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Ukraine War Risks Further Cuts to Finance Development

The conflict is tightening global liquidity, especially for developing countries, as investors flock to assets perceived as less risky.
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Ukraine War Risks Further Cuts to Finance Development

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The financial fallout from the war in Ukraine could widen the already huge gap in financing needed to achieve sustainable development goals (SDGs) and lead to cascading credit downgrades and debt defaults in developing countries, UNCTAD said.

The gap in financing needed to achieve SDGs, such as ending poverty and halting climate change, now sits at $17.9 trillion for the 2020-2025 period, new UNCTAD estimates show. This puts the current annual gap at $3.6 trillion – more than $1 trillion wider than before the COVID-19 pandemic – without even factoring in the effects of the Ukraine conflict.

“We risk going from having a gap to achieve the SDGs to having an abyss,” UNCTAD Secretary-General Rebeca Grynspan said on 21 March as she opened a meeting on financing for development convened by the organization.

Calling for emergency measures and efforts to support sustainable growth, she said climate change and other non-stop crises are hitting developing countries hardest and making it harder for them to achieve the SDGs.

“Shock after shock, their debt burdens rise, their poor become more numerous, their fiscal space shrinks and their sustainable development goals fall increasingly out of reach,” Ms. Grynspan said.

Tightening global liquidity

The $17.9 trillion figure is likely an underestimate, Ms. Grynspan said, because the calculations were done before the start of the war in Ukraine in late February.

The conflict is tightening global liquidity, especially for developing countries, as investors flock to assets perceived as less risky. The cost of credit has already increased since the start of the conflict, with bond yields rising an average of 36 basis points.

The war’s impact on government spending around the globe will put further pressure on aid budgets, which were already low.

“External financial resources for development continue to decrease, which has been especially detrimental to low-income and middle-income countries,” said Abdulla Shahid, president of the 76th session of the UN General Assembly.

In 2020, official development assistance from advanced economies was on average just 0.32% of their gross national income – less than half of the 0.7% commitment.

Cascading effects on debt

Capital flight and less development assistance would create acute stress for many developing countries already struggling with high debt levels. Cascading credit downgrades and debt defaults could be on the horizon.

More than half of African countries were already downgraded by at least one credit rating agency in 2020, said Vera Songwe, executive secretary of the UN Economic Commission for Africa.

“The Ukraine crisis will likely lead to more downgrades as possible contagion spreads across emerging markets,” Ms. Songwe said.

In 2020, debt-to-GDP ratios in developing countries rose to 69% from 57%. For these nations, about 16% of export earnings are spent on debt payments. The share reaches 34% in small island developing states.

The debt burden undermines their abilities to provide essential services. In 62 developing countries, for example, the share of government spending on debt service was higher than health spending in 2020.

Emergency financial measures needed

To keep the gap from becoming an abyss, Ms. Grynspan called for emergency financial measures to help developing countries cope with the impacts of the war in Ukraine – including soaring prices of food, fuel and fertilizer.

According to an UNCTAD assessment, more than 5% of the poorest countries’ import baskets is made up of products that are likely to face a price hike due to the war. The share is below 1% for richer countries.

Such emergency measures would be similar to those provided by the global financial system when the COVID-19 crisis started.

One suggestion was to reconvene the Group of 20 major economies’ debt service suspension initiative (DSSI), which froze debt repayments for low-income countries until December 2021.

“But we also need to restart the DSSI in way that doesn’t just keep kicking the can down the road,” Ms. Grynspan said. “A permanent and comprehensive debt restructuring mechanism is needed.”

Strengthen productive capacities

In addition to emergency measures to reduce costs, Ms. Grynspan called for collective efforts to promote sustainable growth in developing countries.

The efforts should be underpinned by a sustained and structural push to help the countries strengthen productive capacities so they can make more goods and services and add more value to them.

Ms. Grynspan also called for more long-term strategic investments involving the private sector and local, regional and multilateral development banks.

“We urgently need to capitalize our development banks, something that didn’t happen with the pandemic,” she said.

economic mapping Global supply strains that started to ease in early 2022 are worsening again as headwinds strengthen from the war in Ukraine and China’s economy
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Global Supply Lines Brace for Economic Storm to Widen

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Global supply strains that started to ease in early 2022 are worsening again as headwinds strengthen from the war in Ukraine and China’s COVID lockdowns, threatening slower growth and faster inflation across the global economy.

After the pandemic hit Asia-U.S. trade routes the hardest over the past two years, the latest turmoil is being acutely felt in Germany, which is heavily reliant on Russian energy and suppliers across Eastern Europe. Business expectations in the region’s biggest economy during March posted the steepest one-month drop on record, factories across the continent face diesel and parts shortages, and delays moving cargo through key North Sea gateways such as Bremerhaven are lengthening.

“We thought Russia was just a resources story that was going to push energy prices up — that it would make supply chains more expensive but it wouldn’t disrupt them,” said Vincent Stamer, a trade economist with Germany’s Kiel Institute for the World Economy. “It appears a little more threatening than we initially anticipated.”

On top of the wartime setbacks, omicron outbreaks are widening China’s use of strict lockdowns in major trade hubs, the latest in Shanghai. A.P. Moller-Maersk A/S, the world’s No. 2 container carrier, said March 28 that some depots serving local ports have closed indefinitely, and trucking to and from terminals will be “severely impacted.”

