The ICC Banking Commission’s latest trade register, created with support from Global Credit Data and Boston Consulting Group, analysed data from 22 banks worldwide and covered global trade finance and export finance transactions with exposures in excess of US$23tn.

The report says that 2023 is proving to be “a more challenging year for trade finance”, despite inflation-adjusted goods trade growth of 2.2%, echoing results posted by Singapore banks earlier this year.

“Both a slowdown in trade flows and a further decline in product penetration are driving the lower volumes, as businesses prefer to go without financing products rather than pay the higher costs,” the report says.

This downturn marks a reversal of two years of post-pandemic revenue growth for banks’ trade finance business. In 2021, nominal trade and supply chain finance revenues surged by 28.2% year-on-year, while 2022 saw a further 6.3% increase to  US$63bn.

International goods trade flows rose 10.7% to US$23.8tn in 2022 – nowhere near the 25.5% spike in 2021 – but this was largely driven by inflation, not volume increases, the ICC says.

“In real, or inflation-adjusted, terms, goods trade flows grew only 3% in 2022 versus 2021,” the report says.

Jumps in commodity prices meant the energy, metals and mining sector grew 26.3% in nominal terms, while real trade growth in the sector was 12.4% in 2022. Commodities have since experienced deflation, the report says.

The 2023 edition of the annual trade register reiterates previous years’ findings that trade finance is a “low-risk asset class”, as part of the ICC’s ongoing bid to provide the evidence for this claim.

Default rates across all four trade finance products – import letters of credit (LCs), export LCs, loans for import and export and performance guarantees – increased in 2022 compared to 2021 “on almost all measures”.

They mostly remained below 2020 levels, except for the exposure-weighted default rate for import LCs – which reached its highest level since 2009 – and the transaction-weighted default rate for export LCs.

Both were regionally concentrated, the ICC says, with import LC defaults largely in China and Central and South America, and export LC defaults related to exposure to Russian banks.

Default rates for supply chain finance (SCF) payables finance on a transaction-weighted basis fell compared to 2021 levels, but on an obligor-weighted basis, defaults for SCF payables finance in 2022 rose “considerably”. This, the report’s authors say, suggests a small rise in defaults among smaller SME obligors. “It is possible that this was related to a weakening credit environment, as financing costs rose”, the report adds.

Looking ahead, high inflation and interest rates are expected to continue for at least a short time, while excess inventories – due to stockpiling during the pandemic – could also mean a dampened appetite for financing.

The ICC says that trade and supply chain finance revenues are forecast to return to growth next year, rising by 3.8% every year until 2032 to reach an estimated US$91bn.

It also flags an “industry pivot” from documentary trade to open account products and a move away from SCF due to newly introduced disclosure rules.

“We are starting to see some shift away from supply chain finance, partly due to uncertainty in the market about the detail of the regulation,” the report says.

“The impact of this adjustment has been larger than expected in last year’s trade register, as corporates have reported being more concerned than initially expected.”

The post Revenues dip for trade finance but growth to come, report says appeared first on Global Trade Review (GTR).

Correspondent banking provides a vital lifeline for regional lenders and their customers, facilitating cross-border payments, foreign currency transactions and other services that are not otherwise possible without overseas branches. 

However, there has been a years-long decline in the number of correspondent banking relationships kept open by international lenders, with the perceived risks and costs often deemed to outweigh the commercial benefit. 

Data from the Bank for International Settlements shows the number of active correspondents has declined by nearly 30% over the past decade. In Eastern Europe and Asia, the number of active counterparties has dropped by 35% and 30% respectively. 

The trend featured prominently at October’s Trade Finance Forum in Vienna, hosted by the European Bank for Reconstruction and Development (EBRD). 

“This is a big issue, particularly for countries in Central Asia and the Caucasus region, and the figures around the reduction of correspondent bank relationships show a significant level of closures,” says Marco Nindl, associate director and senior banker for the EBRD’s Trade Facilitation Programme, speaking to GTR on the sidelines of the event. 

Though this decline is a long-term trend, Nindl says sanctions imposed on Russia since its invasion of Ukraine have worsened the issue. 

“We are trying to raise this concern with a wider audience,” he says. “It’s not just banks that are impacted, but countries as a whole. Some of the smaller countries in Central Asia have become almost unbankable in US dollars. 

“And it is not just trade finance. If all the relevant correspondent bank relationships in a country have gone, there is no way for us as EBRD to transfer US dollar loans to the banks, institutions and companies that need them.” 

