Russia-Ukraine War Hits Trade Finance Hard - Says World Bank

According to the World Bank, the GDP (Gross Domestic Product) of Ukraine will have shrunk by around 35%. A further downfall is also expected for 2023, as the comprehensive effects of Russia’s war on the economy are visible.

Apparently, the media across the world has properly covered the massive disruptions caused to supply chains including the transportation of Ukrainian grain through Black Sea ports, where Moscow constantly broke guidelines permitting exports to distress customers abroad. Now, with the arrival of winter, Russia’s targeting of Ukraine’s energy infrastructure has led the population of the country in chilling darkness and immensely disrupted businesses. Power cuts have caused digital point-of-sale systems to be inconsistent, compelling an extensive return to cash systems. Regular business processes are now loaded with vulnerability.

“We have been forced to continue our works without electricity for 12 hours a day, and sometimes more, with four hours of power supply followed by four of none (being) normal,” says Serheii Kostogryz, head of the Trade Finance and Factoring Department at Raiffeisen Bank in Kyiv. He further added that 40% of the staff presently operates remotely.

“The continuity in business operations is difficult to keep up with when your utmost priority is to keep your staff safe and knowing you might all soon have to rush to the basement,” he stated. “Till today, we handled it successfully - clients can rely upon us 24x7.”

However, when it comes to trade, it severely impacted trade finance. Many of the correspondent banks that were engaged in regular business have withdrawn themselves, while long-term financing projects have been essentially shelved across the board. Export credit agency (ECA) coverage is short in the extreme. In several cross-border transactions, cash is the dominant factor. 

Against such situations, Ukraine could have effectively come to an end to being a modern trading country. But the central bank attempted to cultivate regularity and support monetary certainty, improving interest rates from 10% to 25% on June 2. In July, the Ukrainian hryvni decreased by around 25%, to 36.9 hryvni to the dollar.  This blocked huge trade finance outflows from the monetary systems. Presently, reliability in Ukrainian banks stays high and lending continues. 

“Unlike other banks, RBI Group kept overhauling the market regionally via RB in Ukraine and with global trade finance service, safeguarding the import of essential civilian goods”, says Martina Zimmerl-Egger, head of Trade Finance at Raiffeisen Bank International (RBI) in Vienna.

RBI has been supported by its lengthy history of transactions in Ukraine - it purchased local bank Aval in 2005 and currently has over 300 branches in the nation, 85% of which keep on working regardless of the disruptions and by its effect prioritization of corporate trade finance.

But it is not the one which is operating alone. At least 10 banks where seven are private and three are owned by the state, have been trying their best to keep trade flowing with imports (especially for the agriculture & energy sectors) & exports (especially grain) determining factors for Ukraine’s endurance and inevitable postwar development as a suitable state. Although several transactions are based on cash, trade finance continues to have a vital role here, with global & local bankers operating together to ensure that financial and product flows are kept up with and secured. According to Olexander Shchur, board member at Ukreximbank, during the initial nine months of the extensive war, it strengthened its position as a leader in facilitating finance of a record 23 billion hryvnia to Ukrainian organizations.

“Our functional framework stays stable”, says Shchur. “When there is no electricity, Ukreximbank constantly serves clients personally with backup sources.” He further added that the bank has successfully implied digitization and IT.

“The framework is so steady it permits even complex cycles to be completed from a distance without interference, without a requirement for customers or employees to be physically presented on the bank’s branches.” he says, “And Ukreximbank was already offering credit funding to clients soon after the war.”

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He further says that Ukreximbank provides an extensive range of trade finance products including “non-resource financing in the form of all types of bank guarantees and confirmed letters of credit, as well as trade finance inside the restrictions of foreign banks using LC with post-importation funding, discussion of documents for export letters of credit and discounting of letters of credit with deferred payment.”

Undoubtedly perhaps, the focal point of trade finance has shifted with the effects of war, away from supporting Ukrainian products and toward funding the fundamental imports, especially of pharmaceuticals, energy and agricultural sources. An important grain exporter, Ukraine is somewhat independent in food.

Vladislav Berezhny, director of trade and structured finance at Credit Agricole in Ukraine, says that the war nicked 10% from the bank’s trade finance portfolio and new beginnings, with volume expected to fall further by mid-2023. Many banks have kept links with the nation, he says, and are ensuring existing credit lines are open. But the daily challenges stay huge.

Raiffeisen’s Kostogryz stated that transaction cycles that were traditionally 90 days before the war are now extended to 150 especially the transactions which need physical paperwork have been a complexity, with global dispatches suspending operations in Ukraine; and he stated that bankers have frequently needed to carry documents in their language.

These extended financing periods led to a large extent by disruptions in logistics, where the costs have increased several times over since February 24. Some 30% of the stockpiling limit for grain - a major export - has been spoiled. Shipping has been complexed by access to seaports, prompting a pickup in exports by means of rail and river bridges that pushed numerous organizations to western Ukraine, with export financing requiring to be settled accordingly. 

But Kostogryz emphasized that there has been no invasion in service, with the bank keeping up to facilitate all its vital products and putting in place a pyramid of backup and risk-dispersal frameworks. “The fact that staff scattered all through Ukraine and, even in some neighboring countries, means a majority of the trade finance team have admittance to electricity and internet,” he says. “Our organization continuity management guarantees that the major offices are outfitted with generators and several internet services are used effectively.” RB is now offering portable phone chargers and admittance to satellite internet to continue daily operations unaffected even in case of longer power cuts.

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“Under different situations, the Ukrainian bank sector handled quite well.” he adds, “And Covid-19 helped us to engage in remote-based working.

However, with foreign banks and clients justifiably nervous, the role of international financial institutions like the International Finance Corporation in guaranteeing transactions is important. The European Bank for Reconstruction and Development (EBRD) has solidly dedicated to supporting Ukraine (suspending exercises in Russia and Belarus) with the nation currently getting, after Turkey, a larger number of investments than any other: around 1.5 billion euros (about $1.6 billion) this year with the similar level expected next, to fund such sectors as food and energy security and energy infrastructure, all severely harmed by Russia.

But guaranteeing trade through EBRD’s Trade Facilitation Program (TFP), and backing regional banks has been important. According to Rudolf Putz, head of the TFP, the bank aids around 40 trade finance transactions a month with 10 partner banks in Ukraine (mainly globally with the Black sea deemed too insecure).

“Priority is allotted to transactions which are transparent, where we are aware of the end users, and what best aids the nation,” says Putz. “This frequently implies the agricultural sector, but also other important sectors to help private companies. “Our benefit is we've been working with these banks for quite a long time,” he adds, “We have trust and laid out lines of correspondence.”

EBRD echoes the viewpoint that Ukrainian banks have been incredibly strong - particularly those that have kept lending with EBRD acting as guarantor - while correspondent and foreign subsidiary banks that remain also have an important role. “These tend to be the banks that are aware of the region and want to be engaged for the long-term,” says Putz. “They know their mastery and support will be required after the conflict when Ukraine begins to modify”

Ukrexim’s Shchur echoes this, “At such a critical time, we truly need to energize prominent foreign banks and ECAs to become more actively engaged in trade finance operations here. Presently, a friend in need is a friend indeed.”

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