Chinese exports were already tailing off from an October peak — a trend that might continue for the next few months if Beijing maintains the hard line on fighting the virus, Stamer said. That’ll add shipping delays, sourcing problems and costs for businesses from the U.S. to Europe.

According to supply constraint indexes developed by Bloomberg Economics, pressures in the U.S. and Europe intensified in February after several months of improvement. Anecdotal evidence through March suggests the strains won’t abate.

Stamer cited the example of electric wire assemblies made in Ukraine for German automakers. “These cable trees are actually custom-made for individual cars” and aren’t easily or cheaply sourced from other countries, he said. Another rare input that’s suddenly even more scarce is neon gas used in semiconductor production. Ukraine produces 50% of the world’s purified neon, Stamer said. Russia’s output of raw materials extends even deeper into the global economy.

More than 2,100 U.S. firms and 1,200 in Europe have at least one direct supplier in Russia, and the total reaches 300,000 when indirect suppliers are included, according to Arlington, Va.-based Interos, a supply chain risk management company.

“Multiple industries are reliant on the same raw materials and a large percentage of them are coming out of Russia,” Interos CEO Jennifer Bisceglie said. “You’re seeing a massive cascading effect on an already limping system of the global supply chain.”

The economic and political stakes are far more consequential than the developed world’s biggest worry in 2021 — the concern that slammed global logistics would spoil Christmas for retailers and consumers.

Fears are now rising about food shortages. The cost of living is rising in rich and poor regions alike. Soaring energy prices are spawning street protests from Albania to the U.K.

Costly, longer-term shifts are accelerating, too: Goldman Sachs economists say the new geopolitical risks are forcing companies to reinforce their operations against global disruptions through reshoring, diversification and overstocking inventories.

“At the moment, the storm clouds on the horizon look quite menacing,” Citigroup Global Chief Economist Nathan Sheets said in a research note March 25, explaining why “a major adverse supply shock” from the Russia-Ukraine conflict led the bank to cut its outlook for world GDP growth this year and increase its inflation projections. “Bottom line, an already complicated picture has become even more complex.”

Trade is already feeling the sting of sanctions on Moscow and blocked transport routes. According to FourKites Inc., a supply chain visibility platform, Russian imports across all modes of freight transportation dropped 62% over the first month of the conflict, while shipments into Ukraine plunged 97%.

Though Russia accounts for 5% of the world’s seaborne trade and Ukraine just 1%, a heightened risk of a global economic slowdown has emerged.

Economists at Barclays on March 28 said the world is entering a new era of higher volatility for growth and inflation. Allianz Research on March 25 warned of a greater risk of a “double whammy” in world trade — lower volumes and higher prices — in 2022. Clarksons Research, a shipping analytics firm in London, last week trimmed its projections for global trade this year and next, saying its port congestion indexes are rising again and the latest shocks are “amplifying an already disrupted maritime transport system.”

According to data compiled by Bloomberg, the German ports of Hamburg and Bremerhaven saw new highs in ship congestion this month, while Rotterdam, the continent’s busiest gateway for container traffic, saw its vessel backup at the start of the month reach an 11-month high.

The snarls make any return to normal unlikely this year unless demand unexpectedly craters. Ocean shipping, the workhorse for some 80% of global trade, was stretched so thin that the spot rate to send a 40-foot container of goods to the U.S. from Asia averaged more than $10,000 in the second half of last year — about seven times higher than the pre-pandemic level. Those rates have come down in recent weeks, but experts say the reprieve probably reflects a seasonal lull before transport demand and costs pick up again.

“It’s going to get worse as we move through the second half of this year and into peak season,” Mark Manduca, the chief investment officer of GXO Logistics, told Bloomberg Television on March 25. “You don’t initially feel the pinch in the first few weeks of a supply chain shortage — people have inventories.”

Even greater than the risks Russia’s war in Ukraine pose to global supply fluidity are the COVID-19 cases and targeted lockdowns in China, according to economists Ana Boata and Françoise Huang at Euler Hermes, a unit of Allianz Group. They see a risk that container freight prices approach or even exceed their previous peaks, before returning to current levels by year end.

“Overall, even if not returning to the peaks of 2021, the cost and congestion levels of global supply chains are likely to remain high for most of 2022,” Boata and Huang wrote in an email. “The normalization may start more visibly only from 2023.”

Trying to anticipate how two years of supply constraints affect consumer prices has already challenged central bankers, with Federal Reserve Chair Jerome Powell saying at a press conference earlier this month that Russia’s isolation from the world economy is “going to mean more tangled supply chains, so that could actually push out the relief we were expecting.”

Some of that relief was reflected in the New York Fed’s Global Supply Chain Pressure Index, a gauge launched in January that most recently showed some easing from peak strains late last year. While it’s too soon for the New York Fed to quantify any wartime effects, there are signs that the index’s recent improvement will be limited.

“There’s been a decrease in the pressure, but the level of the pressure is still very high. It’s an improvement but it doesn’t mean the problems are resolved,” New York Fed economist Gianluca Benigno said about the direction of the index in its latest update in early March. “Anecdotal evidence suggests there might be further pressure ahead.”

effects in vulnerable economies such as small island developing states, landlocked developing states and least developed countries”.
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Ukraine War’s Impact on Trade and Development

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UNCTAD’s Rapid Assessment of the War’s Impact beyond the humanitarian crisis in Ukraine shows a rapidly worsening outlook for the world economy, with the situation especially alarming for least developed countries.

