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Challenges and Strategies for Economic Recovery in Emerging Europe and Central Asia

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Global Logistics, Global Trade Daily, International Trade, News

Challenges and Strategies for Economic Recovery in Emerging Europe and Central Asia

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The World Bank’s latest Economic Update for the Europe and Central Asia region paints a sobering picture of economic activity, forecasting a slowdown in growth due to various factors. Despite a substantial strengthening in 2023, regional growth is projected to slow to 2.8% this year, with headwinds from a weaker global economy, tight monetary policies, and geopolitical tensions.

Antonella Bassani, World Bank Vice President for the region, emphasizes the need for countries to address multiple crises and revive productivity growth to protect their people and accelerate economic recovery. The lingering effects of recent shocks, including Russia’s invasion of Ukraine and the pandemic, continue to hinder progress.

While inflation has fallen faster than expected, households still grapple with the aftermath of the 2022 cost-of-living crisis. In Ukraine, recovery is expected to slow due to factors like labor shortages and a smaller harvest, with reconstruction costs surpassing the country’s pre-war economy size.

Türkiye is also facing economic challenges, with growth expected to dip to its lowest level since 2009, primarily due to macroeconomic consolidation efforts. Meanwhile, subdued global oil prices will impact prospects in Central Asia, with growth projections being revised downwards.

A special focus chapter in the report highlights the importance of unleashing the power of the private sector for economic development. While significant progress has been made in transitioning to market economies, barriers to business dynamism persist, including challenges in the competition environment, state involvement in the economy, and skills gaps in the workforce.

Addressing these challenges requires efforts to reduce barriers to entry for firms, improve the quality of education, and enhance access to long-term finance for private enterprises. By fostering a conducive environment for private sector growth and innovation, countries in the region can bolster their economic resilience and drive long-term prosperity.

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Global Logistics, Global Trade Daily, International Trade, News

Global Trade Braces for Unprecedented Geopolitical Challenges in 2024 

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Container xChange, a leading online container trading and leasing platform, releases its New Year’s Edition Container Market Forecaster, shedding light on the escalating geopolitical risks set to reshape the landscape of global trade in 2024.

In response to these geopolitical risks, majority of shipping professionals surveyed in the month of December 2023, by Container xChange, are gearing up to enhance resilience through strategic initiatives like – ‘risk assessment and scenario planning’, ‘diversification of routes’ and ‘suppliers and regulatory compliance’. The biggest ‘headache’ resulting from geopolitical upheaval is the ‘associated costs’ that they will have to bear on top of the rising operating costs that they have to already face. 

Key Highlights:

  1. Strategic Focus Areas: In response to geopolitical risks, shipping professionals are prioritizing ‘risk assessment and scenario planning,’ ‘diversification of routes and suppliers,’ and ‘regulatory compliance’ in 2024.
  2. Rising Concerns: Survey findings reveal that the biggest concern stemming from geopolitical upheaval is the ‘associated costs,’ compounding the challenges posed by soaring operating costs. Many customers are worried about the rising costs resulting from the Red Sea situation like compliance charges, insurance premiums and war risk charges, etc. The operating costs have already been rising soon after the rates crashed in 2022, and demand failed to recover. On top of the rising costs, these additional surcharges will only add to the worries of shippers and forwarders.
  3. BRICS Expansion: The inclusion of new economies in the BRICS bloc, including Saudi, Iran, UAE, Egypt, and Ethiopia, sets the stage for potential polarization of global trade, impacting geopolitical compliance.
  4. Technology Utilization: Despite challenges, 82% of industry professionals acknowledge the importance of technology for resilience in 2024, with predictive analysis and forecasting tools taking center stage.
  5. Sanctions Compliance: Amidst geopolitical developments, sanctions compliance becomes critical for supply chain professionals, adding another layer of complexity to global trade.
  6. Fluctuating Freight Rates: freight rates will increase in the short to midterm, but not in the long run as demand and supply is still highly imbalanced with no clear signs of a strong revival. 

Talking about the Red Sea situation, Christian Roeloffs said, “The Red Sea is a vital artery for global trade which is currently blocked. Thankfully, there are ways to circumvent that artery and keep the global trade moving and therefore, the trade is not stopped. Therefore, the red sea situation is acute but not chronic in the long term for the shipping industry.”

There are still many geopolitical risks that have the potential to significantly impact shipping trade in 2024. We have the Israel – Hamas war, the related situation in the Red Sea, the Russia Ukraine war with no end in sight, tensions between China and Taiwan and an increasing enlargement of the BRICS block. 

BRICS expansion

“What can have a far- reaching and long-term impact on the global supply chain is the BRICS inclusions of more economies.” Roeloffs added. 

