March 08, 2022

World trade is already affected by sanctions on Russia

Sanctions against Russia are beginning to wreak havoc on world trade, with potentially devastating consequences for fuel and grain importers, and fueling inflation on a planet trying to overcome the supply disruption stemming from the coronavirus pandemic.

Since the Russian invasion of Ukraine began, hundreds of tankers and cargo ships have changed routes to avoid passing through the Black Sea and dozens of them are stranded in ports or on the high seas, unable to unload their valuable cargo.

Russia is one of the main exporters of grains and oil, metals, wood and plastics, goods used around the world in a number of products and industries, from steel factories to car companies.

Russia has some 2,000 tankers or cargo ships, but only a few have so far been affected by Western sanctions.

The freezing of assets of major Russian banks, however, affects all import and export trade. Compounding the picture, firms like Apple and Nike, and big cargo carriers like Maersk, are leaving Russia, whose extensive trade ties with the West are all but severed.

“This is an earthquake like we have never seen,” said Ami Daniel, co-founder of Windward, a maritime intelligence firm that advises governments. “Companies are going well beyond their legal obligations and taking action based on their own value scales, even before their customers ask for it.”

A possible safety valve for Russian exports is China, whose growing economy needs natural resources. But China, perhaps the main beneficiary of globalization, has so far shown little willingness to support Russian President Vladimir Putin, despite abstaining from a United Nations vote to condemn Russia’s incursion into Ukraine.

The impact of sanctions is felt strongly

Interunity Management Corp SA, a Greek shipping company whose 60 cargo and tankers are operated by 200 Russian and Ukrainian captains.

After the invasion, the Russian half of that staff wondered how they would get back home in view of the European Union’s suspension of flights to Russia. The Ukrainian half, for its part, did not know if they would have a country to return to.

A Ukrainian sailor on a tanker stranded in the Gulf of Mexico was so distraught that he demanded to be allowed to disembark months before his contract was due, according to George Mangos, one of the directors of Interunity.

“He told me that he wanted to disembark at the next port to go fight for his country,” Mangos said. “Operating a very sophisticated tanker, with a dangerous cargo, is stressful under normal circumstances. The only thing we can do is ask the staff to focus on work and not think about politics. It’s tough, but they are very stoic people and I’m very impressed with their dedication.” For now, the impact of the war on world trade is being felt most in the Black Sea, where Russian and Ukrainian ports are major stops for shipments of wheat and corn. Traffic has come to a complete standstill, suspending deliveries from the world’s second-largest grain exporter. Unlike oil production, which can be increased quickly, increasing grain supply takes time. Ukraine produces 16% of world corn exports and, together with Russia, they account for 30% of wheat exports. With market disruption, many poor countries that depend on these imports are likely to experience severe shortages. Among those that could be hit the hardest are Turkey, Egypt and India, which rely heavily on Russia for everything from staples used for bread to natural gas and tourism. Approximately 78% of the wheat that Turkey imports comes from Russia. Ukraine contributes 9%. This wheat is used in numerous sectors of the Turkish food industry. India imports 80% of the oil it consumes, much of it from Russia. It also imports Russian metals used in the fifth largest automotive industry in the world. In the United States, the main impact will be felt at gas stations, where rising prices are aggravating inflation that is rising at its highest rate in four decades.

Russia was the third largest source of oil products sold in the United States — behind only Mexico and Canada — and responsible for 8% of imports. It is also the second largest supplier of platinum, used to make automobile exhaust pipes. Overall, however, Russia was only the 20th largest supplier of goods to the United States in 2019, according to government statistics. Wheat prices rose more than 55% after the invasion. Oil prices, which had already been on the rise, reached $110 a barrel for the first time since 2013. And fees charged for hiring tankers have risen as much as 400% as oil traders scramble to secure suddenly scarce transportation. It is not clear what direction the situation will take or what other unexpected consequences there may be. While sanctions are not always enforced, never have so many punishments of a world power been adopted with such speed and coordination. The situation worries Tinglong Dai, an economics professor who studies supply chains at Johns Hopkins University.