SJFMC Capital LTD.

By Admin Trade Finance March 02, 2022

Say No to War

The last week of February was quite a surprising week for our Trade Finance Team. As for the first time, one of our Import Finance transactions of our client couldn’t be funded after confirmations from financing bank a day before funding date.

The reason to our utter dismay was none other than sanctions imposed on Russia because of ongoing Ukraine-Russia War. The shipment was from the Port of Novorossiysk, Russia which came under the sanction list and as per the recent restrictions on Russia imposed by the US and European allies, the financing for the imports through SWIFT was rejected. This instance led us to further enquire about economic crises of the war from the scratch and write this blog.

While the world economy was still recovering from the Covid pandemic, a declaration of war against Ukraine by the orders of Russian President Vladimir Putin has shocked the entire world. Russia being overwhelmingly powerful, has the world’s largest tank forces, air force, navy fleet and 850,000 active personnel which outnumbers Ukraine in every aspect. The tensions between both the countries had become active when Russia had considered military invasion into Ukrainian territory at the end of 2021. The crisis had erupted more when the diplomatic talks to bring control on Russia failed and at the dawn of 24^th February 2022, Gun fires and explosions could be heard in Kiev, Capital city of Ukraine. The fierce battle led the Russian forces capture the Chernobyl Nuclear Plant, the world’s most isolated place since its worst nuclear disaster. The World’s largest Cargo Plane, Antonov AN-225 Mriya manufactured in Ukraine was also demolished by the Russian troops.

Ukraine gained independence in the year 1991 after the dissolution of the Soviet Union which resulted in forming 15 independent republics (Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan) and the establishment of Commonwealth of Independent States. However, since independence, Ukraine has struggled to fight against corruption and to bridge internal divisions as the western part of the country supported uniting with Western Europe and the eastern part had closer ties with Russia.

The Russo-Ukrainian War started in 2014 when the Euromaidan protest resulted in removal of Viktor Yanukovych, Ukraine’s pro-Russian President and at the same time the Russian soldiers forcibly annexed the Ukrainian territory of Crimea causing the region to be in a vulnerable condition for self defense without a government and military support. The Crimean Parliament was then captured by Russia whose outcome was for the Autonomous Republic of Crimea to join the Russian Federation. Taking advantage of this, Putin immediately also ordered invasion on Donbas, the southeastern region of Ukraine. During this ferocious battle, a scheduled passenger flight from Amsterdam to Kuala Lumpur very well known as Malaysia Airlines Flight 17 (MH17/MAS17) was shot down by a Russian supplied missile by the pro-Russian rebels killing all 15 crew members and 283 passengers aboard. This conflict between Russian separatists and Ukrainian army have killed more than 14000 people while Russia still denying its involvement in this conflict.

Volodymyr Zelenskyy, President of Ukraine came into power in 2019 promising peace in Donbas region and economic renewal. The Government of Ukraine also has ambitions to be part of NATO (North Atlantic Treaty Organization) which constitutes a system of security wherein the member countries agree to support defensively in response to aggressive military action by an external party. The government shall also apply for EU membership in 2024.

Reasons for the war is that Post collapse of the Soviet Union, Russia lost control over 14 republics which included Ukraine and now Russia does not want Ukraine and other former Soviet nations to join NATO (North Atlantic Treaty Organization) and involvement of the West which could stop deployment of weapons and force Russia back from Eastern Europe invasion. Joining NATO will gain support to Ukraine from member nations to take back Crimea and Donbas region.

How the world responded to Russia-Ukraine war:

Post dissolution of the Soviet Union, Russia developed a close relationship with India. Both the countries termed this relationship as “special and privileged strategic partnership”. This strategic partnership was built on five components: defense, nuclear energy, politics, space and anti-terrorism. According to 2021-2022 data, India’s total exports to Russia stands at US$ 2.5 billion and total imports from Russia stands at US$ 6.8 billion. Looking at the current situation in Ukraine, Prime Minister Narendra Modi had a telephonic conversation with Vladimir Putin and appealed for an immediate stoppage of violence and the differences between Russia and the NATO group can be resolved through sincere and honest diplomatic dialogue. PM also discussed concerns over the safety of Indian citizens especially students in Ukraine. Following the attack, Ukraine immediately shut down the airports and evacuation of more than 18000 Indians was difficult. Air India informed ‘’flight AI1947 returned back to Delhi due to NOTAM (Notice to Air Missions) in Kiev, Ukraine”.

Russia is the second largest exporter of Crude Petroleum globally and after Putin ordered troops to invade Ukraine, crude oil prices pushed more than US$ 100 per barrel reaching its highest level since 2014. Gold, Metals, and Agricultural commodities also saw record high prices on various exchanges in the world. This sudden hike may cause supply chain disruption, said Chairman of HPCL. Following the Invasion in Ukraine, various sanctions were announced by the United States, United Kingdom and European Union targeting Russian economy specially Banks and Trades. Germany stopped a major gas pipeline project from Russia which routes from Western Siberia to Western Europe via Ukraine.