There is a host of countries being added in the BRICS block, namely, Saudi, Iran, UAE, Egypt, Ethiopia, while Argentina declined inclusion. BRICS has been viewed as a counterbalance to the Western-led world order. 

“If the block starts to increasingly align political decisions and geopolitical stances, then there could be added complexities to the global trade order with rising polarization of global trade. Ultimately this might lead to a situation where one block is not allowed to trade with the other block and eventually, geopolitical compliance becomes more complex and difficult.” he added. 

The expansion of BRICS will bring further interesting developments worth noting. Iran and Saudi are now in the same organization despite a strained relationship. Egypt has close commercial ties with Russia and India but also with the US. India and China together account for ~2.5bn people and could heavily influence global policymaking if they are more aligned.  And finally, Russia and Iran being able to jointly influence “trade” policymaking within the BRICS group could lead to a “sharpening” of trade rethink of US-allies vs BRICS.

Amidst these developments, sanctions compliance will become critical for supply chain professionals for doing business. 

Any geopolitical unrest has a direct and causal impact on global trade which results in market volatility. Classic case in point is the Gaza Strip and the resulting actions by Houthis in Jemen. This leads to trade rerouting, ultimately resulting in rising operating costs, delays, and service disruptions.” said Roeloffs.

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Global Logistics, Global Trade Daily, News, War

Logistics Plus Successfully Executes Complex Delivery Amidst Ukraine’s Ongoing Challenges

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Logistics Plus, a global leader in transportation and logistics, recently accomplished a formidable task—overseeing the delivery of 22,000 tons of essential gas pipes to Ukraine’s Port of Chornomorsk. This achievement, marking the first non-grain, U.S.-managed ship to reach the port since the onset of the war, showcases the company’s commitment to excellence in the face of demanding circumstances.

Challenges arose during the project as Russia’s withdrawal from port access agreements and subsequent bombings of Ukraine’s port infrastructure forced Logistics Plus to reroute the shipment through Romania’s Constanta Port. This strategic move enabled the safe and efficient transport of the gas pipes to Ukraine, involving multiple modes of transportation, including ships, barges, and over 1,000 truck shipments.

Teams from Logistics Plus across China, Poland, Ukraine, Turkey, and the USA played crucial roles in planning and executing the project. Despite ongoing assaults on Ukraine’s port infrastructure, the company successfully delivered the final shipment to the Port of Chornomorsk, demonstrating its global risk management capabilities and dedication to overcoming logistical challenges.

Jim Berlin, Founder & CEO of Logistics Plus, highlighted the operation as a testament to the company’s ability to navigate complex challenges, emphasizing the collaborative effort of international teams. With over 27 years of service, Logistics Plus continues to be a reliable logistics partner, overcoming obstacles to meet client needs and support communities worldwide. This recent operation adds another proud chapter to the company’s successful history across 50+ countries.

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Global Trade Daily, International Trade

Potential ‘Dual Shock’ in Global Commodity Markets as Middle East Conflict Adds to Ongoing Challenges

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A recent conflict in the Middle East, coupled with disruptions caused by the Russian invasion of Ukraine, has raised concerns about the impact on global commodity markets, warns the World Bank’s latest Commodity Markets Outlook. While the global economy is better equipped to handle an oil-price shock than in the 1970s, the convergence of these geopolitical challenges could push commodity markets into uncharted territory.

The initial assessment of the conflict’s impact on commodity markets suggests that the effects will be limited if the conflict remains contained. Under the World Bank’s baseline forecast, oil prices are expected to average $90 a barrel in the current quarter, with a decline to an average of $81 a barrel next year due to a slowdown in global economic growth. Overall, commodity prices are projected to fall by 4.1% in the following year, and agricultural and base metal prices are also expected to decrease.

Thus far, the Middle East conflict has had limited effects on global commodity markets, with minor increases in oil prices and minimal movement in agricultural and metal prices. However, if the conflict escalates, the outlook could quickly change.

The report outlines three risk scenarios based on historical experiences since the 1970s. The effects would depend on the extent of disruption to oil supplies. In a “small disruption” scenario, with a global oil supply reduction of 500,000 to 2 million barrels per day, oil prices could increase by 3% to 13% initially, reaching a range of $93 to $102 a barrel.

In a “medium disruption” scenario, equivalent to the Iraq war in 2003, where the global oil supply is curtailed by 3 million to 5 million barrels per day, oil prices might surge by 21% to 35%, initially ranging from $109 to $121 a barrel. A “large disruption” scenario, similar to the Arab oil embargo in 1973, could lead to a global oil supply reduction of 6 million to 8 million barrels per day, causing a substantial price hike of 56% to 75%, reaching between $140 and $157 a barrel.