Speaking at the event, Istvan Lengyel, secretary general of the Banking Association for Central and Eastern Europe (BACEE), said there are multiple drivers of bank de-risking. 

“Compliance is of course number one – and if you think compliance is expensive, try non-compliance,” he said. 

“Then, if you have correspondent banking relationships you will have credit risk in your bank-to-bank business. Liquidity risk is less well-known, but banks are required to keep 100% coverage for funds from correspondent banks, and this can prove quite expensive.” 

One event attendee, representing a major international lender, said their bank has cut the number of correspondent banking relationships it holds from around 6,000 to 1,600 since 2015. 

Another bank representative said many lenders “just withdraw from this region, because they are not 100% sure they are able to comply” with the ongoing ramping up of sanctions against Russian entities. 

“For banks, the problem is they are fighting on two fronts,” Nindl says. “Not only do they want to avoid getting into trouble over sanctions, but there is a cost issue. Compliance costs are so high that small banking relationships just aren’t worthwhile keeping up anymore.” 

However, speakers also revealed optimism that changing market conditions – particularly as US and European central banks raise interest rates in a bid to tackle inflation – could provide stronger incentives for banks to keep correspondent banking alive. 

“One positive sentiment I heard for the first time was that because of rising interest rates, banks are now earning more money from these transactions,” Nindl says. “That potentially means they can justify having correspondent banking relationships internally.” 

As BACEE’s Lengyel explained, interest income from bank-to-bank transactions “is sometimes overlooked”. 

“The interest rate environment is changing, the period when we have had zero, close to zero or even negative interest rates is over, and this will be a major element of reviving correspondent banking,” he said. 

One speaker described the changing interest rate environment as a “very important point”. 

“There are some positive signs,” they said. “I’m happy to say we have actually been able to grow [corresponding banking] in this respect.” 

At the same time, US authorities are increasingly seeking to discourage de-risking by banks. 

A first-of-its-kind strategy paper published by the US Treasury Department in May admits the government “has limited authority to effectively address some drivers of de-risking, especially those related to business decisions of financial institutions”. 

However, it makes several recommendations to the US federal government, urging it to promote consistent supervisory expectations to lenders and to consider clarifying anti-money laundering regulations set out in the Bank Secrecy Act. 

It says lawmakers should consider requiring banks to incorporate financial inclusion into risk-based anti-money laundering programmes, and calls for an expansion of cross-border co-operation on “creative solutions… such as regional consolidation projects”. 

The Bankers Association for Finance and Trade (Baft) is also targeting de-risking, this week issuing updated guidelines for respondent banks to help them maintain their correspondent banking relationships. 

Meanwhile, the EBRD used the October event to reassure trade finance providers that Ukraine remains a viable market despite the war and challenging sanctions environment. 

“On Ukraine, the message is that we are open for business, and the local banks are open for business,” Nindl says.  

“They have limited risk-taking capacity, given the circumstances, but are doing whatever they can, and they have the support of the EBRD. Banks are still able to conduct trade finance business in Ukraine, imports are still happening, as are exports to a certain extent.” 

The post EBRD takes on de-risking as Russian sanctions bite appeared first on Global Trade Review (GTR).

Released this week, the 2023 edition of the Hinrich-Institute for Management Development (IMD) Sustainable Trade Index (STI) finds evidence of “slowbalisation” amid rising geopolitical tensions, increasing protectionism and shifting global supply chains – making it harder for countries to harness the positive elements of trade while mitigating the negative.

“The global trade system is experiencing fragmentation that threatens to erode the achievements of 70 years of globalisation,” says Kathryn Dioth, CEO of the Hinrich Foundation. “Protectionist trade policies are being implemented under the guise of responding to the headwinds of post-pandemic inflation and geopolitical tensions.”

“With global trade challenged by geopolitical and health issues, the work of streamlining supply chains and reducing costs has become paramount, even at the expense of social or environmental considerations in global trade. Our index sheds light on how this trade-off is being played out,” adds Arturo Bris, director of the IMD’s World Competitiveness Center.

Published annually, the index measures the readiness and capacity of 30 nations to participate in the international trading system in a manner that supports the long-term goals of economic growth, environmental protection and societal development. Scores are determined by averaging each economy’s performance across 71 individual indicators.

This year’s results show that the world’s largest economies, which are best placed to lead efforts to reverse slowbalisation, are instead among the key countries that are raising tariffs and non-tariff barriers, and slowing trade liberalisation.

Meanwhile, among smaller trading nations, the STI finds negative changes have emerged in societal indicators such as forced labour and trade in goods at risk of modern slavery, as well as environmental indicators such as energy intensity. These developments pose challenges to how global trade can be leveraged to achieve positive outcomes for human and natural capital, the index’s authors say.

“We must be cognisant of the challenges that global trade is facing,” says Chuin Wei Yap, the Hinrich Foundation’s international trade research programme director. “The STI is a blueprint of how we see the world and how we see policy as managing, in equal parts, the huge accelerative benefits of trade along with its potentially quite devastating effects on society.”

Of the 30 trading economies studied for the index, the two that managed to achieve this balance were, for the second year in a row, New Zealand and the UK, which place first and second in the overall index ranking.

Across the three main pillars of environmental, societal and economic indicators, New Zealand remained at the top for environmental considerations in trade, driven by its outstanding performance in air pollution (first), environmental standards in trade (first), and share of natural resources in trade (second). The UK comes second in this pillar, although places first overall on the environmental standards in trade metric.

Canada holds the top position in the societal pillar for 2023, up from second place last year. The rise is rooted in its continuously robust performance in labour standards, social mobility, and evenness in economic development, although there is some room for improvement: its lowest ranking in this pillar is in trade in goods at risk of modern slavery (15th) which is driven by its import of goods at risk (24th). Myanmar remained at the bottom of the rankings in this pillar. The stagnation in the country’s performance in the pillar is largely the result of declines in metrics relating to political stability and the absence of violence, a rising risk of goods produced by forced labour or child labour, and trade in goods at risk of modern slavery.

Singapore takes the top spot in the economic pillar of the index, moving up from second place in 2022. Hong Kong, which held first place last year, has fallen to third in the ranking, with the decline stemming from issues such as export concentration, rising tariff and non-tariff barriers and monetary policy intervention. Sri Lanka has dropped to the bottom of the ranking from 26^th last year in this pillar due to feeble performance in consumer price inflation, real GDP growth and trade liberalisation.

In last place overall in the sustainable trade index is Russia, which ranks 25th in the economic pillar, 24th in the societal pillar and 30th in the environmental pillar.

“At the Hinrich Foundation, we believe global trade is an essential ingredient for economic growth. But for trade to be sustainable, its economic, societal and environmental outcomes must be in balance,” says Dioth. The Hinrich Foundation is calling for “prompt dialogue” about the future direction of trade policy to set the world back on a path of sustainable globalisation.

This is the latest call for action to stem the tide of fragmentation in trade.

The World Trade Organization’s (WTO) World Trade Report 2023, published in September, warned of the emergence of “a more fragmented world dominated by regional trade blocs” as growing hostility between the US and China results in a “tit-for-tat escalation of import tariffs”, and policymakers turn to trade restrictions to ensure food security in the wake of Russia’s invasion of Ukraine.

Meanwhile, earlier this month, WTO director-general Ngozi Okonjo-Iweala called for WTO members to “seize the opportunity to strengthen the global trading framework by avoiding protectionism and fostering a more resilient and inclusive global economy”, adding that, for the world’s poorest countries, economic recovery will not be possible without a stable, open, predictable, rules-based and fair multilateral trading system.

The post Globalisation gains at risk as fragmentation threatens sustainable trade growth: report appeared first on Global Trade Review (GTR).

The Respondents’ Playbook 2.0: A Correspondent Banking Relationship Guide serves as a roadmap for respondent banks on international anti-money laundering (AML) and combating the financing of terrorism (CFT) standards. It outlines the decision-making process of correspondents establishing new and reviewing existing relationships and the measures that respondents may take to increase the likelihood of a favourable outcome.

Correspondent banking relationships are crucial for the financing of global trade, as they enable banks that may not have a presence in certain countries to still facilitate transactions, such as issuing or confirming letters of credit, in those regions.

However, although both the volume and value of cross-border payments have surged in the last decade – the Bank of International Settlements estimates increases of 61% and 37%, respectively –the number of correspondent banking relationships has fallen by 29%.

This decline is largely due to a heightened focus by banks on regulatory, reputational and financial risks from AML and CFT. With compliance costs increasing, for many banks, the risk presented by a sprawling network of interbank relationships – particularly in emerging markets – is too great to bear.

The Baft playbook, which reflects the expectations and recommendations of a majority of the 20 largest global correspondent banks, clarifies correspondent bank expectations and provides constructive guidance for respondents to reduce their perceived financial crime compliance risk.

The new document replaces Baft’s first set of guidelines, published in 2019, and includes adjustments to bring the guidelines in line with current regulatory concerns and correspondent bank risk appetite. The 2023 version also includes information on the migration to the new ISO 20022 standard for financial messaging which will boost bank screening and filtering capabilities via a single format for transactions across different systems, platforms and geographies.

The post Baft releases new guidance to stem correspondent banking decline appeared first on Global Trade Review (GTR).

Heads of development banks, which provide government-backed finance, met in Morocco last week in conjunction with the annual general meeting of the World Bank. The conference included a discussion on trade finance by senior bank representatives.

WTO director general Ngozi Okonjo-Iweala told the summit that recent studies by the organisation and the International Finance Corporation suggest that financing by development banks could help small and medium-sized businesses overcome acute trade finance shortages in some parts of the world.

The global gap between demand and supply of trade finance was estimated by the Asian Development Bank last month to be US$2.5tn. But the WTO believes the global headline figure masks much bigger financing shortfalls in regions such as West Africa and the Mekong.

“Only up to 25% of trade is supported by trade finance in these regions, compared to 60-80% in advanced economies,” Okonjo-Iweala told the summit, according to remarks published by the WTO.

Lifting the volume of trade supported by financing from 25% to 40%, she added, “would increase annual trade flows by an average of 8%, reaching 80% in 10 years”.

Addressing the gathered representatives from development banks, she said: “Collectively, you represent a significant counter-cyclical force accounting for US$40bn in trade finance.”

Okonjo-Iweala also “underscored the urgent need to improve the availability of supply chain finance”, according to the WTO, and nominated the lack of supply as a particular hindrance for “lower-tier” and local producers.

The WTO and IFC study on trade finance in four West African nations – Côte d’Ivoire, Ghana, Nigeria and Senegal – last year found that almost a quarter of firms requesting trade finance were rejected.

It also found that trade finance costs in these countries are much steeper than in developed markets. A letter of credit in one of the four nations costs between 2% and 4% of transaction value, compared to a global emerging market average of 2% and a typical cost in advanced economies of less than 1% of the transaction value.

Cheaper and more widely available trade finance in the West African economies would boost annual goods trade by 8% annually, the study found. A second analysis of the trade finance market in Cambodia, Laos and Vietnam will be published in mid-December.

A WTO spokesperson tells GTR the aim of the studies is to identify gaps that can potentially be filled by credit from multilateral development banks.

Many development banks are already major providers of trade finance in developing economies, typically through facilities granted to commercial banks in member countries, who in turn provide trade lending to local businesses.

IFC managing director Makhtar Diop, who spoke alongside Okonjo-Iweala, said his organisation – the financing arm of the World Bank – will continue to “scale up” its trade and supply chain finance offering.

“Trade financing has the same impact, and sometimes even more impact, than direct financial investment,” Diop said. “It is as noble as any type of investment because companies in low-income countries need working capital and access to funds.”

The WTO previously had an informal expert working group on trade finance that advised the secretariat on the market, but it has not met since 2020.

A WTO spokesperson tells GTR that the group was “advising a previous director general, for a period related to the global financial crisis”.

“The informal group is no longer gathered for various reasons – including reduced interest, but the WTO [director general] decided to partner with the IFC and other multilateral development banks, which have built a strong network in the area of trade finance.”

The 10 development bank heads meeting in Morocco lamented “painfully slow” progress toward meeting the sustainable development goals and said “a much scaled-up global effort is thus required to eradicate poverty, accelerate inclusive socioeconomic development, and tackle transboundary challenges”.

The final statement from the meeting did not mention trade finance, but pledged to boost their financing capacity, strengthen co-operation on co-financing and do more to mobilise private investments.

The post WTO chief calls on development banks to help close trade finance gap appeared first on Global Trade Review (GTR).

On October 12, Washington imposed sanctions on UAE-based Lumber Marine SA and Turkish company Ice Pearl Navigation Corp for transporting Russian crude above the US$60 per barrel cap.

Since early December last year, the G7, European Union and Australia have forbidden their companies from providing shipping, finance, insurance or other services if they facilitate the sale of Russian seaborne crude priced above the threshold.

The aim is to squeeze the Kremlin’s oil revenues while ensuring a steady flow of affordable energy to developing countries, though concerns have emerged over the cap’s effectiveness amid an uptick in global crude prices.

The US’ Office of Foreign Assets Control (OFAC), a sanctions body which sits within the Treasury department, says the SCF Primorye, owned by Lumber Marine, exported Novy Port crude from Russia priced above US$75 a barrel.

