The Russia-Ukraine conflict has led to trade interruptions and sanctions, resulting in a greater need for resilience as supply, cost, and trade routes are affected. This timely NBS Knowledge Lab webinar brought together Mr Manu Bhaskaran, Chief Executive Officer of Centennial Asia Advisors Pte Ltd and Council Member of Singapore Institute of International Affairs; Mr Heng Koon How, CAIA, Head of Markets Strategy and Executive Director of Global Economics and Markets Research at UOB; and Mr Baldev Bhinder, Managing Director of Blackstone & Gold to discuss market implications and risk mitigation strategies in the face of this conflict.
Direct and indirect impact on the economy
Moderated by Mr Ted Tan, Enterprise Fellow of Enterprise Singapore, and Adjunct Associate Professor, NBS, the session began with a broad overview of the impact of the Russia-Ukraine conflict on the global economy.
With uncertainties surrounding the conflict leading to decreased economic activity in Europe, businesses will need to accelerate reconfiguring supply chains towards greater resilience, said Mr Bhaskaran. Closer to home, China’s economic response will affect businesses in the long run.
With inflation rising, Mr Heng said businesses will have to rethink how they invest in the longer term to secure raw materials, while Mr Bhinder stressed the need to diversify supply chains.
While the direct impact of the conflict on Singapore has been minimal, the indirect impact can be seen in rising commodities prices, prolonged supply chain disruptions, and a strong US dollar
– all leading to a more unpredictable and costly environment.
Mr Heng warned that the economies of key trading partners like China and Europe will weaken if the conflict drags on. But Mr Bhaskharan said that things are not all gloom and doom either. Pent-up demand during the pandemic is a positive sign towards recovery as economies and tourism begin to reopen.
Addressing legal matters in the light of trade sanctions and supply disruptions
From a legal perspective, Mr Bhinder said that all the sanctions imposed thus far are narrowly targeted at individuals and companies related to Russia. However, businesses have also turned to self-sanctioning in a bid to dissociate themselves
from Russia, leading to a decrease in supply and increase in existing and perceived demands.
Consequently, people may try to get out of a legal contractual agreement, but this is not a feasible solution. More deliberation is needed as there is no eject button in a legal contract.
On dealing with payments on contracts, Mr Bhinder pointed out that the basic starting point is to look at what the contract has specified and assess if one’s specific obligation is affected by sanctions. The best way forward would be to renegotiate new agreements based on a broad and common understanding of the geo-political situation.
In terms of receiving payments from Russia, Mr Heng said that it will be prudent for businesses to stay clear from receiving any Russian roubles
Risks of recession looming in the background
Mr Heng said that while the domestic economy remains on solid footing and given that business cycles rise and fall, businesses can expect some form of (sharp or gradual) slowdown in the next two to three years. Agreeing, Mr Bhaskaran said that recession is not clockwork – it depends on policy responses and how the FED (Federal Reserve Board) manages this.
There are also concerns over China’s reaction to its own economic situation and further problems in Ukraine. Nevertheless, the outlook is positive if the region does well with the reopening of economies and tourism. Conversely, Mr Bhinder suggested that a recession appears unavoidable largely because the European Union is split between those who are pro
-Russia and anti-Russia, and countries may find it difficult to adopt policies different from one another.
Despite current uncertainties, sectors like technology, renewable energy, and biomedicine are making good progress and Mr Bhaskaran believes that potential investors could consider these areas after careful study.
Mr Heng emphasised the importance of sustainability. Policy makers need to go beyond making pledges and consider how they can adopt and apply new technologies to diversify and move away from fossil fuels. However, Mr Bhinder provided a different perspective, saying that we cannot realistically abandon fossil fuels overnight. Although sustainable energies provide great opportunities, it is also a matter of tapering down rather than completely abandoning one for another.
Impact on oil and currency
While many are focusing on OPEC’s unfriendly moves, Mr Heng highlighted that the global oil inventory had been dropping to below average levels even before the Russia-Ukraine conflict. It remains to be seen how soon the supply can be replenished and if it can be done in a meaningful way.
On the Euro, Mr Heng said that it will continue to remain weak. However, this may not be a bad thing as it will help rebalance trade and kickstart the European economy.
Impact on China and ASEAN trade
According to Mr Bhaskaran, the main concern with China surrounds the pandemic lockdowns, which have led to significant supply chain and transportation network disruptions, and port congestions, meaning the Chinese economy will likely underperform in the second and third quarter of this year. This will impact the ASEAN economy as Chinese export platforms that import intermediate goods from the region are affected.
Mr Bhaskaran shared that some businesses have turned to reshoring as technology allows for more automation of processes. Nearshoring has benefitted places like Morocco and Turkey, which are close to large economies while offshoring continues in the face of rising costs in China.
Additionally, Mr Heng touched on inventory management and the tendency for businesses to hog inventory to safeguard their goods. While this is understandable, it is an inefficient mindset that locks in funds and goods.
Managing challenges ahead
In these uncertain times, Mr Bhaskaran believes that diversification of supply and markets is crucial, and companies should be prepared and conservative in their cashflow management.
Mr Heng added that this is not the time to try to predict the future. If businesses can hedge their risks at a level that is still positive for their operational profits, they should do so. In terms of contracts, Mr Bhinder suggested that flexibility is key and for businesses to have more options and clauses that allow them to get out of difficult situations.
Businesses should be more resilient, and to keep on seizing opportunities for growth, developing new capabilities and becoming more competitive. Then, despite the uncertain climate, and despite facing pressures from supply chain disruptions and rising operational costs, they can still find opportunities around the world.
For more info, please visit our NBS Knowledge Lab page.