External Expansion Limited

Monday, 10 March 2014

HOW THE CONFLICT OF UKRAINE AFFECTS INTERNATIONAL TRADE


These last days the markets are in tension caused by the latent conflict between Ukraine and Russia, due to the invasion of Crimea by Russia. This has important effects in the international markets which will definitely affect the prices of commodities and consequently there will experience imbalances in international trade to which we must be prepared .

First of all, we might analyze the Ukrainian nation which is composed of 24 oblasts (states or provinces) and one autonomous republic (Crimea). Kiev oblast consists by the city of Kiev with a special bylaw similar to Sebastopol's bylaw, which shelter the Russian Black Sea Fleet as lessee, located in Crimea. The country is bordered by Russia to the east, Belarus to the north, Poland, Slovakia and Hungary to the west, Romania and Moldova to the southwest, and the Black Sea and Sea of Azov to the south. Ukraine gained the independence after the dissolution of the Soviet Union in 1991, this independence introduced Ukraine gradually into a market economy and was affected by a recession and high inflation later that lasted eight years until after 2000 when begins to experience stable growth in GDP of 7% yearly. Ukraine has the second largest military forces in Europe, after Russia. There are 46.2 million mostly Ukrainians and Russians lesser extent inhabitants (Concentrated mainly in Crimea), Belarusians and Romanians, being the official language is Ukrainian but Russian is widely spoken and the dominant religion is Orthodox Christianity.

In 2000 exports began to grow 10% annually, mainly by industrial production. In 2008-2009 the economical crisis affects drastically the country, reason for what the IMF in November 2008 loans about 16.5 billion dollars as it kept one of the highest GDP in the world. Ukraine produces all types of transport and spacecraft. Some of the main means of transport which produces and exports to many countries are the Antonov airplanes and trucks Kpa3. These exports are mainly destined to the European Union and the Commonwealth of Independent States which is a supranational organization composed of 10 of the 15 former Soviet republics. Ukraine produces its own satellites, launch vehicles and even build their own spaceship through the National Space Agency of Ukraine. It has become recognized as a world leader in the production of missiles and missile-related technology. Let's say that Ukraine exports of industrial products production quality and advanced technology. By contrast, the country imports oodles of energy supplies, primarily oil and natural gas, depending largely on Russia by 35% as their energy supplier, despite that 25% comes from domestic sources and 40% remaining of Central Asia through transit routes controlled by Russia. However 85% of the Russian gas is delivered to Western Europe through Ukraine classified by the World Bank as a middle-income state highlighting its main infrastructure problems, underdeveloped transportation, corruption and bureaucracy.

Starting from November 2013 turn to a series of protests known as Euromaidán, in which part of the population called for greater integration of their country with the EU after the rejection of the Government of Viktor Yanukovych to consider it disadvantageous for country. These protests have been growing in intensity and transforming into civil unrest demanding the demission of the president and his government. This violence escalated from January 2014 because the government wanted to impose a law against demonstrations which led to invade several government buildings and began using weaponry that caused hundred of deaths. Last February the 22nd, Yanukovych was removed and replaced provisionally by Oleksander Turchinov, appointed by parliament until elections to be held next May the 25th. However, after the support of the population of Crimea to integration with Russia given the majority Russian population in this region, between 27 and 28 February, Russia intervenes in the Crimea territory with soldiers of the Black Sea fleet, placing them in strategic locations of Crimea to defend the Russian and Ukrainian speakers in general. At the time of this writing Ukraine has prepared his army and intensified diplomatic meetings between the various ministers of Europe, USA, Russia and Ukraine in order to avoid any military confrontation. Given the possibility of a conflict, it should be recalled that in Ukraine were located nuclear silos of the USSR and although in 1994 Ukraine gave up its part of the Soviet nuclear arsenal in exchange for its safety, there were some cracks in the control of the transfer of such weapons nuclear to Russia. Latest news was that the regional government of Crimea has decided to convene a referendum among its citizens to decide whether or not to belong to Russia for Sunday March 16, while at the same time validated the Russian legal tender, moving the ruble to the hryvnia .