The Yasa Golden Bosphorus, a ship registering Ice Pearl Navigation as its owner, is also accused of carrying ESPO crude oil above US$80 a barrel.

OFAC claims both vessels used US-based service providers while transporting the Russian crude, contravening rules laid out by the Price Cap Coalition.

Jason Prince, a partner at law firm Crowell & Moring and former OFAC chief counsel, says the designations send a clear message to “fence sitter” countries such as the UAE, Turkey, China and India, “that they should no longer doubt the Coalition’s resolve to put teeth in the price cap regime”.

“I anticipate that these two designations are the opening salvo in a sustained price cap policy enforcement push by not only OFAC, but also other Coalition partners,” Prince tells GTR.

Analysts say both of these vessels were already considered to be high risk and would likely have been flagged by risk compliance programmes, based either on their ownership structures or frequency of visits to Russia.

Byron McKinney, director for trade finance at S&P Global Market Intelligence, says the sanctioning of the SCF Primorye is a “token gesture” as the vessel’s ownership is linked to the already blacklisted Russian firm Sovcomflot.

“A closer look at the group owner highlights the original risk on this ship was already fully transparent. Lumber Marine’s care of address is the same as [Sovcomflot subsidiary] Sun Ship Management, a clear association,” he says in a LinkedIn note.

However, the sanctioning of the Yasa Golden Bosphorus could be “taken as a warning” by owners and haulers of Russian cargo, he says.

“There are plenty of other examples of similar owners and vessels currently in operation; the coming weeks and months will determine if this sanctioning has had a knock-on effect.”

A “second phase”

The price cap’s impact on Russia’s energy revenues has diminished due to rising crude prices.

An October Oil Market Report published by the International Energy Agency finds that Moscow’s oil export revenues surged by US$1.8bn to US$18.8bn in September, their highest since July 2022.

This jump came on the back of strong sales, with oil export volumes rising by 460,000 barrels per day to 7.6 million.

There are growing concerns that Russia may increasingly use G7 or EU ships and services to continue trading crude oil above the US$60 mark, relying on false documentation and other deceptive practices, experts say.

Eric Van Nostrand, acting assistant secretary for economic policy at the US Treasury, says the White House is gearing up for the second phase of its Russian oil price cap plans, following a “successful” first stage.

He has previously claimed that the cap dented Russian oil revenues by nearly 50% in the first half of 2023, as compared to the same period last year.

In a speech at the Brookings Institution on October 16, Van Nostrand said Moscow has also incurred a “large expense” from constructing an alternative ecosystem of ships and services, often labelled Russia’s “dark” or “shadow” fleet.

“Putin has purchased hundreds of new oil tankers for billions of dollars, and he faces elevated costs of insurance, longer transport times to new importers, elevated capital expenditures on domestic oil wells without G7 involvement, and reinvestments in ports that service non-G7 providers,” Van Nostrand said.

US Treasury secretary Janet Yellen has foreshadowed further enforcement action over violations of the price ceiling, telling the Wall Street Journal last week: “We are looking at enforcement very carefully and we want to make sure that market participants are aware we take this price cap seriously, and, to the extent Western services are used, we mean business about abiding by the cap.”

Alongside its enforcement action, OFAC also published a maritime advisory offering industry guidance on compliance with the cap, amid “increased safety, environmental, economic, reputational, financial, logistical, and legal risks”.

For instance, Russia’s shadow fleet relies on older ships and laxer safety regulations, potentially driving up the risk of “maritime casualties”, OFAC says, while a lack of formal insurance may mean shippers are unable to cover the costs of oil spills.

OFAC lists a total of seven recommendations – some of which were covered in the regulator’s landmark 2020 maritime advisory – including requiring appropriately capitalised P&I insurance, and “vigilantly” monitoring automatic identification system activities of ships as well as ship-to-ship transfers.

Despite the risks, trade finance banks and insurers in the G7, EU and Australia are protected by a “safe harbour” provision in the price cap scheme.

“As long as these service providers comply in good faith with the safe harbour scheme’s requirement to request and retain certain documentation showing that the Russian crude oil or petroleum products were purchased at or below the relevant price cap – and they don’t bury their heads in the sand when red flags arise – they will not be penalised for unwittingly advancing the evasion schemes of bad actors,” says Crowell & Moring’s Prince.

The post US slaps sanctions on Turkey and UAE-based shippers over oil cap breaches appeared first on Global Trade Review (GTR).

In fresh analysis of Russian trade data, the European Bank of Reconstruction and Development (EBRD) finds that Russia invoiced 20% of all imports in the yuan in 2022, a sharp uptick from 3% in the previous year.

