What We're Reading:

Russia in ‘failure to pay’ credit event, investor committee says. A panel of investors on Wednesday determined Russia had triggered a credit event after it failed to pay nearly $1.9 million in interest on a sovereign bond, taking the nation a step closer to its first major external debt default in over a century. (Reuters)

UN says Iran has enough uranium to produce nuclear weapon. The United Nations atomic agency said Monday that Iran hasn’t offered credible answers to its probe into nuclear material found in the country and reported that Iran’s stockpile of highly enriched uranium has grown to roughly enough material for a nuclear bomb. (WSJ)

Israel, UAE boost ties with free trade pact. Israel signed a free trade agreement with the United Arab Emirates on Tuesday, its first with an Arab state and one which eliminates most tariffs and aims to lift their annual bilateral trade to more than $10 billion. (Reuters)

Turkey will now be known as Türkiye (at least at the UN). Turkey has a new name—at least at the United Nations. The organization has agreed to recognize it as Türkiye after a request from the country's government, which has been working to rebrand the nation's name since last winter. (NPR)

Brazilian state hit by floods fears more rain. Residents of Brazil's Pernambuco state fear that heavy rains forecast for Thursday could cause fresh landslides. The number of people killed after torrential downpours started last week has risen to at least 120, according to official figures. (BBC)

Ukraine renews diplomatic push for speedy EU membership. Ukrainian officials are embarking on a concerted diplomatic push to start the country’s journey towards EU membership, as skepticism remains in a number of western European capitals about a fast-track approach. (The Guardian)

EU formally imposes 6th sanctions package targeting Russian oil. Hungary was the biggest stumbling block on the way to agreeing the sixth package of measures, which phase out most oil imports from Russia. The latest sanctions targeting Moscow have now officially taken effect. (DW)

Russia may be in Ukraine to stay after 100 days of war. When Vladimir Putin sent troops into Ukraine in late February, the Russian president vowed his forces would not occupy the neighboring country. But as the invasion reached its 100th day Friday, Russia seemed increasingly unlikely to relinquish the territory it has taken in the war. (AP)

Is the Indian economy out of the woods? India’s fourth-quarter GDP data released Monday showed that economic growth has not come roaring back after the pandemic. It slowed down for the third consecutive quarter, growing 4.1% in the January-March period. (Business Standard)

FBX Index: Balancing on the tip of a sword. As we are nearing the traditional peak season in container shipping, the key question is how supply, demand, freight rates and congestion will play out this year. (HSN)

But CAN the United States defend Taiwan? President Joe Biden has yet again stated that if China attacked Taiwan to reunify what Beijing sees as a renegade province with the mainland, the United States would come to Taiwan’s military defense. (Brookings Institute)

Ukraine war: Russian Foreign Minister Lavrov denies Putin illness. Russian Foreign Minister Sergei Lavrov has denied speculation that President Vladimir Putin is ill. In an interview with French TV, Mr. Lavrov said the Russian leader appears in public every day, and no sane person would see any signs of an ailment. (BBC)

Roughly one month after President Emmanuel Macron’s reelection—the first French president to have been reelected in 20 years—French diplomats are going on strike, also for the first time in 20 years, according to several news reports.

The diplomats are against a proposed reform and budget cuts by Macron that they say could damage France’s global standing and damage their careers. If the reform were to pass, it would merge roughly 800 career diplomats with a larger body of civil servants, starting in July, and scrap special status for foreign ministry officials, according to ABC News.

“We risk the disappearance of our professional diplomacy,” a group of 500 diplomats wrote in a commentary published last week in Le Monde newspaper. “Today, (diplomatic) agents ... are convinced it is the very existence of the ministry that is now being put into question.”

However, Macron has taken the position that the reform is meant to “modernize and diversify France's diplomatic corps, which was created in the 16th Century, and to bring down the walls of what some in the government see as an elite institution turned in on itself,” the ABC News article reads.

The political turmoil comes at a bad time for Macron because France holds the EU presidency until the end of June when he hopes to continue playing a leading role in the bloc, per Reuters. France has the third-largest diplomatic network in the world, according to the news agency, and “half a dozen diplomats Reuters spoke to said the reform was merely the culmination of years of malaise that have seen staffing fall some 20% since 2007 and repeated budget cuts just as the demands on the service have increased.”

“Without this diplomatic corps, there would have been no opposition to the U.S. intervention in Iraq in 2003, and no Paris climate accords in 2015,” one diplomat told the Financial Times. “For France, this means a loss of independence, a loss of skills and a loss of historical memory that will all weigh heavily in the years ahead as the world is reshaped—and just as there are major crises in Ukraine, the South China Sea and the Sahel.”

The war in Ukraine and related sanctions have triggered a sharp increase in commodity prices, which will add to the challenges facing countries in the Middle East and North Africa—particularly the region’s oil importers.

After leaping to a peak of $130 per barrel following Russia’s invasion, oil prices are expected to settle at an annual average of around $107 in 2022, up $38 from 2021, according to the IMF’s latest World Economic Outlook. Similarly, food prices are expected to increase by an additional 14% in 2022, after reaching historical highs in 2021.

This surge in prices comes at a precarious time for the region’s recovery. In our Regional Economic Outlook, we revised up our forecast for growth in the Middle East and North Africa as a whole by 0.9 percentage points to 5%, but this reflects improved prospects for oil exporters helped by rising oil and gas prices.