“The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s—Russia’s war with Ukraine,” said Indermit Gill, the World Bank’s Chief Economist. “If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades—not just from the war in Ukraine but also from the Middle East.”

Higher oil prices, if sustained, can lead to increased food prices, potentially exacerbating food insecurity. Governments need to remain vigilant to prevent the situation from worsening, and developing countries should take steps to manage potential headline inflation increases. Trade restrictions, such as export bans on food and fertilizer, should be avoided as they can intensify price volatility and food insecurity. Instead, improving social safety nets, diversifying food sources, and enhancing food production and trade efficiency are recommended.

In the long term, countries can enhance their energy security by accelerating the transition to renewable energy sources, which can help mitigate the impact of oil-price shocks. Despite the challenges posed by these geopolitical events, the report highlights that the global economy has made significant progress in reducing its dependence on oil and improving its ability to manage such shocks.

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Global Trade Daily, News, War

Global Armored Vehicle Market Sees $25.6 Billion Surge in 8×8 Wheeled Vehicles Amidst Rising Tensions

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In the wake of escalating global tensions following the Russo-Ukraine conflict, the armored vehicle market is undergoing a significant transformation, with an expected $25.6 billion investment in 8×8 wheeled vehicles by 2035.

Influenced by the Russo-Ukraine conflict, the world of armored vehicle spending is witnessing a resurgence. Beyond the attention-grabbing main battle tanks and tracked Infantry Fighting Vehicle (IFV) programs, there is a growing focus on 8×8 wheeled armored vehicles over the next six years.

A recent report sheds light on several key findings regarding the future of the 8×8 armored vehicle market. This includes the growing importance of Rapid Strategic Mobility, the demand for armored Command and Control (C2) vehicles, and the potential for 8×8 wheeled platforms to replace medium/light tanks in African and South American markets.

According to Defense Insight’s market report, spending on 8×8 vehicle programs is projected to reach $25.6 billion between 2022 and 2035. Notably, the figures for tracked armored vehicles and main battle tanks are considerably higher, with planned investments of $62.2 billion and $84 billion, respectively.

The report identifies specific market opportunities, including a $1.8 billion forecast for Qatar in 2024/25, a $2.8 billion forecast for Greece in 2026, and a longer-term forecast for France to replace its Jaguar EBRC 6×6 and Griffon VBMR 6×6 with 8×8 wheeled vehicles by the mid-2030s.

In North America, there are targeted investments in various programs. The US Army is prioritizing the procurement of tracked vehicles while Canada is progressing with its LAV 6.0 upgrades and orders, replacing legacy M113 tracked Armored Personnel Carriers (APCs).

The report also highlights the enduring debate between tracks and wheels, particularly in the context of the Ukraine-Russia conflict. As mobility and armor become increasingly critical in land-based operations due to the emergence of loitering munitions, future large armored vehicle programs are expected to be contested between 8×8 and tracked alternatives.

Modularity is emerging as a crucial factor, offering maintenance and cost advantages. By leveraging the advantages of lower overhead costs, reduced maintenance burdens, and improved strategic mobility, the 8×8 market has the potential to compete globally with tracked IFVs and medium/light tanks.

Paramount’s Mbombe armored vehicle family is strategically positioned to meet these evolving requirements. At the forefront of armored vehicle technology, the Mbombe family offers unmatched protection levels to ensure the safety of military personnel.

According to Paramount’s spokesperson, “Paramount is not just a manufacturer; we’re evolving into a technology-driven global OEM. With our focus on IP licensing and global partnerships, we’re shaping solutions that the world is seeking today. Through our portable production concept, we’re targeting partnerships in Europe and the UK, strengthening our position as a global leader.”

Paramount’s portable production concept involves locating manufacturing activities within customer countries to produce and sustain armored vehicle fleets, promote indigenous innovation, and provide long-term support. Collaborating with industrial partners enables nations to access modular and proven options for upgrading their armored vehicle capacity.

In conclusion, the global armored vehicle market is experiencing a significant shift towards 8×8 wheeled vehicles, driven by geopolitical tensions and the need for rapid mobility and strategic agility. Paramount’s Mbombe family, along with other key players, is well-positioned to meet the evolving demands of this dynamic market.

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Global Logistics, Global Trade Daily, Ocean Ports

Russia-China Trade Dynamics in a Post-War Era: Navigating Challenges and Opportunities

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As Russia grapples with the western sanctions one year after the invasion in Ukraine, China supports by bolstering bilateral trade between the two nations. Container xChange investigates the intricacies of the China-Russia trade and how it impacts the container logistics industry, now and in future. 

China – Russia trade ties 

“There is significant cargo movement from China into Russia but very scarce movement back to China from Russia. Containers are piling up in Russia which means that the secondhand container prices are very low in Russia. You see a 40ft high cube container being on sale in Moscow for less than $1,000, while in other parts of the world it is almost double or even more. This is significant and has tremendously detrimental impact on the business of container logistics because of the high imbalance of demand and supply of containers.” said Christian Roeloffs, cofounder and CEO, Container xChange. 

In February 2022, the average price of a 40ft high cube container in Moscow was $4,175, which is now $580 as of 25 September 2023. (See graph below) 

Similarly, the average price of a cargo worthy 20 ft DC was $1,961 in February 2022, which has consistently declined and bottomed out to $675 as of 25 September 2023. 

“Currently there are around 150,000 surplus containers in Russia, and everybody is looking for an opportunity to return containers back to China. All containers from Russia to China go with a pickup charge. Regarding container trading, many Chinese companies are selling containers below market price to get rid of the boxes since it doesn’t make sense to send them back to China. From Moscow to Shanghai, the offline market offers around $1,500 for new containers. If cargo worthy containers are in good condition and cost less, they prefer to sell the boxes in the local market. 

But this doesn’t mean that the market is bad. There are still many companies exporting as many as 4,000 SOC containers from Russia to China. The transactions between China and Russia are still very significant.”  a customer of Container xChange shared. 

China, traditionally a substantial purchaser of Russian energy, has now emerged as a vital source of imports, encompassing a wide range of products such as machinery, pharmaceuticals, auto parts, consumer goods, smartphones, cars, and agricultural equipment, from China. This shift has created a shortage of closed cargo containers, further intensifying the logistics challenge. 

This shift is a direct result of numerous international companies exiting the Russian market amid ongoing geopolitical tensions and the conflict in Ukraine.

Trade between China and Russia witnessed substantial growth of 36.5% in the first seven months of 2023, totaling $134.1 billion, according to Chinese customs data. China’s exports to Russia surged by 73.4%, reaching approximately $62.54 billion, while imports from Russia also grew significantly by 15.1%, totaling $71.6 billion.

Soon after Russia’s invasion in Ukraine last year in February 2022, the bilateral trade between China and Russia dipped for a brief period of time and then picked up to reach record levels. 

Russia anticipates that its trade volume with China will surpass $200 billion this year, a notable increase from the approximately $185 billion recorded in 2022.

Surge In trade causing container imbalance 

As imports from China to Russia continue to surge, it is leading to a significant trade imbalance and container congestion. According to a report from the VPost, Russian railway depots are grappling with an overwhelming accumulation of empty shipping containers originating from China. Managers at Russian shipping companies have expressed concerns about the severity of the situation, describing it as “almost critical” in regions like Moscow and central Russia.

This container crisis is primarily a consequence of the deepening trade imbalance between Russia and China. Russia is flooded with more containers carrying goods from China than it can dispatch back. Furthermore, the commodities exchanged between the two countries play a role in exacerbating the problem, as Russian raw materials are primarily transported to China via rail tanks and open wagons rather than in containers.

In an attempt to improve the container congestion, Russian shipping companies have started offering discounts to expedite the return of containers to China. 

Overloaded Russian ports and roads are causing transportation inefficiencies. Although some investments have been made to improve infrastructure, fiscal constraints and the use of the National Wealth Fund to cover budget shortfalls complicate matters. Russia seeks Chinese investors to address these issues, but uncertainty stays due to recent actions against Western companies. However, Russia’s pivot to Asia hinges on substantial infrastructure development.

China-Russia trade: Current trends and prospects 

As we look ahead to the future of China-Russia trade, it becomes evident that despite recent declines in shipping rates, operators providing container shipping services are pressing forward with their expansion plans on this trade lane.

One noteworthy development is the entry of CStar Line, a newcomer in the industry, into the China-Russia trade arena. In a parallel development, Yangpu New New Shipping has expanded its Northern Sea Route service, connecting China to St. Petersburg. This expansion follows the successful eastbound trial voyage by the 1,638 TEU Newnew Polar Bear, which departed from Xingang in August. 

Despite recent rate declines in shipping to Russia, operators like CStar Line and Yangpu New New Shipping are finding profitability, especially during the summer peak season. Notably, cargo volumes from Busan to Russia’s Pacific ports saw a robust 6% increase in July, reaching 13,600 TEU compared to the previous month. However, the market faces pressure from new Chinese entrants, leading to a month-on-month decrease in the average freight rate for the Busan-Far East Russia route, ranging from $1,000 to $2,200 per TEU—a drop of approximately $100. These developments underscore the shipping industry’s resilience and adaptability as the China-Russia trade landscape continues to evolve.

 

Additional Data: 

Strengthening trade Ties with Central Asian nations

In 2022, trade between Russia and Central Asian countries increased by 15%, reaching more than $42 billion. This growth is attributed to strong trade partnerships among countries in organizations like the Shanghai Cooperation Organization (SCO), BRICS, and the Eurasian Economic Union (EAEU). Central Asian nations, such as Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, collaborate closely with Russia on technology and independence-related matters. This expansion of trade bolsters Russia’s regional influence and strengthens its ties with Central Asian partners.

The compatibility between Russia and China’s foreign policy objectives, emphasizing multipolarity and resisting control, may strengthen their partnership in Asia, impacting the region’s geopolitics. This shift towards Asia represents a clear trend for Russia towards establishing better trade partnerships with Asian countries.

Russia’s European trade challenges

Russia, a key euro area trade partner, experienced a 50% dip in trade with the region. While euro area exports to Russia initially dropped quickly, they have since partially recovered for non-sanctioned goods, while sanctioned goods exports remain low. Russia also reduced natural gas flows to Europe, causing a 90% drop in gas imports. Europe compensated by importing gas from Norway, Algeria, and Azerbaijan while increasing liquefied natural gas (LNG) imports, substantially diminishing Russia’s influence in European energy markets.

EU trade with Russia has been strongly affected by import and export restrictions imposed by the EU following Russia’s invasion of Ukraine.  

Both exports and imports have dropped considerably below the level prior to the invasion. Seasonally adjusted values show that Russia’s share in extra-EU imports fell from 9.6% in February 2022 to 1.7% in June 2023, while the share of extra-EU exports fell from 3.8 % to 1.4% in the same period.

European sanctions and voluntary boycotts have redirected Russian trade away from the euro area, increasing dependence on non-sanctioning partners and leading to discounted commodity exports. This shift has reoriented Russia’s global trade, making it heavily reliant on China and other Asian countries. 

It is clear that Russia does not foresee agreement with the US and the West, making Asia, particularly China and India, its top priorities in economic and military cooperation.

 

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Archives, Global Trade Daily, International Trade, War

Winter is Coming 

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Europe is in a rush for natural gas. The Russian invasion of Ukraine resulted in European-imposed sanctions on imported Russian gas. That left the continent scrambling to find a replacement. The most obvious replacement importer of liquified natural gas (LNG) was the US, and while US imports have risen (nearly doubling between March and June of this year compared to 2021), more is needed. 

The US is home to immense natural gas reserves and the fracking boom intensified the supply. Construction of export terminals followed to eventually chill the gas into a liquified state and set it to export. Before the Ukraine invasion, Europe had received approximately 40% of its gas from Russia. The US has already gone on record indicating they cannot replace those volumes. In the LNG world, long-term contracts are the norm. US LNG exporters already have their buyers and spare LNG is scant. Some buyers, specifically in Asia, had been willing to sell their LNG imports to Europe for a nice profit, but now that winter is approaching even in the face of an economic windfall, they are also beginning to cut supply. 

For the first half of 2022, US LNG exports averaged 11.2 billion cubic feet a day. This is 17% more than the first half of 2021. Australia and US were on track to export the most LNG in 2022 but a massive fire at a Texas LNG terminal slowed exports considerably. Yet, with the war in Ukraine showing few signs of letting up, analysts expect 2022 to be a banner year for US and Australian LNG. 

S&P Global Commodity Insights is a provider of commodities and energy information. According to a recent study, demand for LNG at a global level is expected to reach 78 billion cubic feet per day by 2030. This would be a 60% increase from 2021. The global research and consultancy group, Wood Mackenzie, revealed a similar jump in future demand. Since March, six US firms have signed on to process 39.5 million tons of LNG per annum to be shipped out of future terminals. This is a consequential 74% increase from 2021 volumes.

LNG spot prices are understandably hitting new heights. Yet, long-term supply depends on infrastructure. The promises of a transition to renewable energy that most developed countries have pledged to mean a reduction in LNG. Stateside, LNG executives point to interstate pipelines in Appalachia. A region stretching from the southern tier of New York all the way south to northern Alabama and Georgia, Appalachia is home to the country’s most prolific natural gas field. The development of pipelines is critical in ramping up LNG exports, yet many LNG exporters are in a difficult position. To secure funding investors want to see pipelines (or permits for new ones) established with the corresponding permits. Federal officials, however, are reticent to grant permits unless LNG exporters can show they have already secured funding. 