The upswing in Chinese yuan invoicing came at the expense of both the dollar and the euro, both of which had consistently been used for roughly 80% of Russia’s imports prior to the war – but fell to a low of 67% last year.

There has been a “substantial increase in the use of the yuan in Russia’s imports from China, accompanied by a declining share of the US dollar”, says EBRD chief economist, Beata Javorcik.

She says the bank has “also observed an increase in the use of the yuan as an invoicing currency by third countries”.

The findings are outlined within an EBRD working paper titled Exorbitant privilege and economic sanctions, analysing millions of transactions involving Russian firms from January 2016 to the end of 2022.

The report lays bare the impact of western sanctions imposed on Russian firms – and their banks – such as the exclusion of major lenders from the Swift payments system in response to the Ukraine invasion.

Such restrictions have driven up costs and made US dollar invoice processes more complex, the EBRD says.

The rise in yuan invoicing was most notable for imports coming from China. Russian importers only invoiced 20% their imports from China in the yuan in 2021 but this share grew to over 60% last year.

There was also a jump in yuan invoicing for imports from third countries, including Taiwan, the Philippines, Malaysia, the UAE, Thailand, Japan, Tajikistan and Singapore. In one notable example, Russia invoiced 18% of all imports from Mongolia in the yuan last year, up from zero in 2021.

The data suggests Russian importers are using the yuan when seeking to bypass US and EU sanctions on certain goods.

The yuan’s share of transactions related to internationally sanctioned dual-use and industrial-capacity goods was typically between 6 to 8% higher than for non-sanctioned goods, the EBRD finds.

The research comes amid a growing push by Russia and China, alongside other members of the Brics alliance, to reduce their reliance on the US dollar.

The Brics group is set to be expanded from January, and experts say the upcoming entry of Saudi Arabia will add impetus to de-dollarisation efforts, given the state accounted for 17% of global crude exports last year.

Members of the group, which also includes India, Russia, Brazil and South Africa, have floated the idea of a common Brics currency, which could be used for both international trade and investments.

However, Brics members made little mention of these plans in a statement published following their latest summit in Johannesburg.

After that event, held in August, they instead “stressed the importance of encouraging the use of local currencies in international trade and financial transactions between Brics as well as their trading partners”.

Such developments have given rise to suggestions that the yuan could challenge the US dollar’s role in global trade.

The EBRD warns that while the US dollar’s dominance in global trade makes sanctions more effective, there is evidence that such measures may ultimately erode the greenback’s status in the coming years.

“The results are consistent with the use of trade sanctions gradually weakening the exorbitant privilege enjoyed by the US dollar and leading to the fragmentation of international payment systems, with the emergence of alternative global currencies such as CNY,” the bank says.

At a recent GTR conference in Geneva, one commodities trader said a split is emerging between a US dollar sphere on the one side, “and on the other side, Russia and China… starting to use the Chinese currency”.

They suggested a dichotomy may develop where the two spheres use different currencies for the same products, and then a third group of countries that are “happy to use whichever”.

But while the yuan is increasingly being used for bilateral trade settlements, the greenback remains dominant.

Between 1999 to 2019, the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia Pacific, 79% in the rest of the world and 66% in Europe, the US Federal Reserve noted in June.

A July research note from Goldman Sachs said yuan usage remains “limited globally, especially relative to the size of China’s GDP and its influence in trade”, and pointed to Beijing’s capital controls as a key limiting factor.

The post Russia accelerates yuan trade invoicing as sanctions bite appeared first on Global Trade Review (GTR).

In an updated outlook released last week, WTO economists now expect world merchandise trade volumes to grow by just 0.8% this year. This is less than half the 1.7% annual increase predicted in April, when the prospect of falling energy prices and the end of Chinese pandemic restrictions looked set to drive a recovery from the abrupt slowdown that began in the fourth quarter of 2022.

However, the WTO says, strained property markets have prevented a stronger revival from taking root in China, and inflation has remained sticky in the US and the European Union. “Together with the after-effects of the war in Ukraine and the Covid-19 pandemic, these developments have cast a shadow over the outlook for trade in 2023 and 2024,” the intergovernmental organisation adds.

A closer look at the WTO’s figures reveals a broad-based slowdown across a wide array of goods, including iron and steel, office and telecom equipment, textiles, and clothing – although a notable exception is passenger vehicles, which have seen a surge in sales so far this year.