For oil-importing countries, we marked down our projections, as higher commodity prices add to the challenges stemming from elevated inflation and debt, tightening global financial conditions, uneven vaccination progress, and underlying fragilities and conflict in some countries.

The effect of high commodity prices

Higher inflation is one of the most direct impacts of rising commodity prices. Food prices accounted for about 60% of last year’s increase in headline inflation in the Middle East and North Africa, excluding the countries of the Gulf Cooperation Council. Hence, we project inflation to remain elevated in the region in 2022 at 13.9%—a significant upward revision relative to our previous projections in October.

This is no surprise given the high dependence of many economies in the region on shipments of foreign food (about one-fifth of total imports), and the heavy weighting of food in consumption baskets (more than one-third on average) and even higher in the case of low-income countries.

The war has also heightened concerns about food insecurity, given the region’s dependence on wheat imports from Russia and Ukraine and the rise in prices, which makes it harder for people to afford food.

The situation is particularly concerning for fragile and conflict-affected states, since strategic reserves cover less than 2.5 months of net domestic consumption. Overall, rising food prices and potential wheat shortages affect the poor more because they allocate a higher share of their expenditure to food. This will add to poverty and inequality and heighten the risk of social unrest.

Commodity price increases will also have a significant negative impact on oil importers’ external accounts. We project that these countries’ current account balances will deteriorate by 1 percentage point of GDP, on average. For low-income countries, higher wheat prices alone will be a significant blow, worsening current accounts by around 1.2% of GDP on average.

How are countries responding? Some are using targeted measures to ease the burden on their people, while others have resorted to more subsidies and price controls to limit the inflationary effects of higher international prices—but this will worsen fiscal balances in the absence of offsetting measures.

Energy subsidies alone could increase by up to $22 billion for oil-importing countries in 2022. This represents money that could otherwise have been spent on more targeted support or other priority measures. In addition to existing subsidies, some countries have introduced measures to smooth the impact of higher prices, such as direct transfers and lower tariffs on food, which will add to fiscal costs.

What should policymakers do?

Near-term policy trade-offs have become increasingly complex for oil-importing countries in the Middle East and North Africa. Containing inflation is a key priority, despite fragile recoveries. In countries where there are risks of inflation expectations rising or price pressures broadening, policy rates need to increase. Clear and transparent communication will be critical to guide markets.

It is also urgent that countries address food security risks and mitigate the impact of high international prices on the poor. The most effective way is to ensure vulnerable households are protected with targeted, temporary, and transparent transfers. Where safety nets are less strong, prices could be raised gradually. For low-income countries, sustained financial support from the international community is crucial.

For countries with high debt, these measures should be accompanied by offsetting measures elsewhere—for example, cutting unnecessary spending, promoting additional tax equity, or a combination of the two—to safeguard debt sustainability given limited fiscal space.

Coordinating fiscal and monetary policies and anchoring them in credible medium-term policy frameworks will help ease these trade-offs.

These challenges underscore the importance of pressing ahead with structural reforms, which will help countries weather future macroeconomic shocks and accelerate recovery. Measures that bolster the efficiency of government expenditure and revenue collection, including through digitalization, promote private sector activity, and strengthen social safety nets will all be important priorities.

As countries throughout the Middle East and North Africa work to adapt their macroeconomic policies to new geopolitical realities, the IMF will continue to help through policy advice, financing, and capacity development.Reprinted with permission by IMF Blog.

Following Russia’s invasion of Ukraine in late February, countries around the globe retaliated with a wave of tough economic sanctions. While the majority of the blow was to the Russian economy as intended, the sanctions have made cross-border trade more difficult.

“Many avenues’ people would normally use to do business with Russia and surrounding areas are no longer permitted,” said Phillip Poland, of counsel with LimNexus LLP (Washington DC), during FCIB’s webinar on Russian sanctions. “And to make it even more complicated, the different administrations and countries did not communicate so the sanctions were out of sync.”

The disorganization in sanction rollout is partly what has created the logistical nightmare of transporting goods that many companies are seeing today, Poland added. “For example, if you are a freight forwarder or carrier and the goods on board are suddenly sanctioned overnight, you have to either hold or return that product. Or you could have goods that are acceptable under U.S. sanctions; but if they are forced to go through Europe because that is the only way, all of a sudden, they may not be allowed and that adds another layer of confusion.”

As a result, some major forwarding companies have thrown their hands up and decided to stop servicing that region altogether as a foolproof way to avoid breaking sanctions. “So now the number of carriers you can work with has shrunk, and the ones that are still carrying goods have increased demand,” Poland said.

All of that eventually trickles down to the credit department, he added. “Because of these massive shipping delays, sometimes the goods are arriving after credit terms. So [financial sanctions] have limited what kind of terms you can offer and you will likely be waiting for full payment.”

But there are ways to make life a bit easier if your company plans to continue doing business in Russia. Poland recommends:

• Do your due diligence to the utmost.
• Make sure to have loopholes in your contracts and purchase orders in case regulations change after the product has shipped. That way you aren’t stuck with the cost and so you don’t have a breach of contract.
• Switch modes of transportation for shipping goods when needed.
• Use the “new silk road railway” between Asia and Europe through Russia before it becomes designated by the U.S. and/or EU.

You can watch Poland’s two-part webinar series on Russian Sanctions Part 1: Navigating Logistics Fallout and Russian Sanctions Part 2: Navigating Financial Challenges on-demand.

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate