Ukraine conflict – Impact on receivables finance

ARTICLE WRITTEN FOR TRF NEWS, MARCH 2022

Authors:
Luiza Buserska, Corporate Communications Executive at CODIX, and Laurent Tabouelle, COO of CODIX Group

The factoring and receivables finance industry, like all other sectors of the economy, is facing a new challenge that will inevitably cause a new shake and the need for rapid adaptation to new rules and regulations.

The world is watching with bated breath what is happening in Ukraine. For the first time in more than 70 years, there has been large-scale military action throughout a whole country. The current political situation and the conflict in Ukraine will inevitably have a huge impact on the global and European economy and will put Europe in the dynamics of energy and gas price wars with a potential embargo on energy exports, and with a quasi-certain ripple effect in pretty much every activity sector. As European countries prepare Plan B for a lack of energy, the international community has prepared a package of sanctions for Russia. The EU has already started imposing sanctions on individuals and organizations. All this will inevitably lead to huge shocks with unpredictable consequences for countries and economies in general, as well as for the factoring and receivables finance industry in particular.

Analysts are calculating the economic consequences of a possible suspension of gas supplies from Russia to Europe and the application of sanctions on Russia – millions of refugees fleeing the west, higher prices for natural gas, construction materials, food, rising inflation. The latter being directly dependent on energy prices. Oil prices have already risen to their highest level since 2014 due to the conflict, and this is contributing to global inflationary pressures. There are also real fears of disrupting the supply chain after the start of the military actions.

Against the background of a global economy which hasn’t fully recovered yet from the pandemic, of cross-borders exchanges which remain more difficult than they were until two years ago, emphasized by an already existing energy crisis and the growing risk of global conflict, the prospects for stagflation in the eurozone are becoming increasingly real.

According to observers, one possible scenario is to increase and tighten sanctions to the extent that they will fall on everyone by raising raw material prices. A scenario in which agricultural raw materials have doubled in price and gas has been cut off is a major problem for the global economy. It is also questionable whether sanctions will be imposed on countries that trade with Russia, such as its main export partner – China. It seems to be an economic war which aims to bring one of the big economies to its knees and which is already painfully reviving the memory of the Cold War.

All this is happening against the background of inflation, a slow recovery from the pandemic, growing interest rates, rising indebtedness (as the government supported packages are coming to an end) and the possibility of a collapse of global markets.

How the conflict will develop, what will be the effect on political and public life, is impossible to predict, but one thing is certain – the current situation and the forthcoming economic sanctions will completely change western business and international trade relations.

Each organization, even if not related to the financial sector, must reassess which markets it operates on, which companies it has a contractual relationship with and monitor the sanctions regime from a regulatory point of view so that it can take steps to maintain its business. This is a change that all businesses, incl. factoring and receivables finance players, must accept and to which they will be obliged to adjust their processes and actions. For example, credit insurers will no longer be able to provide coverage to Russian business. This, in turn, will quickly affect exporters, forcing them, as well as credit insurers and receivables financing organizations, to step up their due diligence efforts throughout the sanctioned region.

The economic effect of the sanctions on both the Russian state and the West will be tangible. Among other measures, the exclusion of Russia from the main international payment system SWIFT is the most drastic one and has already been imposed on number of banks and individuals by the EU, UK, US and their allies. The global financial network is the link between thousands financial institutions in 200 countries. This means that the big European banks will have to re-evaluate and limit the risk in any way. This must also be done at the local level in each country in relation to local banks and local financial institutions.

Whether there will be a great economic war ahead remains to be seen. Meanwhile, now is the time for financial organizations to take action to minimize possible risks and provide maximum flexibility, ensuring full compliance with the rapidly changing regulatory framework.

This article was published by BCR, the leading provider of news, market intelligence and training for the global Receivables Finance industry: TRF News, March 2022.