All global regions except for Asia are expected to post lower trade growth this year than they did in 2022. For 2023, Asia’s trade volumes are expected to grow by 0.6%, up from 0.4% last year – marking the second year running that the region’s trade growth has been below the global average.

Asia-focused banks are also feeling the pinch of a flagging trade environment. Several major lenders recently attributed flat or declining trade finance revenues to sluggish goods trade in the region.

For 2024, the picture is a rosier one. The WTO expects slow but stable GDP growth and a moderation in inflation and interest rate increases to push trade volume growth up to 3.3%. However, it cautions that threats to this relatively upbeat outlook are starting to emerge in the shape of supply chain fragmentation – a view shared by Standard Chartered Global Research.

“Despite recent efforts to restore the WTO’s relevance, the push towards trade liberalisation is generally happening outside the WTO structure, mostly in the form of bilateral or regional free trade agreements that tend to reinforce the fragmentation of global trade into specific corridors and regional pacts,” the bank’s economists say in a report published this month.

“We do see some signs in the data of trade fragmentation linked to geopolitical tensions,” says Ralph Ossa, the WTO’s chief economist. “Fortunately, broader deglobalisation is not here yet. The data suggest that goods continue to be produced through complex supply chains, but that the extent of these chains may have plateaued, at least in the short run. Positive export and import volume growth should resume in 2024, but we must remain vigilant.”

To ensure trade can turn its fortunes around, WTO director-general Ngozi Okonjo-Iweala is calling for WTO members to “seize the opportunity to strengthen the global trading framework by avoiding protectionism and fostering a more resilient and inclusive global economy”, adding that, for the world’s poorest countries, recovery will not be possible without a stable, open, predictable, rules-based and fair multilateral trading system.

The post WTO slashes 2023 trade growth forecast by more than half amid slowdown appeared first on Global Trade Review (GTR).

Clause LMA3100 – originally introduced in response to Iranian sanctions in 2010 – states that insurers are unable to provide cover for something that would then expose them to breaking sanctions in the UK, US or EU.

While the clause has “stood the test of time” when challenged in court, the LMA, which produces model clauses that can be used or adapted by insurers depending on their requirements, says an appeal in a French court revealed the need for the clause to be updated for use in civil law jurisdictions.

In June 2022, the Paris Court of Appeal decided in favour of buildings materials manufacturer Lafarge, ruling against AIG Europe’s claim that it should not have to pay for the defence costs of Lafarge’s directors.

Lafarge later pleaded guilty to providing resources to terrorist organisations the Islamic State of Iraq and al-Sham (ISIS) and the al-Nusrah Front from 2013 to 2014 in exchange for permission to operate a cement plant in Syria.

The clause in question was deemed not to have met “French law requirements by virtue of not being certain enough as to which specific sanctions were to be excluded from the outset”, the LMA says.

The clause was also challenged in a 2018 case concerning the theft of two cargoes of steel billets taken from Russia to Iran in August 2012, the LMA says.

In that instance, Justice Nigel Teare held that the language of the clause in the marine cargo insurance policy covering Mamancochet Mining was clear that its insurer, Aegis Managing Agency and others, would not be held liable to pay a claim that would be prohibited under US extra-territorial sanctions.

In response, following more than a year of industry consultation with insurers, sanctions lawyers, the US Treasury’s Office of Foreign Assets Control and the UK Treasury, the LMA is introducing two fresh variations of the clause.

The LMA3100A is the same as the original but “with a more descriptive title” to explain that it suspends “any coverage that would expose the insurer to sanctions”.

Meanwhile, clause LMA3200 “specifies agreement between the parties that any coverage that may expose an insurer to sanctions will be suspended” and is designed to be an alternative to LMA3100A for contracts not subject to UK or US law. In addition, the LMA says, LMA3200 doesn’t need to comply with the requirements for exclusions under French law, because it is not an exclusion but a “suspensory condition”.

“These updates are designed to enhance and give underwriters options for dealing with sanctions across jurisdictions. The LMA remains committed to simplifying insurer adherence to regulatory requirements in a complex regulatory landscape,” says Arabella Ramage, the LMA’s legal director.

The LMA has also released model language that can be used to incorporate sanctions from other jurisdictions, such as Australia.

The post LMA tightens sanctions wording to protect insurers appeared first on Global Trade Review (GTR).

In the wake of western restrictions on direct purchases of Russian crude, introduced swiftly after the country’s invasion of Ukraine in February last year, India stepped forward as a willing alternative buyer.  