A UNCTAD rapid assessment of the war in Ukraine’s impact on trade and development confirms a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertilizer prices.

The report published on 16 March also shows heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs.

“The war in Ukraine has a huge cost in human suffering and is sending shocks through the world economy,” UNCTAD Secretary-General Rebeca Grynspan said in a statement.

“All these shocks threaten the gains made towards recovery from the COVID-19 pandemic and block the path towards sustainable development.”

The two fundamental ‘Fs’

Concern abounds over the two fundamental “Fs” of commodity markets – food and fuels.

Ukraine and Russia are global players in agri-food markets, representing 53% of global trade of sunflower oil and seeds and 27% of global trade of wheat.

This rapidly evolving situation is especially alarming for developing nations. As many as 26 African countries, including some least developed countries, import more than one third of their wheat from the two countries at war. For 17, the share is over half.

“Soaring food and fuel prices will affect the most vulnerable in developing countries, putting pressure on the poorest households which spend the highest share of their income on food, resulting in hardship and hunger,” Ms. Grynspan said.

According to UNCTAD calculations, on average, more than 5% of the poorest countries’ import basket is composed of the products that are likely to face a price hike due to the war. The share is below 1% for richer countries.

Risk of civil unrest

The risk of civil unrest, food shortages and inflation-induced recessions cannot be discounted, the report says, particularly given the fragile state of the global economy and the developing world due to the COVID-19 pandemic.

“Long-standing effects of rising food prices are hard to predict,” the report says, “but an UNCTAD analysis of historical data sheds light on some troubling possible trends.”

Agri-food commodity cycles, for example, have coincided with major political events, such as the 2007-2008 food riots and the 2011 Arab Spring.

Freight rate hikes

Restrictive measures on airspace, contractor uncertainty and security concerns are complicating all trade routes going through Russia and Ukraine. The two countries are a key geographical component of the Eurasian Land Bridge.

In 2021, 1.5 million containers of cargo were shipped by rail west from China to Europe. If the volumes currently going by container rail were added to the Asia-Europe ocean freight demand, this would mean a 5% to 8% increase in an already congested trade route.

“Due to higher fuel costs, rerouting efforts and zero capacity in maritime logistics, the impact of the war in Ukraine can be expected to lead to even higher freight rates,” the report says. Such increases would have a significant impact on economies and households.

In 2021, UNCTAD simulated that the freight rate increase during the pandemic raised global consumer prices by 1.5%, “with particularly oversized effects in vulnerable economies such as small island developing states, landlocked developing states and least developed countries”.

Ukraine crisis overtakes Covid as biggest threat to global supply chain
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Ukraine crisis overtakes Covid as biggest threat to global supply chain

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We are now two weeks into the Russia-Ukraine war. As the war continues, more and more companies are ceasing operations in Russia, wreaking further havoc on an already incredibly disrupted supply chain.

Productivity in Ukraine’s export sectors has dropped severely, with grain and wheat yield reducing majorly. Before Russia’s invasion, over 60.0% of Ukraine’s exports of grain and wheat went to former Soviet Republics such as Russia, Kazakhstan and Belarus, all major allies of Russia. Ukraine currently holds 11.0% of the world’s grain market – increasing its grain production by 32.0% in 2021 to 85.7m tonnes – and 55.0% of the sunflower oil market. These sectors will be severely impacted by the ongoing conflict in the country. Neighbouring countries such as Poland, which have received huge influxes of refugees, are also showing signs of struggle; VW’s Polish units recently announced it was halting production amid supply chain problems caused by the Ukrainian war.

Re-building after catastrophes such as this war will also come at a great financial expense. In addition, rebuilding efforts will be hindered not only by a shortage of supplies, but also soaring commodity prices. In the medium-term, oil and gas supplies are also running low for Ukraine, with the geopolitical landscape subject to incredible volatility. Raw materials are also seeing shortages, with Ukraine’s trade infrastructure already having taken a large hit that will have large implications down the line for the country regardless of the outcomes from the horrific conflict.

Core metals are also experiencing rocketing prices. Russia produces 14.0% of global aluminium, and, with all factors put into perspective regarding economic sanctions, this will only reduce and cause supply shortages in the future. To add, with a largely reduced number of road freight and trucks making their way into and through Russia, its productivity has started to steadily decline. In Ukraine, with rockets and missiles causing sustained damage to buildings, roads and other infrastructure, the physical act of moving materials across the country has reduced by almost 80.0% in most areas and ceased altogether in the other 20.0%.

Electronics is likely to take the largest hit in the near future, as Russia supplies over 40.0% of the world’s palladium, one of the main resources in the production of semiconductors. Computer chips also require neon, of which Ukraine produces over 70.0% of the world’s total supply. In addition, the two major purifiers for Russian and Ukrainian neon are in Odesa, an area where access is now virtually impossible. Disruption of such supplies is an illustration of the wide-scale global impact the conflict will have, reaching corners of the world presumed to be untouched by the invasion occurring in eastern Europe.

An Achilles Q4 2021 shows data for global supply chains forecasted a tumultuous start to the year, the situation in Ukraine notwithstanding. With the additional tension from the conflict, this will only increase. The restrictions imposed on Russian finances and businesses by the West have caused complete disruption to Russian supply chains, as well as sustained damage to the Federation’s economy. As of March 8 2022, the Ruble is valued at ₽1/$0.0073, entering freefall amidst the sanctions levied on the Russian economy by entities such as the EU, USA, UK and even Switzerland, putting aside its long-standing neutrality in the face of these dreadful acts.

