It’s been an eventful year for trade and trade finance, which means a busy year for the GTR team. Here we gather our views on what we perceived as the most significant developments in the trade space in 2015.
Sense and sustainability
By Sofia Lotto Persio, GTR reporter
The end of 2015 represented the climax in a year-long increasing focus on sustainability and climate financing. The UN climate conference in Paris dominated headlines in the beginning of December, with 196 countries agreeing to a universal, legally binding climate deal aiming to hold global temperatures to a maximum rise of 1.5°C above pre-industrial levels.
As part of the deal, the nations committed to raising US$100bn a year by 2020 in climate funding to help poorer countries adapt their economies, and accept a new goal of zero net emissions by later this century.
Critics of the deal have lamented the absence of explicit references to fossil fuel and carbon emissions. From a financial perspective, the OECD deal struck in November renegotiating the terms for export credit support for coal projects is a more explicit take on tackling global warming through financial means.
The difficulties experienced by Indian mining giant Adani in financing a coal mine in Australia are also a sign of how financiers are becoming more cautious in getting involved in projects that would cast a dark shadow on their corporate social responsibility targets and their reputation.
The strive for a more sustainability-friendly investment profile is also reflected in a growing body of research on fostering sustainable trade, such as Commerzbank’s scenarios or the Cambridge Institute for Sustainable Leadership (CISL)’s discussion papers. CISL also spearheads the Bank Environmental Initiative and its soft commodities compact, a joint project with the Consumer Good Forum that recently added JP Morgan and Société Générale to its original group of 10 banks.
These participating banks, which represent a combined share of over 50% of the global trade finance market, have committed to raising industry-wide banking standards and reinforce the development of new market norms, as well as financing the transformation of supply chains. The overall aim is to mobilise the global banking industry to help remove deforestation from soft commodity supply chains and achieve zero net deforestation by 2020.
This is still not enough. Banning government support for polluting coal production is one step in the right direction, and ensuring the sustainability of supply chain is another, but the elephant in the room remains fossil fuel (particularly oil) extraction, production and consumption.
The low oil prices have propelled some countries, such as the UK, to increase subsidies and tax breaks for fossil fuel and reducing those for renewable energy. Support for scandal-ridden oil companies like Petrobras has not waned, either. At this pace, it is unclear how the targets agreed globally can ever be reached. Including oil in the conversation about coal and sustainability is as urgent as ever: changes in climate have already started affecting crops and land in various parts of the world. Less crops mean less trade and less trade means less financial opportunities – there is no simpler economic argument than this.
Still, supporting renewable energy against fossil fuel financing is a long-term argument, one that organisations focused on short-term gains (elections, quarterly results) may be reluctant to prioritise. This is why development and multinational institutions are playing an instrumental role in driving the effort for funding renewable energy projects, especially in emerging economies.
The sustainability agenda’s momentum cannot be sustained by these players alone. Ultimately, effective actions against climate change depend on individual and collaborative efforts between governments, financial institutions and consumers. In 2016, it will be time to agree on what exactly needs to be prioritised in the drive for people, planet and profit.
Sanctions, sanctions, sanctions
By Melodie Michel, GTR deputy editor
Much has been said about the “weaponisation” of trade and the use of trade-related sanctions to assert political authority, and in 2015, two countries shared the spotlight of the sanction stage – Russia and Iran. While their sanction regimes went in opposite directions this past year, it would be wrong to assume the sanctions developments in the two countries were completely unrelated.
The accelerated development of Iran’s South Pars natural gas field since 2012 represents an alternative source of energy for Europe, which has traditionally been over-dependent on Russia for its gas needs. This could be seen as one of the reasons Europe was so keen to negotiate with Iran on its nuclear programme and reopen trade. A deal (the Joint Comprehensive Plan of Action) was finally struck on July 14 between Iran and the P5+1 (the US, France, China, the UK, Russia and Germany) with expected implementation in Q1 2016.