This “chicken and egg” scenario is not welcome news to Europe. On the environmental side, we’re now seeing developing nations like India and Pakistan switch back to burning coal because LNG is simply too expensive. These are problematic times for everyone.     

ban Commerce Restricts the Export of Luxury Goods to Russia and Belarus and to Russian and Belarusian Oligarchs and Malign Actors in Latest Response to Aggression Against Ukraine
Archives, Commentary, Global Trade Daily, International Trade, War

The Fallout of Putin’s Sanctions: What You Need To Know

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The Russia-Ukraine war has caused sanctions to be leveled from both sides of the conflict. Sanctions began when Russia increasingly mobilized its military along its border with Ukraine. Since the invasion, Western states have responded with additional sanctions, and Russia has retaliated. The exact outcomes of the conflict and the sanctions are likely to continue to materialize over the remainder of the year. This article will look at the sanctions, their fallout, and just what you need to know.

Ukraine Invasion Triggers a Global Response

On February 24, 2022, Russia attacked Ukraine, undertaking a total invasion of the country. The invasion was set off after years of escalating military conflicts in Ukraine and a military buildup by Russia. As Ukraine announced its intention to join NATO, and after talks broke down, Russian President Vladimir Putin announced the recognition of two pro-Russian breakaway regions in eastern Ukraine on February 21, 2022. The next day, the first round of economic sanctions by the U.S, the U.K., and the European Union was announced.

What Sanctions Are in Place?

Before diving into how Russia has replied to western sanctions, let’s look at what sanctions have been put in place so far. Currently, Russia is experiencing economic, energy, and individual sanctions. Additionally, many private companies are also making their own business decisions to impact Russia.

  1. Financial Sanctions: Russia’s central bank assets are frozen, bringing a halt to $630bn of foreign currency. As a result, Russia has seen a 17.8% rise in inflation, and the rouble has lost 22% of value. Additionally, most Russian banks have been removed from the international financial messaging system Swift, which is used for many types of payment processing. Finally, the U.S. and the U.K. have both taken actions to prevent Russia from utilizing funds in their banks.
  2. Energy Sanctions: The U.S. has banned all Russian oil and gas imports. Similarly, the U.K. has begun phasing out Russian oil imports and expects to be done by the end of 2022. Germany, which depends on Russian natural gas, has put a stop to the opening of the Nord Stream 2 gas pipeline from Russia. Finally, the E.U. has pledged to stop Russian coal imports by this August.
  3. Individual Sanctions: The U.S., E.U., U.K., and other countries have also begun sanctioning many Russian individuals and businesses. The most well-known of these include Russian oligarchs. Russian oligarchs wield tremendous power and wealth in Russia and are often closely associated with the Kremlin. Oligarchs aren’t the only ones being sanctioned, as many government officials and their families have also been sanctioned.
  4. Other Actions: Over 1,000 international companies have suspended operations in Russia, including McDonalds, Coca-Cola, and Starbucks. Russian flights have been banned from Western airspace. Dual-use goods (that is, items that can be used both for civilian and military purposes) have also been banned from export to Russia. Even Bitcoin wallets aren’t safe right now, with Russian bitcoin miners being put under sanctions.

The Russian Reply to Sanctions

With so many sanctions being imposed on Russia, it would be hard to believe if they never replied. Next, we’ll look at how Russia has reacted to the sanctions imposed by Ukraine and its allies.

Russian Export Bans

The most recent wave of Russian bans included more than 200 products after the West enacted its own sanctions.

A non-exhaustive list of products banned for export includes:

  • telecommunication, technological, and medical equipment;
  • vehicles;
  • agricultural machinery;
  • electrical equipment;
  • railway cars and locomotives;
  • containers;
  • turbines;
  • stone and metal cutting machines;
  • video displays;
  • projectors; and
  • switchboards and consoles.

The ban was put into effect until the end of 2022. Russia suspended the export of the goods to all countries except for members of the Eurasian Economic Union (EAEU) and the Russian-recognized separatist states of Abkhazia and South Ossetia. The Eurasian Economic Union includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. Cuba, Moldova, and Uzbekistan are member-observers.

No Indication of Energy Sanctions

Interestingly, Russia did not go as far as to cease energy and raw materials sales. Russia’s raw materials and energy sales are the country’s largest contribution to the global trade by far, and Russia remains key to the continuous flow of energy to European nations. In March, Russia threatened to cut off natural gas supplies via the Nord Stream 1 pipeline.

