your product gets stuck on a ship in the Black Sea, like recently happened to Esther Hale, ICCE, senior global credit analyst with Phillips 66 (Bartlesville, OK). ““The export marketing group I support, in cooperation with our export compliance group, have determined that FAS is the only term we will accept for export shipments,” Hale said. “If an act of war, natural disaster at the destination or any number of other things occur, we have only limited rights to the goods. I just manage it the best way I can.

“If we can get the consignee to agree to endorse the bills of lading over to us, we can sell the cargo to another customer,” she said. “If not, we have no recourse except to hope that the customer pays for goods it may not ever receive.”

Hale acknowledged she has a love-hate relationship with the FAS term. “FAS works wonderfully when we have a documentary letter of credit or prepaid shipment. But if we don’t, then even if there is no cargo interruption, in the event of an actual or perceived imminent default, the customer would be in possession of the original bill of lading. Because we are seldom the shipper of record, we have no authority to redirect due to either customer or sovereign risk.”

According to Shipping Solutions, most exporters within the U.S. use some form of FOB, which means once the goods are loaded onto the carrier, the buyer assumes risk and transportation costs. With FAS the risk and costs turn over to the buyer once the goods are delivered to the loading dock.

One tip to remember is that Incoterms can be altered; they are a starting point, Noah said. “They are malleable, and both parties can spell out any changes to make the terms fit better by negotiating.”

The war in Ukraine threatens the uneven recovery of developing East Asia and Pacific (EAP) countries from the Covid-19 shock, according to the World Bank. The war comes on top of the economic distress caused by the lingering Covid-19 pandemic, the financial tightening in the United States and the pandemic resurgence amidst zero-Covid policies in China.

Shocks emanating from the war in Ukraine and the sanctions on Russia are disrupting the supply of commodities, increasing financial stress and dampening global growth, according to the World Bank’s report, East Asia and Pacific Economic Update: Braving the Storms. Countries in the region that are large importers of fuel—like Mongolia and Thailand, and food—like the Pacific Islands—are seeing a decline in real incomes. Countries with large debt—like Lao People’s Democratic Republic and Mongolia—and high dependence on exports—like Malaysia and Vietnam—are susceptible to global financial and growth shocks.

While commodity producers and fiscally prudent countries may be better equipped to weather these shocks, the repercussions of these events will dampen the growth prospects of most in the region. Overall, economic growth is projected to slow to 5% in 2022—0.4 of a percentage point less than expected in October. If global conditions worsen and national policy responses are weak, growth could slow to 4%. China, which accounts for 86% of regional output, is projected to grow 5% in the baseline and 4% in the downside scenario. Output in the rest of the region is projected to expand 4.8% in the baseline and 4.2% in the downside scenario. In the downside scenario, 6 million more people in the region would remain trapped in poverty in 2022 at the US$5.50/day poverty line.

The war, financial tightening and China slowdown are likely to magnify existing post-Covid difficulties. Struggling regional firms, more than 50% of which reported payment arrears in 2021, will be hit by new supply and demand shocks. Households, many of whom fell back into poverty during the pandemic, will see real incomes shrink even further as prices soar. Indebted governments that have seen their debt as a share of GDP increase by 10 percentage points since 2019 will struggle to provide economic support. Increased inflation, at least 1 percentage point above previous expectations due to the oil price shock alone, will shrink room for monetary easing.

The report recommends four types of policy action. Instead of price controls and unselective assistance, targeted support to households and firms would limit pain from the shocks and create space for growth-enhancing investment. Stress-testing financial institutions could help identify risks that fester behind the veil of regulatory forbearance. Reform of trade-related policies in goods and, especially, in still-protected services sectors would enable countries to take advantage of shifts in the global trade landscape.  Improving skills and enhancing competition would strengthen the capacity and incentive to adopt new digital technologies.

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso and Bryan Mason, Editorial Associates