Meanwhile, western governments formed a united front against Russia in 2014 to mark their disapproval of Russia’s annexation of the Crimea region – which previously belonged to Ukraine. Those sanctions were prolonged and stepped up in 2015 as Russia failed to implement its part of the Minsk agreement.
Russia of course retaliated with counter-sanctions against the EU, and things escalated when it got involved in the Syrian conflict: not only did President Vladimir Putin provoke the ire of his European counterparts by bombing zones controlled by regime opponents after agreeing to strike Daesh strongholds only, but he also faced disapproval from Turkey for flying Russian fighter planes too close to the country’s airspace. The tension culminated at the end of November with the downing of one of said jets by Turkey, which led to – you guessed it – more trade sanctions.
Knowing that all the proposed pipelines between the South Pars gas field and Europe would go through Syria, it is no wonder the country’s bloody civil war has been fuelled by western interventions, and has become the theatre for intense power plays between Russia and Europe.
But it is regrettable that trade – a source of growth, development and prosperity – is being used so often as a way to punish certain countries for disagreeing with other countries. While the readiness to resort to trade sanctions in political conflicts reasserts the importance of trade at domestic and international levels, its impact is, as always, most intensely felt by those who had nothing to do with the initial reason that led to the sanctions.
During GTR’s visit to Iran this past October, several people assimilated trade sanctions to a violation of human rights, and while one can’t deny the irony of that statement originating from a country that regularly makes headlines for its own human rights violations, it is still a statement worth pondering upon.
The view from Asia
By Finbarr Bermingham, GTR Asia editor
2015 will be remembered as the year the world finally gave up on a global trade deal, after 15 years of going through the motions of the Doha Round. A free trade agreement encompassing 162 member countries was far-fetched and the week before Christmas in Nairobi, the WTO finally killed it off in pursuit of smaller agreements which are likely to face fewer barriers.
Combined with the progress made in the Trans-Pacific Partnership (TPP) and other regional agreements, as well as accords such as the AEC, the death of the Doha Round fed into a wider picture of fragmentation that has dominated global trade over the course of 2015. This has been particularly borne out in the trade finance sector, where the buzzwords of the post-2008 era, “retrenchment” and “consolidation”, have once more passed into common parlance.
It’s been clearly visible in a year spent representing GTR around Asia. Along with the constant speculation and debate about China, the overwhelming majority of banks and companies I spoke to from Korea to Indonesia, from Sri Lanka to Malaysia talk about cutting lines, de-risking and focusing on core markets. They talk of SMEs and small banks being starved of finance, as bigger players bunker down amid growing concern about the cost of regulation and OFAC’s Faustian pursuit of renegade sanctions breakers. It dominated the conversation at Sibos in Singapore, which was unusual in the sense that bankers who usually deny any sort of market withdrawal were openly and freely discussing the trend. It is impossible now to pretend.
As for next year, it’s impossible to predict anything other than more of the same. But expect concerns over that other great elephant in the room – China – to accelerate as policymakers in Beijing continue to struggle with the biggest economic transformation. In trade and investment terms, the story from China is multi-faceted.
The slowdown in China will continue to crush commodity markets in 2016, which will send chills down the spine of Asian trade. All along the Mekong trail, through the rubber plantations of Laos and the oil fields of Myanmar, down to the nickel mines of Indonesia and the coal pits of Australia, the reach of China’s malaise is enormous. Commodity traders and banks can expect to suffer further as it continues.
Another side of the story is one of opportunity. We expect the Asia Infrastructure Investment Bank (AIIB) to start lending in Q3 2016 and trade banks will be forming a disorderly queue for a slice of the pie. Beijing’s new Five Year Plan is expected to create financing and export opportunities for those in the renewables sector. The one thing we can be certain of is that 2016 in Asian trade will, much like 2015, rarely serve up a dull moment.