Many Trade transactions mainly Import & Export financing having direct or indirect involvement of Russian-Ukraine region (for example: buyers, sellers and shipment from/to ports of Ukraine and Russia) were rejected/cancelled as the regions fall in the recent OFAC Sanction List. UK and USA decided Russia to be removed from SWIFT International System and were keen to push it hard as meeting to discuss the Bloc’s Sanction was held on 24^th February 2022 in Brussels. The SWIFT system is overseen by the European Central Bank and G-10 Central Banks and handles millions of transactions across 200 countries and more excluding North Korea and Iran. The exclusion from the SWIFT will have a huge hit on Russia’s foreign funding as more than 130 countries have at least one commodity import from Russia and the payment to the Russia’s exporter are done through SWIFT. However, Russia has developed its own payment system with 23 foreign banks connected. Other alternative can be routing of payments via countries that has not imposed any restrictions on Russia.

US President Joe Biden along with UK Prime Minister Boris Johnson announced freezing of assets of 5 Russian Banks which includes Sberbank and VTB the largest lenders and 3 Russian Billionaires along with travel ban to UK. Latin American Countries such as Colombia, Argentina and Chile have also appealed Russia to cease military operations in the Ukrainian territory. New Zealand PM Jacinda Ardern has called for permanently withdrawal of war to avoid catastrophic loss of innocent people and announced Russian ambassador and officials shall be expelled and banned from travelling.

The war has also caused Global Equities sell-off as Stock Exchanges around the Globe crashed drastically. This puts a question on the investors in regards to the interest rate hike by the Federal Reserve in March 2022. The sanctions imposed on Russia led to wipe out of US$ 250 billion from the Stock markets in Russia as the stocks collapsed more than 45%. US$ 177 billion were also wiped out in the first hour of trade from the Indian Stock Market on 24^th February 2022. Other Asian Markets were hit hard as well.

Asian Markets	% Change on Feb 24, 2022
Shanghai SE Composite Index	-0.89%
Taiwan	-2.08%
Nikkei 225	-2.33%
Australia	-3.02%
Hang Seng	-3.11%
Sensex	-3.46%

The leaders of IMF and World Bank have come together to support Ukraine and World Bank being the crisis lender are in process to deploy US$ 2.2 billion to assist Ukraine. David Malpass, World Bank President said “he was deeply saddened and horrified by the devastating developments in Ukraine, which will have far-reaching economic and social impacts. The bank is also preparing for large support to Ukrainian people and the region”.

Meanwhile, Thousands of Russians gathered on the street of St. Petersburg and Moscow to protest against Putin with banners and candles in hand chanting “No to War”. People from other countries such as Germany, Georgia, Japan, Australia, UK and USA were gathered in their cities to protest against Russia. UEFA Champions League, being Europe’s biggest football event will not host this season’s Champions League final in St. Petersburg, Russia and therefore has moved the finals to Paris. Football fans and players supported Ukraine by holding Ukrainian flags and banners to Stop War during their Football match in Europe. Some football clubs have also decided to remove logos of Russian Sponsors. “Anonymous” a hacking group has declared Cyber war on Russia and was proved by hacking website of Russian TV channel. Their motive is “for a better future for humanity”.

Remembering the music legend Michael Jackson in his song “Heal the World, make it a better place for you and for me and the entire human race. There are people dying, if you care enough for the living, make it a better place for you and for me”. At this moment the world stands with Ukraine for their freedom, sovereignty, peace and self-determination and calls for an end to the Bloodshed.

References:

https://www.moneycontrol.com/news/business/commodities/hpcls-surana-warns-of-supply-disruptions-as-crude-closes-in-on-100-a-barrel-8148621.html

https://www.thehindubusinessline.com/markets/commodities/crude-oil-futures-down-on-hopes-of-us-russia-summit/article65070143.ece

https://www.marketwatch.com/story/oil-rises-and-natural-gas-surges-8-as-russia-orders-troops-to-ukraine-11645493192

https://www.zeebiz.com/india/news-russia-ukraine-crisis-hits-commodities-severely-crude-oil-at-7-year-highs-gold-price-highest-in-14-months-179335

https://www.reuters.com/business/energy/oil-climbs-growing-fears-conflict-over-ukraine-2022-02-22/

https://www.investing.com/analysis/crude-oil-corrects-early-in-the-week-200618403

https://oilprice.com/Energy/Crude-Oil/Are-US-Shale-Firms-Spending-Enough-On-New-Oil-Projects.html

https://www.telegraphindia.com/business/move-to-fill-up-crude-oil-storages/cid/1852785

https://uk.finance.yahoo.com/news/shell-bp-oil-and-gas-rise-as-brenct-crude-soars-deepening-russia-ukraine-crisis-102427530.html?guccounter=1

https://www.moneycontrol.com/news/business/markets/russias-ukraine-invasion-may-rule-out-50-bps-rate-hike-by-us-fed-in-march-8157261.html

https://www.moneycontrol.com/news/business/markets/india-tells-un-it-fears-danger-of-a-bigger-crisis-need-to-be-careful-8156811.html