In 2019, Russian raw materials included $123bn in crude petroleum, $66.2bn in refined petroleum, $26.3bn in gas, $26.3bn in iron/steel/aluminum, $17.8bn in precious metals and gems, $17.6bn in coal briquettes, and $9.7bn in cereal products. Despite reluctance to reduce raw materials exports, Russia has suspended the export of some types of timber and timber products.

What Will Happen Because of Russian Sanctions?

The key to the Russian economy is the export of its raw materials. Not only do Western countries depend on these goods, but they are also the backbone of the Russian economy. This means that goods like oil and gas and metals such as steel and nickel are of key importance. 

As stated before, none of these materials appear on the materials banned for export. If any of these goods end up being blocked from export, many consequences could follow, including the cost of cars and other vehicles going up.

However, items like railway cars and locomotives will likely not suffer much harm. Additionally, agricultural machinery primarily exported to former-Soviet bloc countries like Belarus and Kazakhstan will not be impacted. 

Vehicles may be an issue for the company Stellantis, which owns Vauxhall, Peugeot, and Citroen. Related is that Russia recently announced the nationalization of Renault’s Russian assets. How all of this will play out in the long run is hard to say, but regardless, Russian vehicle exports do not make up as large of a slice of the global economy as their raw materials.

In the end, Russian bans on export appear to be symbolic in nature and designed to send a signal to countries that Russia views as a threat.

One area of possible concern, however, is how the Russia-Ukraine war will impact global food costs. Both Russia and Ukraine supply large amounts of grain to the world. In addition, Russia exports large amounts of agricultural fertilizers, including potash and phosphates, which are used as ingredients in fertilizers. The disruption of Ukrainian crop production during the summer growing season could lead to potential food shortages. Additionally, President Vladimir Putin warned there would be “negative consequences” for the world’s food markets.

Conclusion

Russian sanctions and sanctions on Russia are both bound to have an impact on the global economy. At this stage, Russia has not cut off its supply of raw materials, but that could change. For now, Putin’s sanctions may just be posturing on Russia’s part, but real threats like food shortages could be lurking in the shadows. 

 

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Archives, Commentary, Global Trade Daily, International Trade, War

Food and Energy Price Shocks from Ukraine War Could Last for Years

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Shift to more costly trade patterns has begun; transition to cleaner energy could be delayed

The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production, and consumption in ways that will keep prices at historically high levels through the end of 2024, according to the World Bank’s latest Commodity Markets Outlook report.

The increase in energy prices over the past two years has been the largest since the 1973 oil crisis. Price increases for food commodities—of which Russia and Ukraine are large producers—and fertilizers, which rely on natural gas as a production input, have been the largest since 2008.

Indermit Gill, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions explained that Overall, it amounts to the largest commodity shock they have experienced since the 1970s adding that the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilizers.

These developments have started to raise the specter of stagflation. Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy.

Energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years. Nevertheless, commodity prices are expected to remain well above the most recent five-year average. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected.

Because of war-related trade and production disruptions, the price of Brent crude oil is expected to average $100 a barrel in 2022, its highest level since 2013 and an increase of more than 40 percent compared to 2021. Prices are expected to moderate to $92 in 2023—well above the five-year average of $60 a barrel. Natural-gas prices (European) are expected to be twice as high in 2022 as they were in 2021, while coal prices are expected to be 80 percent higher, with both prices at all-time highs.

Ayhan Kose, Director of the World Bank’s Prospects Group made it known that the Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine which led to the production of the Outlook report. “The resulting increase in food and energy prices is taking a significant human and economic toll—and it will likely stall progress in reducing poverty. Higher commodity prices exacerbate already elevated inflationary pressures around the world.”

Wheat prices are forecast to increase more than 40 percent, reaching an all-time high in nominal terms this year. That will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine. Metal prices are projected to increase by 16 percent in 2022 before easing in 2023 but will remain at elevated levels.

John Baffes, Senior Economist in the World Bank’s Prospects Group stated that Commodity markets are under tremendous pressure, with some commodity prices reaching all-time highs in nominal terms adding that this will have lasting knock-on effects and the sharp rise in input prices, such as energy and fertilizers, could lead to a reduction in food production particularly in developing economies.

Special Focus:  The Impact of the War in Ukraine on Commodity Markets

The report’s Special Focus section offers an in-depth exploration of  the war’s impact on commodity markets. It also examines how commodity markets responded to similar shocks in the past. The analysis finds that the war’s impact could be longer-lasting than previous shocks for at least two reasons.