The extent to which local and global supply chains and economies are becoming impacted by the war is slowly becoming clearer. A glimmer of hope is that many regular civilians across Europe are coming to the aid of the refugee issue in western Ukraine, which is reducing human congestion across these normally busy trade and trucking routes. For now, however, the Ukrainian people remain under an unprecedented threat. According to Forbes, the Russia-Ukraine crisis could leave the world facing extended reductions to energy supply, severe sanctions that will likely impact food security as well as rare metal supplies needed to sustain production of key technologies. All of this, coupled with the humanitarian crisis, complicates this unrest further.

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Global Aluminium Market: Russia Could Lose Export Earnings, Europe to See Higher Prices

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IndexBox has just published a new report: ‘World – Aluminum – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The global aluminium market will see significant changes this year. Due to sanction restrictions, many key importers may refuse purchases from Russia, which could result in global supply chain disruptions. Russia is the second-largest supplier in the global aluminium market, accounting for 11% of total supplies.

Approximately 78% of Russian aluminium exports are sent to ten countries, namely Turkey (20%), Japan (14%), China (10%), the Netherlands (9%), the U.S. (7%), Greece (5%), Chinese Taiwan (4%), Italy (3%), South Korea (3%), and Norway (3%). Financial and logistic sanctions posed on Russia amid its conflict with Ukraine could damage supply chains, leading to local metal shortages in European countries and the U.S. and higher aluminium prices. Russia may lose its share in global aluminium exports due to possible secondary sanctions on countries that will continue importing from the country. Competitors like Canada and India are also likely to attempt to drive out Russia from the market.


 

Russia’s Aluminium Exports

In 2021, the amount of aluminum exported from Russia soared to 4M tonnes, rising by 50% compared with the previous year. In value terms, supplies skyrocketed to $7.9B.

Turkey (807K tonnes), Japan (542K tonnes) and China (410K tonnes) were the main destinations of aluminum exports from Russia, with a combined 44% share of total volume. In value terms, Turkey ($1.5B), Japan ($1.1B) and China ($720M) constituted the largest markets for aluminum exported from Russia worldwide, together comprising 42% of total supplies.

In terms of the main countries of destination, China saw the highest growth rate of the value of exports in 2021. Supplies to China rose more than threefold, while shipments for the other leaders experienced more modest paces of growth.

Global Aluminium Exports in 2020

The amount of aluminium exported worldwide stood at 24M tonnes in 2020, increasing by 2.3% on the year before. In value terms, supplies amounted to $44.7B.

The shipments of the eight major exporters of aluminium, namely Canada (2.9M tonnes), Russia (2.7M tonnes), India (2.1M tonnes), the United Arab Emirates (2.0M tonnes), the Netherlands (1.9M tonnes), Malaysia (1.5M tonnes), Australia (1.4M tonnes) and Norway (1.3M tonnes), represented more than half of total supplies. The following exporters – South Africa (594K tonnes), Germany (482K tonnes), Saudi Arabia (476K tonnes), Bahrain (469K tonnes) and the U.S. (424K tonnes) – each finished at a 10% share of total volume.

In value terms, Canada ($5.4B), Russia ($4.2B) and India ($3.9B) were the countries with the highest levels of exports in 2020, with a combined 30% share of global supplies. The Netherlands, the United Arab Emirates, Norway, Malaysia, Australia, South Africa, Saudi Arabia, Germany, Bahrain and the U.S. lagged somewhat behind, comprising a further 43%.

Leading Aluminium Importers

In 2020, the U.S. (3.5M tonnes), followed by the Netherlands (2.2M tonnes), Japan (2.1M tonnes), Germany (1.9M tonnes), Malaysia (1.6M tonnes), South Korea (1.4M tonnes), and Turkey (1.2M tonnes) represented the major importers of aluminium, together mixing up 57% of total purchases. Italy (1,058K tonnes), Poland (675K tonnes), Spain (657K tonnes), Taiwan (Chinese) (602K tonnes), Thailand (583K tonnes) and Mexico (512K tonnes) followed a long way behind the leaders.

In value terms, the U.S. ($7B), the Netherlands ($4.1B) and Germany ($3.8B) constituted the countries with the highest levels of imports in 2020, with a combined 32% share of global supplies.

Source: IndexBox Platform

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U.S. and EU Impose Sanctions in Connection with the Crisis in Ukraine: A Detailed Look

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On February 21, 2022, President Biden issued a new executive order targeting the breakaway regions known as the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LPR”, and together with the DNR, the “Covered Regions”) in eastern Ukraine.  On February 22, 2022, President Biden announced further sanctions, specifically designating two major Russian banks and three close associates of Russian President Vladimir Putin, and imposed increased restrictions on dealings in Russia’s sovereign debt.  On February 23, 2022, the EU adopted, a set of new Regulations and Decisions implementing asset freezes and travel bans notably against senior Russian officials and close associates of President Putin, financial restrictions limiting Russia’s access to the EU’s capital and financial markets, and trade restrictions targeting economic relations with the Covered Regions. The actions follow President Putin’s formal recognition of the independence of those breakaway regions and react to the continued involvement of Russian military forces.

