Russia’s invasion of Ukraine is expected to contribute to a slowdown in global economic growth, push up the cost of trade and exacerbate liquidity shortages in the commodities markets, researchers warn. 

Sanctions imposed on Russia by governments in the EU, UK and US are expected to decelerate economic growth, particularly in Europe, according to research published this week by Paris-headquartered Allianz Trade, previously known as Euler Hermes. 

The resulting shock to confidence and demand “will result in a loss of US$480bn in exports to Russia and Eurozone countries in 2022 (roughly evenly split between the two destinations), with companies in Eastern Europe the most exposed”, Allianz Trade says. 

Taken alongside pre-existing issues, including disruptions to global supply chains and high commodity prices, the report says trade faces a “double whammy” of lower volumes and higher costs. The credit insurer now expects trade volumes to grow just 4% this year – 2% lower than its forecasts before the war in Ukraine – but for the overall value of that trade to soar by nearly 11%. 

In terms of direct exports to Russia, the most exposed countries are identified as the Czech Republic, Moldova, Serbia, Slovakia and Slovenia, where exports are greater than 1.5% of GDP.  

Within the Eurozone, Germany and Italy face GDP losses of 0.6% and 0.5% respectively – equivalent to US$21bn and US$90bn – if relationships with Russia are completely frozen. 

Eastern Europe is also the region most vulnerable to restrictions on imports from Russia. Allianz Trade says Bulgaria, Hungary and Lithuania are most at risk, though there is exposure throughout the Eurozone. 

The sectors where Russian suppliers are most prominent are energy, notably oil and gas, as well as metals such as aluminium, palladium and nickel, and agri-food including wheat and corn. 

The UN Conference on Trade and Development (UNCTAD) has already expressed major concern over potential food scarcity, particularly in developing nations, caused by high fuel and agri-food prices. 


Liquidity concerns 

Issues are also emerging on the lending side, with Allianz Trade predicting that access to financing will become increasingly challenging for exporters and traders this year. 

It expects the US dollar to appreciate around 8% against the euro during 2022, meaning funding in dollars becomes more expensive. Typically, every 1% appreciation in the dollar results in a decline in trade volumes of between 0.6% and 0.8%, while high oil prices also correlate closely with container freight costs, it points out. 

At the same time, commodity traders are under growing pressure to find fresh sources of liquidity, even at the larger end of the market. It emerged earlier this month that trading giant Trafigura held talks with private equity funders in a bid to secure additional financing in the face of huge margin calls. 

“The current context is already pushing up financing needs for commodity trading and squeezing funding for other types of international trade operations,” Allianz Trade says. 

“As short-term futures contracts are trading at a high premium compared to longer-term ones, commodity traders who usually buy physical materials and sell futures to hedge themselves from price risk have been facing increased margin calls. 

“This has led to several major commodity powerhouses calling on banks to supply the required liquidity to comply with the margin calls. Some have even lobbied central banks in order to get direct liquidity support.” 

Greater demand for liquidity is not necessarily being met. Banks have continued to exercise caution in lending, driven by fear of exposure to Russian activity, concerns over the integrity of smaller traders and a challenging regulatory environment. 

Investors, meanwhile, are seeking out “safe havens” due to economic uncertainty over the war in Ukraine, according to a recent UNCTAD report. This is resulting in capital flight, particularly from developing markets. 

“The conflict is tightening global liquidity, especially for developing countries, as investors flock to assets perceived as less risky,” the report says. “The cost of credit has already increased since the start of the conflict, with bond yields rising an average of 36 basis points.” 

It says the situation is “of growing concern”, warning of “financial shockwaves that can push some developing countries into a downward spiral of insolvency, recession and arrested development”. 

As of press time, there are signs that Russia’s invasion of Ukraine could be pulled back. A defence ministry official said on March 29 that military activities would be “dramatically” scaled back following peace talks with Ukraine, though US President Joe Biden said he would not “read anything into” the announcement.