First, there is less room now to substitute the most affected energy commodities for other fossil fuels—because price increases have been broad-based across all fuels. Second, the increase in prices of some commodities is also driving up prices of other commodities—high natural-gas prices have raised fertilizer prices, putting upward pressure on agricultural prices. In addition, policy responses so far have focused more on tax cuts and subsidies—which often exacerbate supply shortfalls and price pressures—than on long-term measures to reduce demand and encourage alternative sources of supply.

The war is also leading to more costly patterns of trade that could result in longer-lasting inflation. It is expected to cause a major diversion of trade in energy. For example, some countries are now seeking coal supplies from more remote locations. At the same time, some major coal importers could step up imports from Russia while reducing demand from other large exporters. This diversion will likely be more costly, the report notes, because it involves greater transportation distances—and coal is bulky and expensive to transport. Similar diversions are occurring with natural gas and oil.

In the near-term, higher prices threaten to disrupt or delay the transition to cleaner forms of energy. Several countries have announced plans to increase production of fossil fuels. High metal prices are also driving up the cost of renewable energy, which depends on metals such as aluminum and battery-grade nickel.

The report urges policymakers to act promptly to minimize harm to their citizens—and to the global economy. It calls for targeted safety-net programs such as cash transfers, school feeding programs, and public work programs—rather than food and fuel subsidies. A key priority should be to invest in energy efficiency, including weatherization of buildings. It also calls on countries to accelerate the development of zero-carbon sources of energy such as renewables.

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Archives, Global Trade Daily, Imports/Exports, International Trade, Special Reports, War

Commerce Announces Addition of Iceland, Liechtenstein, Norway, and Switzerland to Global Export Controls Coalition

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Today, the U.S. Commerce Department, through the Bureau of Industry and Security (BIS), is issuing a rule that formally adds the nations of Iceland, Liechtenstein, Norway, and Switzerland to the growing global coalition of nations that are cooperating in the stand against Russian aggression, and Belarusian complicity, through their implementation of similarly stringent export controls. Multilateral application of export controls is a force-multiplier in cutting Russia and Belarus off from the commodities, technologies, and software necessary to sustain their aggression, depriving their defense, aerospace, and maritime sectors of key materials.

US Secretary of Commerce, Gina M. Raimondo in his remarks made it known today that the more countries that agree to implement tough export controls, the less chance Vladimir Putin has to obtain the commodities, software, and technologies that he needs to sustain his brutal war machine, saying the US welcome the commitment of Iceland, Liechtenstein, Norway, and Switzerland to joining the U.S. and 33 other allies and partners in standing together against Putin’s aggression.

Deputy Secretary of Commerce Don Graves added that today’s rule recognizes the strong partnership they have with Iceland, Liechtenstein, Norway, and Switzerland in standing up for democracy and in solidarity with the people of Ukraine. He in his speech also mentioned that the effectiveness of export controls is enhanced greatly when they are joined by committed international allies and partners., recognizing that the more the coalition with foreign countries grows, the fewer places Putin and the Kremlin can turn for aid.

Under a rule issued and implemented today by BIS, Iceland, Liechtenstein, Norway, and Switzerland are added to the list of countries that are excluded from certain license requirements of the U.S. Russia/Belarus Sanctions rules, including the foreign direct product (FDP) rules for Russia/Belarus and Russian/Belarusian Military End Users (MEUs). Iceland, Liechtenstein, Norway, and Switzerland join Australia, Canada, the 27 member states of the European Union (EU), Japan, the Republic of Korea, New Zealand, and the United Kingdom, bringing the total number of countries excluded from application of the FDP rules to 37.

Specifically, under the Export Administration Regulations (EAR), countries that have made a commitment to implement substantially similar export controls on Belarus and Russia under their domestic laws may receive full or partial exclusions, as appropriate, from the FDP rules’ license requirements, and such license requirements are not used to determine controlled U.S.-content under the EAR’s de minimus rules provided certain criteria set forth under the new Russia-Belarus restrictions (§746.8 of the EAR) are met.

Adoption of substantially similar export controls by the countries in the coalition expands the scope of products that cannot be obtained by Russia and Belarus. Countries that apply substantially similar controls to those of the United States through their own laws are excluded from application of the FDP rules for Russia/Belarus and Russian/Belarusian MEUs because their own domestic controls duplicate the effects of these FDP rules. These partners are sharing in the effort required to implement these controls globally through their own legal systems, educating companies on compliance responsibilities under their domestic laws, and leveraging their law enforcement resources. The United States will continue to work tirelessly with our partners to share information and enforcement resources, and to coordinate on the commodities, technologies, and software to be controlled, which will result in an increasingly effective global effort.

These BIS actions were taken under the authority of the Export Control Reform Act of 2018 and its implementing regulations, the Export Administration Regulations (EAR).