New U.S. Sanctions

February 21, 2022 Executive Order

The February 21 executive order largely extends the existing restrictions on the Crimea region of Ukraine and applies them to the Covered Regions.  In particular, the executive order prohibits:

-New investment in the Covered Regions;

-Importation into the U.S. of any goods, services, or technology originating in the Covered Regions;

-Exportation, reexportation, sale or supply from the United States or by a U.S. persons of any good, services or technology to the Covered Regions; and

-Any approval, financing, facilitation, or guarantee by a U.S. person of prohibited transactions.

The executive order further authorizes the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) to add to the Specially Designated Nationals (“SDN”) list any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

-To operate in the Covered Regions;

-To be a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions;

-To be owned or controlled or acting on behalf of any person blocked under the executive order; or

-To have materially assisted or supported any person blocked under the executive order.

However, although some individuals in the Covered Regions have been previously designated under the Crimea-related authorities, no person has been designated yet under the executive order as of the date of this alert.

Simultaneously with the issuance of the executive order, OFAC issued six general licenses to permit otherwise prohibited activity in the Covered Regions.  Most significantly, General License 17 authorizes all transactions that are ordinarily incident and necessary to the winddown of transactions in the Covered Region until March 23, 2022.  Note, however, that a specific license from OFAC would still be required for any transactions with an SDN designated under the executive order.  The other five general licenses authorize the following activity:

–General License 18– authorizing the export or reexport to the Covered Regions of certain agricultural, medical, and COVID-19 related products and services;

–General License 19– authorizing transactions that are ordinarily incident and necessary to the receipt or transmission of telecommunications in the Covered Regions;

–General License 20– authorizing transactions by the United Nations and other specified non-governmental organizations;

–General License 21– authorizing transactions related to non-commercial, personal remittances to the Covered Regions; and

–General License 22– authorizing transactions related to the exportation of services or software from the United States or by U.S. persons that are incident to the exchange of personal communications over the internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.

One key question following the issuance of the executive order is how the specific territories of the Covered Regions will be determined.  This may be particularly challenging, given the shifting borders of the DNR and LPR throughout their prolonged conflict with the Ukrainian government.  We anticipate that OFAC will seek to clarify this question through the guidance in the form of responses to “Frequently Asked Questions” in the coming days.

February 22, 2022 Actions

On February 22, 2022, in a speech in which President Biden stated that “Russia has now undeniably moved against Ukraine,” he announced “the first tranche of sanctions to impose costs on Russia,” promising to “continue to escalate sanctions if Russia escalates.”  Subsequently, OFAC issued a press release detailing the specific actions, all of which were taken pursuant to the existing Executive Order 14024, which included the designation of two major Russian banks and three close associates of President Putin as SDNs as well as restrictions on transactions involving Russian sovereign debt.

Specifically, the two Russian banks targeted are the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”), along with 42 of their subsidiaries.  The designations were made pursuant to a contemporaneous determination issued by Treasury Secretary Janet Yellen that Russian financial institutions are eligible for sanctions under Executive Order 14024 (previously, determinations had also been made on April 15, 2021, with respect to the technology sector and defense sectors).  Both banks are state-owned institutions and play key roles in servicing Russia’s sovereign debt and defense contracts.  Further, in connection with PSB’s designation, OFAC designated the following five Russian-flagged vessels in which PSB has an interest:

-Baltic Leader (IMO: 9220639), a cargo vessel;

-Linda (IMO: 9256858), a crude oil tanker;

-Pegas (IMO: 9256860), a crude oil tanker;

-Fesco Magadan (IMO: 9287699), a container ship; and

-Fesco Moneron (IMO: 9277412), a container ship.

In addition, three close associates to President Putin – including the Chairman and CEO of PSB and two sons of previously designated oligarchs – were added to the SDN list.  As a result of these designations, U.S. persons are prohibited from virtually all transactions with the listed parties or entities of which they own fifty percent or more, directly or indirectly.  In addition, “significant” transactions with these entities could create secondary sanctions liability under Section 228 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).

OFAC also issued a new Directive 1A under Executive Order 14024, which replaces the prior Directive 1.  The effect of the new Directive 1A is to expand existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.  Specifically, Directive 1 previously prohibited U.S. financial institutions from, as of June 14, 2021, participating in the primary market for bonds issued by Russia’s Central Bank, National Wealth Fund or Ministry of Finance, or lending funds to those organizations.  Directive 1A keeps those prohibitions in place, and additionally prohibits U.S. financial institutions – effective March 1, 2022 – from participating in the secondary market for bonds issued by the listed organizations.  Note that OFAC clarified in FAQ guidance that the fifty percent rule does not apply to Directive 1A so that entities owned by the institutions identified in Directive 1A are not themselves automatically subject to the restrictions.

In conjunction with these restrictions, OFAC also issued General License 2, which authorizes transactions involving the servicing of bonds issued by VEB prior to March 1, 2022, and General License 3, which authorizes a winddown period with respect to VEB through March 24, 2022.  No similar general license has been issued yet regarding transactions involving PSB.

