Besides the devastating human catastrophe, the crisis in Ukraine is also creating economic reverberations around the globe. As Alicia Garcia-Herrero noted at a webinar on 6 May, Russia’s invasion of Ukraine is just one of several shocks that include the pandemic and U.S. Fed tightening.
“To summarise, this means higher inflation and lower growth,” she said.
Garcia-Herrero, Chief Economist for Asia Pacific at Natixis, then gave an overview of the current global economic situation. She said that, for several reasons, she does not expect to see a fast recovery.
Firstly, the pandemic is not over. The current Covid wave in China has led to reduced mobility with knock-on effects on the supply chain, which is also affecting Hong Kong’s export sector.
“On top of that, because of the current logistical nightmare for China and global trade, we will see more inflationary shocks,” she added.
With the pandemic continuing to affect the global economy, the invasion of Ukraine is a further blow to hopes of a recovery. Ukraine’s key sectors are commodities and agriculture, so the crisis is hitting costs around the world.
“The Ukraine war is a massive shock in terms of inflationary pressures, and in terms of food and energy prices for Asia,” she said.
Certain economies that also export commodities, however, will see some benefits.“The biggest beneficiary is Australia, followed by Indonesia and Malaysia.”
The third major development is the U.S. Fed’s programme of interest rate rises. As Hong Kong will also have to raise its rates at the same time, this will mean higher borrowing costs for the Government, corporates and households.
“To conclude, for this part of the world we have to think in terms of ‘Ukraine-plus-plus’ – meaning Covid in China, and the Fed,” she said.
For Hong Kong, Garcia-Herrero has a number of concerns: “First, Hong Kong is very dependent on the Mainland, so the pandemic is a major shock; second, because it has to follow the Fed; and third, on Ukraine, because any financial centre will suffer due to the sanctions.”
Stephen Olson, Senior Research Fellow at the Hinrich Foundation, then discussed the impact of war on the multilateral trade system.
“The crisis in Ukraine will lead to a further weakening in our post-World War II aspiration for a single, stable and deeply integrated global system,” he said.
This system is becoming more fragmented. In the past, under GATT and then the WTO, trading relationships were built on economic efficiencies and commercial imperatives.
“That world and that vision is slipping a bit further away,” he said. “This trend was long under way before Russia invaded Ukraine, but has been accelerated and deepened as a result of the crisis.”
He noted three specific impacts. First, there has been an intensification of the “democracy versus autocracy” mindset. While many nations quickly condemned the invasion, China did not do so. As the war has dragged on, the different approaches have taken on greater resonance.
Secondly, there has been “an increased weaponisation of trading relationships.” The United States and European Union rolled out sanctions against Russia very quickly, and have made clear that any country that helps Russia to circumvent the sanctions will also be targeted.
“This weaponisation creates a strong incentive to restrict trade relationships to ‘friendly’ countries that share your values,” he said. “Which is pushing us towards a more fragmented trade system.”
The third impact of the Ukraine crisis is that it is weakening an already weakened WTO. If trade is no longer based on a single system, the relevance of a global organization will diminish.
So what does all this mean for businesses? Olson said that companies, and multinational corporations in particular, should regard the Ukraine crisis as a wake-up call. For many years, with a well-functioning trade system in place, executives have been able to focus on commercial priorities and not worry too much about political developments. This is now changing.
“Geopolitical issues will intrude into the boardroom much more than before,” he said. “The world will get a lot messier.”
Thomas So, Partner at Grandall Zimmern Law Firm, then shared his expertise on the issue of Western sanctions on Russia.
He explained that the U.S., E.U. and United Kingdom had all introduced a wide range of sanctions that affect Russian people, companies, certain industries and vessels. For example, they prohibit movement of targeted people, assets and money.
As So explained, strictly speaking, these sanctions have no legal backing in Hong Kong, as they are not part of the law here. “But these sanctions can still create a substantial impact on people doing business in Hong Kong,” he added.
Some of the sanctions are very broad: for example, the definition of a “U.S. person” includes anyone in the U.S. The sanctions also target goods or services of U.S. origin, and transactions in U.S. dollars.
“Combining the U.S., U.K. and E.U. sanctions, you can appreciate how wide the scope is,” So said. “If you are doing business, first you need to ask yourself – from a managing risk perspective – are there any targeted persons or companies involved in the transaction?”
Businesses also need to check whether any of the industries or goods they are dealing with are on any of the sanctions lists. They should also be aware that Russian banks have been removed from the SWIFT payment system, and ensure that alternate payment methods are available.
So suggested that companies review their contractual arrangements to check if there is an exit clause or other options to terminate agreements. A new clause can be added to contracts that asks parties to confirm that they have not been sanctioned.
Another option for risk management is insurance, especially for exporters. “Check your insurance policies on which claims could arise to see if they contain sanction clauses,” So added.
Despite the sanctions, it is worth noting that Russia is not closed for business, and even the E.U. is continuing to import energy. But businesses should ensure they understand what is permitted under the sanctions.