Companies around the world cut off Russian trade

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Shortly after the Russian convoy threatening Kiev slowed down, pictures and videos began to emerge showing its military vehicles apparently damaged in what Ukrainian residents said was proof that a front of the Russian invasion had been pushed back.

It’s an apt metaphor: Russian economic activity has almost come to a standstill, stalled by a sudden lack of access to products and services such as software, payment processing and insurance – cogs ​often neglected in commercial machinery but nonetheless vital.

Experts say transport, energy and banking are the three sectors where these sudden omissions are likely to hit the hardest.

Michael O. Moore, a professor of economics and international business at George Washington University, likened the scenario to waves of supply chain crises created by Covid, like unfinished vehicles sitting on assembly lines that had become inactive for lack of a small computer chip. or a quantity of seat cushion foam.

In the case of the Russian economy, Moore said the potential impact could be all the greater as it affects not only goods, but also the vast network of professional services that modern businesses depend on to facilitate trade. .

“A lot of trade isn’t just the movement of goods – it’s transportation services, insurance services, software services and all of those are potential targets,” he said.

With companies most fearful of breaching sanctions, international trade experts have observed that any connection with Russia, no matter how small or indirect, has turned toxic.

Consider SWIFT, the critical communications network for the global banking industry that operated, until about a week and a half ago, more or less under the radar. Although largely invisible on the surface of commerce, it performs an essential function – leaving Russia’s major financial institutions locked out without an effective means of doing business.

“There is no complete cut off of financial transactions but…the sanctions make it difficult to interact with Russian companies, because how do you execute transactions?” said Jeffrey Schott, senior fellow at the Peterson Institute for International Economics.

The insurance industry is also rapidly withdrawing from Russia, with consequences already visible. Analysts say one of the reasons oil prices soared last week was that Russian oil was not budging, despite the energy sector’s exclusions from international sanctions. The problem: Shipping lines and oil buyers had a much harder time finding companies willing to insure tankers or their contents.

“Insurance is truly the lubricant of the global economy, as very little cargo can be transported around the world without the effective participation of insurers. This includes energy and energy infrastructure,” said Robert Hartwig, professor of finance and insurance at the University of South Carolina.

“It is effectively illegal to allow ships that are not properly insured to enter ports around the world,” he said. “Even without the sanctions in place, actions taken by insurers to withdraw from these markets…will broaden the effectiveness of these sanctions.”

This sudden inability to insure ships and cargo is happening in the air and at sea. The UK announced last week that it would ban Russian aviation and space industries from London-based insurance and reinsurance markets – the largest in the world – which would make it much more difficult for airlines carrying passengers or cargo to obtain insurance.

Image: The Biden administration will ban Russian flights from US airspace
A sign reads “Flight cancelled” at the Aeroflot check-in counter in the Tom Bradley International Terminal at Los Angeles International Airport in Los Angeles on March 2, 2022.Mario Tama/Getty Images

Lack of access to insurance is not the only obstacle facing the Russian aviation sector. Global airlines rely on one or more of a trio of software companies – Saber, Amadeus and Travelport – to expedite reservations and reservations. All three have effectively kicked Russian flag carrier Aeroflot out of their global distribution systems. The global distribution ecosystem is a part of airline activity rarely seen or noticed by passengers, but it is a critical link between businesses, travel agencies and airline reservation systems.

“The private sector is doing what the US and EU were more reluctant to do: directly punishing the Russian oil and gas sector,” said Cullen S. Hendrix, a professor at the University’s Korbel School of International Studies. from Denver, in an email. .

Part of that reluctance stems from a reluctance to not only breach current sanctions, but also avoid any additional sanctions that may be added in the future, Hendrix said, citing some companies’ reluctance to touch Russian products, even with significant discounts. But the public relations fallout looms as an even bigger worry, he said. “The reality and perspective of doing business with Russian state-owned or state-aligned companies is just terrible; Is the reduction worth having your name mentioned in articles about the bombing of civilian targets and a massive refugee crisis? »

Enterprise software giants SAP and Oracle both announced on Wednesday that they were suspending operations in Russia. Oracle said via Twitter he had “suspended all operations” in Russia. SAP released a Publish of CEO Christian Klein who said: “We are stopping activities in Russia in accordance with the sanctions and, in addition, suspending all sales of SAP services and products in Russia.”

Microsoft President Brad Smith said in a blog post Publish On Friday, the software publisher had suspended its new sales in Russia. Besides, “[W]We are shutting down many aspects of our business in Russia,” to comply with sanctions, he said. Apple has halted online sales of its products in Russia and also shut down its Apple Pay service inside the country.

While it’s unclear to what extent these companies are divesting themselves of their Russian customers, experts said any action that prevents Russian business customers from gaining access to vital technology services provided by these companies could quickly become a quagmire. .

“Anything that involves a database, access to information … would potentially be problematic,” said Moore, a professor at George Washington University, because much of enterprise IT architecture is based on embedded technology.

“A system’s DNA is how different computers communicate with each other,” Moore said.

“We’re a consumer-driven, data-driven economy, so these software vendors are really getting into the heart of business transactions. It’s not a flesh wound.

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