Potential Further Action

The Biden Administration has also implied that additional multi-lateral sanctions could be forthcoming, indicating an incremental approach.  A Fact Sheet issued in conjunction with the February 21, 2022 executive order explained that the executive order “is distinct from the swift and severe economic measures we are prepared to issue with Allies and partners in response to a further Russian invasion of Ukraine. We are continuing to closely consult with Ukraine and with Allies and partners on next steps and urge Russia to immediately deescalate.”  As also noted above, President Biden characterized the February 22, 2022 actions as the “first tranche” of sanctions and kept open the possibility for “escalation” depending on how Russia responds.  An embargo on semiconductors and advanced technology has reportedly been considered as part of a second tranche of actions if Russia escalates or continues its incursion further into Ukraine.

New EU Sanctions

February 21, 2022 Designations

On February 21, the Council of the European Union (“EU”)  imposed travel bans and asset freezes (including a prohibition to make funds or economic resources available) on five new individuals “for actively supporting actions and implementing policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine,” bringing the total number of designated parties to 193 individuals and 48 entities on the EU’s list of parties subject to Ukraine-related sanctions.

The new designations include members of the State Duma of the Russian Federation, who were elected to represent the annexed Crimean peninsula and the City of Sevastopol on 19 September 2021, as well as the head and deputy head of the Sevastopol electoral commission.

February 22-23, 2022 Actions

On February 22, the Presidents of the European Council and European Commission jointly announced that an additional package of restrictive measures will be swiftly adopted by the EU in reaction to Russia’s latest aggression against Ukraine, which the EU sees as “illegal and unacceptable” under the Minsk Agreements, which stipulate the full return of the Covered Regions to the control of the Ukrainian government.

The same day, Josep Borrell, the High Representative of the Union for Foreign Affairs and Security Policy, urged Russia “to reverse the recognition, uphold its commitments, abide by international law and return to the discussions within the Normandy format and the Trilateral Contact Group.” Borrell later announced in a joint press conference with French Minister for Europe and Foreign Affairs Jean-Yves Le Drian that the 27 Member States had unanimously agreed on a new package of sanctions.

The new package has been swiftly adopted and published in the Official Journal of the EU on February 23 through 4 Council Decisions and 5 Regulations amending EU’s current sanctions program targeting Russia progressively strengthened since 2014, which already included:

-Individual restrictive measures consisting of travel bans and assets freezes on designated individuals and entities;

-Comprehensive restrictions on economic relations with Crimea and Sevastopol, including (i) an import ban on goods from Crimea and Sevastopol, (ii) restrictions on trade and investment related to certain economic sectors and infrastructure projects, (iii) a prohibition to supply tourism services in Crimea or Sevastopol, and (iv) an export ban for certain goods and technologies;

-An import and export ban on trade in arms as well as an export ban for dual-use items for military end-users or end-use in Russia;

-Financial restrictions limiting access to EU primary and secondary capital markets for certain Russian banks and companies;

-Economic restrictions limiting Russia’s access to sensitive technologies and services that can be used for oil production and exploration.

As announced, the new package of sanctions is quite wide-ranging and intended to “hurt [Russia] a lot” in the words of High Representative Borrell.

First, the legal acts of February 23 (Council Implementing Regulation (EU) 2022/260 and 2022/261 ; Council Decision (CFSP) 2022/267) formally designate individuals and entities which will be subject to individual restrictive measures, namely a travel ban and an asset freeze, in the Union. The new designations target:

-336 members of the Russian State Duma who voted for the recognition of the two self-proclaimed republics; and

-22 decision-makers involved in the illegal decision in addition to 4 entities (Internet Research Agency, Bank Rossiya, PROMSVYAZBANK and VEB) financially and materially supporting, or benefiting from them, those operating in the Russian defense sector and having played a role in the invasion such as senior military officers, as well as individuals engaging in a “disinformation war” against Ukraine.

The legal acts (Council Implementing Regulation (EU) 2022/259 ; Council Decision (CFSP) 2022/265) also provided for a derogation from the application of the new restrictive measures targeting Bank Rossiya, PROMSVYAZBANK and VEB. The competent authorities of a Member State may authorize the release of certain frozen funds or economic resources belonging to these Russian banks, or the making available of certain funds or economic resources to those entities, under such conditions as the competent authorities deem appropriate and after having determined that such funds or economic resources are necessary for the termination by August 24, 2022, of operations, contracts, or other agreements, including correspondent banking relations, concluded with those entities before February 23, 2022.

Moreover, further financial restrictions limiting Russia’s access to the EU’s capital and financial markets will now apply (Council Implementing Regulation (EU) 2022/262 ; Council Decision (CFSP) 2022/264) including notably:

-A prohibition to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments issued after March 9, 2022 by Russia and its government, the Central Bank of Russia or any person or entity acting on behalf or at the direction of the said Central Bank;

-A prohibition to directly or indirectly make or be part of any arrangement to make any new loans or credit to the above-mentioned persons and entities;

-The current prohibitions applicable to securities giving the right to acquire or sell such transferable securities are extended to the securities giving rise to a cash settlement determined by reference to transferable securities.