Kpler data analysed by Centre for Research on Energy and Clean Air (CREA), a Finnish research organisation, shows that in September this year, India imported around 42 million barrels of crude from Russia, a year-on-year increase of 44%. In the five months prior to the conflict, imports averaged less than 1.5 million barrels per month. 

At the same time, the EU has ramped up its purchases of diesel, jet fuel and gasoil produced by refineries in India. Oil product imports from India were nearly 30% higher in September than a year ago, and more than 250% higher than the monthly average across Q1 last year. 

In May, campaign groups warned the trend represents a sanctions “loophole”, with the import of refined fuels from non-sanctioned countries falling outside the restrictions – even if the oil used is of Russian origin. 

The EU’s high representative for foreign policy, Joseph Borrell, said at the time the practice is “certainly a circumvention of sanctions” and urged member states to “take action”. No further measures have been introduced, however. 

Speaking to GTR, a European Commission spokesperson says policymakers are now “working with our friends and partners to seek solutions to continue reducing the revenue of the Russian regime”. 

“The aim of EU sanctions on Russian oil and of the G7 price cap is to decrease the revenue of the regime, which is being used to finance its war of aggression against Ukraine,” they say. 

“While India is entitled to have its own commercial relationship with Russia and on the letter Indian refined products as such are not sanctioned within the EU, the fact that Russian oil is at the origin of these products certainly goes against the aim of our sanctions.” 

It is unknown whether fuel produced in India and exported to the EU is of different origin to products used domestically or exported elsewhere. 

But for Isaac Levi, CREA’s team lead for Europe-Russia policy and energy analysis, the effect is the same, driving up overall demand for Russian crude and preserving a vital source of revenue for the country. 

“Crude oil is going into these countries and they’re exporting refined products, so Russia is able to sell higher quantities of its oil and therefore doesn’t have to offer such large discounts to find willing buyers,” he tells GTR.  

“Russia is able to increase the price and volume of oil it is selling, and this is a huge source of finance for the war.” 

Lela Stanley, co-lead of Global Witness’ Stop Russian Oil project, adds that “refining loopholes” in western sanctions regimes “keep money flowing to the Kremlin and funding its war on Ukraine”. 

“If an NGO like Global Witness can track this oil trade, G7/EU countries certainly can,” she tells GTR. “What’s been missing is the political will to do so.” 

Targeting refineries 

In some cases, the EU has introduced sweeping prohibitions on purchases of goods that contain Russian inputs. For example, its 11th package of sanctions demands importers prove that products they buy contain no Russian-origin iron and steel, even if they are bought from a non-sanctioned country. 

Equivalent measures for oil products might be more impractical. US sanctions guidance states that even if produced from Russian crude, fuels refined elsewhere have undergone a significant enough transformation to be considered of non-Russian origin. It can also be difficult to trace exactly where inputs originate. 

“People have asked how you would know products are actually made from Russian molecules, but I would say that’s not so much the focus,” Levi says.  

“It doesn’t really matter whether that molecule of Russian oil is being consumed as fuel domestically in India, and the exports going to the EU are from Saudi Arabia; it’s an outlet for Putin to sell oil at higher prices and quantities.” 

Instead, calls are growing to expand the sanctions regime so that EU or US companies would be prevented from importing fuel originating in refineries relying on crude brought in from Russia. 

In the US, Congressman Lloyd Doggett is pushing for fresh legislation that would ban imports from any such refinery. 

He told BBC Newsnight in August that the practice is “really very similar to money laundering” and that ultimately, Russia “gets the money”. 

“It doesn’t make any difference whether it’s crude or refined,” he said. “We need to plug this loophole and I will be calling on the administration to do this… but also entering legislation that would call on banning imports from any refinery that has Russian oil.” 

Stanley says Global Witness is “excited about movement in the US to close the loophole here… and hope the EU will follow suit”. 

CREA’s Levi adds: “My reflection is something like this could be plausible for the EU. It is something that needs to be monitored and enforced, of course, but these refineries are huge, they can’t move, and governments can track the shipments coming into them.” 

The impact of targeting refineries would likely go beyond India. EU and G7 member states have also increased refined fuel imports from China, Turkey, the UAE and Singapore since the onset of war, CREA data shows. 

Yet in the year following the invasion, seaborne Russian crude exports to those four markets, as well as India, increased by 140% in volume. 

The European Commission spokesperson did not comment on targeting refineries, but said: “Circumventing EU sanctions is a crime. That is why the Commission is working hard to crack down on it.” 

The post Authorities weigh action on Indian fuel exports made from Russian oil appeared first on Global Trade Review (GTR).