What Russia Gains On The Energy Swings, it loses on the Rouble roust

We are sure many of you may be affected by Russian invasion of Ukraine, for a variety of reasons, including the state of trade. The effect of sanctions on Russia and the effect that inflation will have on the buying power of your customers.

Russia has been removed from the open general export licences covering dual use goods. Controls on exports are changing all the time. The US has banned exports of telecoms equipment to Russia. At the time of writing that policy hasn’t been adopted by our own government, but it’s worth searching the Department of International Trade (DIT) site, using term ‘Export Controls’, regularly.

Having said that there are some goods which are otherwise not subject to export controls and they don’t appear to have any further restrictions imposed yet.

Sanctions have been imposed against specific organisations (banks) and individuals. The wider implications of which we will discuss below. First, we should outline what former United States Secretary of Defence Donald Rumsfeld called the ‘known knowns’ of a conflict – the trade sanctions. Then we shall get onto the ‘known unknowns’ of demand elasticity for your trading services.

The Known Knowns

America has imposed some trade sanctions already - however in a briefing to the White House press corps vice president Kamala Harris implied that some sanctions are being held back ‘as a deterrent’. In cases where the goods being shipped have any US involvement, you must make the appropriate checks to see what current US re-export licence rules will apply.

In such an atmosphere of confusion and flux, there are few oases of calm. The Export Control Organisation (ECO) should tell you all you need to know, provided you register on the Shared Primary Information Resource Environment (SPIRE).

The DIT website also has guidance covering financials, trade, shipping and immigration sanctions on Russia. The site updates the EU sanctions and imposes new prohibitions on trade which can be penalised with fines. Certain categories of goods will invoke punishment and exporters should check the regulations carefully before exporting goods to Russia.

Your safest option is to contact the Export Control Joint Unit , before shipping any goods to Russia. Be wary of suspect sources of goods that may be shipped to one country and then forwarded or diverted to Russia.

The Financial Sanctions , Russia document details the asset freezes on those who the government has identified as destabilisers of Ukraine and those who undermine or threaten the territorial integrity, sovereignty and independence of Ukraine. This category also includes people who engage in, support or promote any policy or action that achieves the above.

The Known Unknowns

The big problem for our Russian trading partners is that the actions taken by their leader have seen them excluded from SWIFT. This excludes them from payments - possibly temporarily - but the damage caused by inflation will have much longer lasting effects.

As soon as the Asian money markets opened, the Russian rouble went into freefall, pushed over the edge by the prospect of Western sanctions. The freezing of Russia’s foreign currency assets and banishing of its banks from the SWIFT international transaction network was even more brutal. The US Dollar rose 40 per cent against the Rouble, taking the Russian currency from 84 to 188 to the Dollar.

In response to the largest one-day slump in the Russian currency’s modern history, its central bank doubled its key interest rate to 20 per cent. The Russian Finance Ministry then ordered companies to convert 80 per cent of their income into roubles.

The Touble’s collapse shows how isolated the government has become. Its exclusion from international financial markets will cripple the economy. A degrading currency makes all imports dramatically more expensive. The quality of life for the Russian middle class - the main buyers of UK consumer goods - hurts any agent that has to pay for overseas goods and services.

The country’s central bank has ordered financial institutions to reject the instructions of foreign clients attempting to sell Russian securities, a move that may be the beginning of controls to prevent massive outflows of capital. Banning foreign investors from accessing their money will ruin any credit that’s left in Russia’s reputation as an investment destination. With Muscovites queuing outside banks to withdraw their money, there could easily be panic about the stability of Russia’s financial system. Such fears lead to bank runs.

What You Gain On The Oil Swings, You Lose On The Rouble

Could Russia benefit from energy shortages? Oil prices are nearing $100 per barrel and as a huge exporter of oil and gas, Russia should gain from higher energy prices. But the plunge of the rouble has neutralised the effect of any extra revenue from commodity sales and gains will be overshadowed by the damage caused by sanctions.

International sanctions mean that banks overseas will hesitate to participate in any workarounds that could violate incoming sanctions for fear of losing access to dollar-denominated payment and settlement.

If the weakness of the rouble endures and capital is frozen for the foreseeable future, the financial damage to businesses and livelihoods could be lasting. The diversification of Russia’s economy away from commodities would have been set back by years and the Russian economy could end up being isolated.

The Marine Reinsurance People Have the Best Intelligence

Be aware that the routing of cargo is another danger. If that routing goes through or over Russia, matters will get complicated. Some rail routes are a cause of alarm. The Trans-Siberian Railway is a train that won’t ‘take the strain’ for you any-more. Many airlines say they will no longer fly over the Ukraine.

You absolutely must check your position on insurance. If only because insurance people know everything. They have to because they are effectively laying bets on business outcomes every day. The marine re-insurance brokers generally have intelligence feeds coming into their computers from multiple sources. They often seem better informed than the media.

You need to investigate the fine details about the impact of the crisis on freight forwarder insurance. What is your liability and what is your insurer’s policy as it stands now? Cover may be withdrawn and your premiums increased, for goods being shipped to and from Russia. Or indeed anything else in that region.

To summarise: please review your internal processes for shipments to and from Russia and its neighbours until the current crisis is resolved.

And finally…There is a rumour circulating that if Russia becomes isolated, it will channel goods and capital through China. North Korea does 90 per cent of its trade through China. To verify this rumour - tell it to the marines. The reinsurance marines that is.

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