Finally, the legal acts (Council Implementing Regulation (EU) 2022/263 ; Council Decision (CFSP) 2022/266) introduce extensive trade restrictions targeting economic relations with the Covered Regions of Donetsk and Luhansk, on the model of those already targeting Crimea and Sevastopol including:

-A prohibition to import goods from the Covered Regions into the EU and to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance related to such imports;

-A prohibition to (i) acquire any new, or extend any existing participation in ownership of, real estate in or located in the Covered Regions, including the acquisition in full of such an entity or the acquisition of shares therein, and other securities of a participating nature of such an entity; (ii) grant or be part of any arrangement to grant any loan or credit or otherwise provide financing, including equity capital, to an entity in the Covered Regions, or for the documented purpose of financing such an entity; (iii) create any joint venture in the Covered Regions or with an entity in the Covered Regions; and (iv) provide investment services directly related to these prohibited activities;

-A prohibition to sell, supply, transfer or export goods and technology listed in Annex II suited for use in the transport, telecommunications, energy, oil and gas and mineral sectors, to (i) any natural or legal person, entity or body in the Covered Regions, or (ii) for use in the Covered Regions;

-A prohibition to provide, directly or indirectly, technical assistance or brokering services related to the goods and technology listed in Annex II, or related to the provision, manufacture, maintenance and use of such items to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions;

-A prohibition to provide, directly or indirectly, financing or financial assistance related to the goods and technology listed in Annex II to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions.

-A prohibition to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in the specified territories in the mentioned sectors, independently of the origin of the goods and technology; and

-A prohibition to provide services directly related to tourism activities in the Covered Regions.

The new restrictive measures entered into force on February 23, the date of their publication in the Official Journal of the EU.

Potential Further Action

In reaction to the latest events, Olaf Scholz, Germany’s Chancellor, announced that Germany will halt the certification of Nord Stream 2, a gas pipeline designed to bring natural gas from Russia directly to Europe, a decision welcomed by both High Representative  Borrell and President Ursula von der Leyen.

On February 23, 2022, President Biden announced that he would direct OFAC to sanction Nord Stream 2 AG – a wholly owned subsidiary of Gazprom, which is already subject to U.S. sectoral sanctions – and its corporate officers.

The EU had warned it will leave the door open to the adoption of more wide-ranging political and economic sanctions at a later stage should Russia use “the newly signed pacts with the self-proclaimed “republics” as a pretext for taking further military steps against Ukraine.” As President Putin declared war against Ukraine and escalated military action on February 24, President Michel of the European Council urgently convened an extraordinary meeting of the European Council. EU leaders intend to meet later today to discuss further restrictive measures that “will impose massive and severe consequences on Russia for its action, in close coordination with our transatlantic partners.”

The Member States will also keep a close eye on Belarus, which is said to have “aided and supported the Russian actions” in Ukraine, and the EU is ready to enlarge the listing criteria “to target those who provide support or benefit from the Russian government – the oligarchs, in plain language,” if needed.

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OFAC Sanctions Four Ukrainian Officials for Acting on Russia’s Behalf; Additional Russia Sanctions Could Follow

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As tensions run high between Washington and Moscow over a possibly imminent Russian invasion of Ukraine, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) designated today four (4) current and former Ukrainian officials under Executive Order (“EO”) 14024 dated April 15, 2021. In a press release issued earlier today, OFAC asserted the Russian Federal Security Service (“FSB”) “recruit[s] Ukrainian citizens in key positions to gain access to sensitive information, threaten the sovereignty of Ukraine, and then leverage these Ukrainian officials to create instability in advance of a potential Russian invasion.” OFAC also noted that Russian agents have sought to influence U.S. elections since at least 2016.

In today’s action, OFAC added two (2) current Ukrainian Members of Parliament – Taras Kozak and Oleh Voloshyn – to the Specially Designated Nationals and Blocked Persons List (“SDN List”) and labeled them FSB “pawns”. OFAC accused Kozak of amplifying false narratives regarding the 2020 U.S. elections and Voloshyn of undermining Ukrainian government officials and advocating Russian interests. OFAC also added two (2) former Ukrainian officials to the SDN List – Volodymyr Oliynyk and Vladimir Sivkovich. OFAC asserts Oliynyk gathered information about Ukraine’s critical infrastructure for the FSB and Sivkovich engaged in influence and disinformation campaigns targeting both the Ukraine and the U.S.

All four (4) SDN designations were made pursuant to EO 14024, which authorizes OFAC to impose sanctions on persons who act or purport to act for or on behalf of, directly or indirectly, the Government of the Russian Federation. As a result of the designations, all property and interests in property of these persons in the U.S. or controlled by U.S. persons must be blocked and reported to OFAC. U.S. persons are prohibited from sending or receiving any provision of funds, goods, or services to/from these newly designated SDNs. According to OFAC’s “50% Ownership Rule,” these sanctions also extend to any entities in which these SDNs directly or indirectly hold, either individually or in the aggregate with other SDNs, an ownership interest of 50% or more.

The U.S. has also recently signaled its readiness to impose additional sanctions if Russia proceeds with an invasion of Ukraine, but has not shared many details of its plans. On January 21, 2022, Deputy Secretary of the Treasury Wally Adeyemo in a conversation with Ukraine Minister of Finance Serhiy Marchenko “emphasized that the United States and its allies and partners are prepared to inflict significant costs on the Russian economy if Russia further invades Ukraine.” Some news reports have forecasted that restrictions on semiconductor exports to Russia, sanctions against Russian financial institutions, and controls on foreign-produced goods going to Russia are among the options under consideration by the White House. However, any additional sanctions beyond the four (4) SDN designations reported in this post are purely speculative at this time.

Husch Blackwell’s Export Controls and Economic Sanctions Team continues to monitor U.S. sanctions and export controls against Russia and will provide further updates if additional developments occur.