Given this seriousness of the facts, such as the U.S. first announced suspend trade with Russia if it continued with the current position on Crimea, as well as joint military exercises that were planned. Regarding bilateral trade between Moscow and Washington, the figure is around 30 billion dollars a year. USA is the largest economic partner of Russia, which has greater volume of trade with China, Germany and the Netherlands (EU). Russian exports (fuels) to the U.S. are valued at 13 billion dollars and imports (machinery) are worth 15 billion dollars. There are joint holdings of deposits of Sakhalin Island between oil Exxon Mobil and Rosneft, assuming these sanctions to the American company an annual loss of 10 billion dollars, so post back to jointly develop the holdings of such deposits of oil and gas in Sakhalin will be a complex choice for the U.S. company.

According to historical data, in 2012 Russia exported about 530 billion, while imported 336 billion dollars. Europe is the leading Russian supplier followed by China, USA and Japan. Trade between the EU and Russia reached record levels in 2012, that year being European exports (technology , machinery, vehicles and consumer goods) of 165 billion dollars, while imports about 292 billion dollars from Russia (Fuels and gas mainly for Germany). Outside the European block, China is the second trade partner exporting worth 35 billion dollars and importing for 52 billion dollars. Japan exports (vehicles and machinery) to Russia worth $ 16 billion, while imports worth 16 billion relating to oil and its derivatives. In short , the structure of Russian exports consists of petroleum and petroleum products, cereals, chemicals, defense weapons, metals, wood, foodstuffs, machinery and equipment, while the base of its imports are machinery and equipment, assets consumption, medicines, meat, sugar, semifinished metal products.

If the U.S. would make a trade embargo, could be more harmful to them than to Russia itself, this wouldn't be the case if the embargo is also done by the European Union, where Russia has more economic partners, but up to now, Brussels is not considering any punishment to Moscow for commercial trade. The closure of Russian companies in other countries, and vice versa, would result in a significant loss in tax revenues and increased unemployment in the countries to implement these measures. If the dispute is not resolved through diplomatic track risks would be about potential supply problems and rising energy that at least a quarter of the gas consumed in the EU comes from Russia through Ukraine (Already have appreciated the first increases oil markets). Exist in both Russia and Ukraine, a strong weight in the grain trade and having experienced a rise in the price of the main raw materials, to deduce that a strong conflict wheat and corn could fire their market values. International trade would be significantly affected, mainly in Europe which is one of the major trading partners of Russia and it has yet to overcome the crisis, taking positions in companies with up to 10% of sales in Russia and many other interests in Ukraine. We observe a strong impact on the markets immediately affecting stock markets around the world and even in the exchange markets, boosting demand for safe havens. Russia could return to recession like many other countries that do not just start steadily. Ukraine is about to fall into default, if it have not already, and that is why the proposed loans from Europe, IMF and the U.S.. The impact on the European banking system would be devastating if Ukraine went bankrupt as if a war is definitely also occur.

In the case of Latin America, a substantial rise in the price of cereals would benefit this region. It is noteworthy that in recent years Argentina has given Ukraine as fifth exporter of wheat. Meanwhile Russia is the fourth largest exporter of this cereal. The surprising increases in Chicago and Kansas markets pushed up 6 % in wheat and 2 % for maize, as many funds invest large sums of money on these goods considered refuge from such crises. For the specific case of Argentina, is not able to take advantage of the initial price increase for lack of exportable surplus of wheat mainly. Ukraine is the fourth overall maize exporter, behind Brazil, USA and Argentina. Ukrainian corn exports come from the Black Sea, where the conflict is currently being, which would lead to possible cancellations of foreign sales and collection of grain from producers waiting to see how situation goes on, which would push further up the prices of these raw materials. However, the need to add foreign currency by the government of Ukraine to correct its delicate economic situation could fire its grain exports and attract the opposite effect lowing down global prices of wheat and corn.

Finally, we do not know how these facts will end, but if we analyze the case of international trade, and increases were seen in commodities related to fuel and food will undoubtedly involve a generalized deterioration in consumption people. We consider that these initial increases in the prices of these products to the possibility of a conflict, are benefiting those who have the control of the prices, while the final consumer as well as those at the intermediate scales of international trade are who suffer the consequences, so we hope that this article can somehow prepare to act in the international arena.

For more information or require services related to this article, please contact through our website www.externalexpansion.net or directly to our email info@externalexpansion.net.

Until the next article...

Leonardo Dufau
LinkedIn

Also read the following related article: UNRAVELING THE INS AND OUTS OF INTERNATIONAL TRADE

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