Trade credit insurers in wait-and-see mode on Russia

By bne IntelliNews March 20, 2015

Iana Dreyer in Brussels -


A typical EU fudge over extending the sanctions on Russia means the global trade finance sector, on which Russia’s external trade is highly dependent, will continue to keep its options open on Russia.

On March 19, the EU voted to link the extension of sanctions on Russia to the fulfilment of the two Minsk ceasefire agreements, but stopped short of immediately re-imposing the sanctions regime, which is due to start expiring in July. A formal, legal decision on whether to extend the sanctions on Russia's financial, defence and energy sectors will only be taken at the next EU summit in June.

Trade finance has not been directly targeted by the West. Trade per se has only marginally been affected: there is an arms export embargo and a ban on sales of equipment for oil and gas projects to Russia. Moscow adopted counter-sanctions on European food exports, but the bulk of trade between the EU, Russia’s biggest trading partner by far, is in industrial goods and fossil fuels – sectors not affected by the sanctions.

Yet trade finance professionals are clearly feeling the tremors linked to the earthquake that has struck Russia’s economy since last year: an oil price plunge, a recession, ruble devaluation were all aggravated by the sanctions. Trade between the EU and Russia, which stood at €320bn in 2013, fell by 12-13% in 2014, according to preliminary EU Commission estimates.

It is very difficult to isolate the effect of sanctions on the trade finance sector in all this. “It is far too early to imply any conclusions about the impact of sanctions on Russian borrowers,” Kai Preugschat, secretary-general of the London-based Berne Union, a grouping of 48 major government-owned and private export credit insurers and guarantors, tells bne IntelliNews.

Robert Nijhout, executive director of the Amsterdam-based International Credit Insurance and Surety Association (ICISA), which represents 95% of the world's private credit insurance business and covers 15% of world trade, also says there are “no hard figures” on this, and agrees with Preugschat that in as much as Russian-related trade finance business has been negatively affected during recent events, the main causes of this are macroeconomic.

“We see a decrease in demand, and the majority of our members have seen a drop in demand [for trade credit on Russia transactions] by more than half. The re-insurance companies see a decrease in ceded business with regard to Russian risks,” Nijhout said, adding that there has been a concurrent increase in demand for cover against the risk of the withdrawal of export or import licences.

To Nijhout, due diligence pressures from sanctions mean that credit insurers have become “a bit hesitant to take risks”. Many credit insurers no longer accept new Russia-related business so as to minimise their risk exposure, although they continue to manage existing business. Banks for their part are hesitant to give credit because they are concerned that transactions might not be sanctions compliant. 

Confidence despite medium-term risks

Looking ahead, exposure to Russia risk for the business remains high. Berne Union members’ mid- to long-term exposures to the Russian market stood at more than $39bn in 2013, their second highest level of exposure after the US market.

Any further escalation of sanctions would not be without its risks for the sector. A much-debated, though not among the most likely, measures under discussion is cutting off Russia from the global financial transaction messaging system SWIFT. Proponents of such a measure refer to the precedent set by Iran’s cut-off from SWIFT transactions in 2012, which many believe contributed to Teheran’s decision to negotiate with the West over its nuclear programme. In 2013, Iran short-term claims on Berne Union members soared to 191 that year. Iran became their first source of insurance payment claims.

An equivalent decision regarding Russia “would clearly be damaging,” says Preugschat. But “both the diversity of Russian borrowers and their various sources of revenues and funding versus the same situation in Iran makes it next to impossible to compare the two.”

Exporters are hoping for an improvement in the situation in Russia. “They try to maintain their connections as much as possible. They want to be ready to continue business as usual once the sanctions are lifted. From the underwriter’s side it’s a matter of risk appetite. What we see is premium rates are higher than they used to be, but they want to do business,” says Nijhout.

If the EU’s financial and investment sanctions are extended this summer, the largely Western-dominated trade finance business does not appear to worry that this could significantly increase competition from emerging market financial institutions based in countries which haven’t put sanctions on Russia. Firms operating from financial centres like Hong Kong or Shanghai, for instance, seem aware of reputational risks and of the global reach of the Western regulators (the US in particular). Asian-based private financial institutions’ international shareholding structures could expose them to compliance risk, says ICISA’s Nijhout.

Nor does the private Russian financial sector operating with the ruble yet seem to have the financial depth needed to replace global financial institutions in financing Russian imports.

Overall, the industry’s outlook for their Russia-related business is not bleak. “The Russian sanctions are not the only sanctions that we are dealing with,” says Nijhout. “Trade needs to happen anyway. People live, people consume, and the consuming element is what makes it relevant for us. Trade will find a way. There are other ways of doing trade where you are not breaching the sanctions. Or certain measures are lifted.”


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