__________________________________________________________________

Tony Busch is an attorney in Husch Blackwell LLP’s Washington, D.C. office and is a member of the firm’s International Trade & Supply Chain practice team.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

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Ukrainian Sunflower Oilcake Suppliers Enjoy Surging Demand in China

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IndexBox has just published a new report: ‘China – Sunflower Oilcake – Market Analysis, Forecast, Size, Trends And Insights’. Here is a summary of the report’s key findings.

Over the last year, China increased its sunflower oilcake imports from 1.4M tonnes to 2.2M tonnes. In value terms, the imports skyrocketed by +51.3% y-o-y to $588M. Ukraine dominates Chinese sunflower oilcake imports, with a 97%-share of the total volume. The supplies from Ukraine gained $170M last year. The average sunflower oilcake import price in China fell by -3.5% y-o-y to $269 per tonne in 2020.

Chinese Sunflower Oilcake Imports by Country

In 2020, approx. 2.2M tonnes of sunflower oilcake were imported into China, picking up by +51% against 2019. In value terms, sunflower oilcake imports surged by +51.3% y-o-y to $588M (IndexBox estimates) in 2020.

In 2020, Ukraine (2.1M tonnes) was China’s main sunflower oilcake supplier, accounting for a 97% share of total imports. It was followed by Bulgaria (50K tonnes), with a 2.3% share of total imports.

In value terms, Ukraine ($571M) constituted the largest supplier of sunflower oilcake to China, comprising 97% of total imports. The second position in the ranking was occupied by Bulgaria ($13M), with a 2.2% share of total imports. In 2020, the average annual rate of growth in terms of value from Ukraine totalled +42.2%.

In 2020, the average sunflower oilcake import price amounted to $269 per tonne, reducing by -3.5% against the previous year. Average prices varied noticeably amongst the major supplying countries. In 2020, the country with the highest price was Ukraine ($270 per tonne), while the price for Bulgaria amounted to $262 per tonne. In 2020, the most notable rate of growth in terms of prices was attained by Bulgaria.

Source: IndexBox Platform

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ANTONOV Airlines Steps Up to Support Saipan

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Following the devastation left behind from super typhoon Yutu in the Saipan region, Ukrainian-based ANTONOV Airlines teamed up with Air Partner Plc to provide reconstruction support by transporting supplies, relief goods, and humanitarian aid through 23 flights carried out in less than a month.

“Both of these projects in the Western Pacific proved significantly challenging given the sheer volume of goods, totaling 1,500 tonnes, and very short time frame in which to deliver, coupled with the fact that both destinations were in remote locations,” said Ruslan Bykovets, Head of Commercial Department, ANTONOV Airlines.

“We mobilized our AN-225 for the Guam operation and our AN-124-100 for the Saipan mission, working very closely with all parties involved to ensure that the cargo was delivered successfully and that the much-needed relief reached the affected populations.

Thanks to the open-skies agreement between Ukraine and the US, preparations for support and aid were in the works before the typhoon hit land.

“These two projects demonstrated the fast reactions and flexibility of the company and the reliability of our aircraft in emergency situations, to handle the speedy transport of large quantities of cargo to difficult-to-reach locations.”

Source: Meantime Communications

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USCOC, NAM Oppose More Sanctions on Russia

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Washington, DC – In a major policy shift, the US Chamber of Commerce (USCOC)  and National Association of Manufacturers (NAM), two of the largest business groups in the US, have publicly come out in opposition to the sanctions imposed by the White House on Russia following that country’s February military incursion into neighboring Ukraine.

The groups ran newspaper advertisements last week in several publications including the New York Times, Wall Street Journal and Washington Post, asserting that “the only effect” of additional sanctions would be “to bar US companies from foreign markets and cede business opportunities to firms from other countries.”

Both groups had, previously, confined their opposition to the sanctions in a series of private meetings with Obama Administration officials.

The ads ran under the headline, “America’s Interests Are at Stake in Russia and Ukraine“.

Its text read: “With escalating global tensions, some US policymakers are considering a course of sanctions that history shows hurts American interests. We are concerned about actions that would harm American manufacturers and cost American jobs. The most effective long-term solution to increase Americas global influence is to strengthen our ability to provide goods and services to the world through pro-trade policies and multilateral diplomacy.”

Jay Timmons, NAM president and CEO, wrote, “History shows that unilateral sanctions don’t work. President Reagan recognized this reality three decades ago when he lifted the ineffective grin embargo on the Soviet Union.”

The only effect of such sanctions, Timmons said, “is to bar US companies from foreign markets and cede business opportunities to firms from other countries. It’s time to put American jobs and growth first.”

US workers and industries, wrote USCOC President and CEO, Thomas J. Donohue, “pay the cost of unilateral economic sanctions that have little hope of increasing the United States ability to achieve its foreign policy goals.”

Both the US and European Union have imposed penalties against Russian companies, as well Ukrainian supporters of the separatists with Russian President Vladimir Putin threatening to retaliate against US and European companies if broader sanctions are imposed.

US officials have said that the current sanctions now in place have fueled a record $60 billion capital outflow in the first quarter of this year, as well as losses in Russia’s stock market and currency.

The Ukrainian government, the US and its European Union allies say Russia is fueling the conflict by providing manpower and weapons including tanks and anti-aircraft missiles to separatist rebels in Ukraine.

07/08/2014