8 takeaways from the Russian war
The economic repercussions of Russia’s invasion of Ukraine will ripple through the financial, energy, retail and agricultural sectors, among others. (A link to a related King & Spalding webinar can be found here.) While the full effects of the financial mushroom cloud will only become clear over time, here are eight points to remember as the war continues:
- Rise of the Petroyuan: Since 1974, most international oil and gas shipping contracts require payment in dollars. Western sanctions against Russia have cut off the country’s access to dollars, underscoring this vulnerability of China, Russia and India to the American economic muscle. Typically, countries are forced to hold large amounts of dollars in their banks in order to buy oil. This, in turn, allows the US dollar to serve as the de facto global currency par excellence. China has accelerated diplomatic efforts to persuade Saudi Arabia, the world’s third-largest oil producer, to denominate its oil contracts in yuan, and Russia has signaled it will demand gas payments from “unfriendly” countries. ” (penalties) in rubles. Significant breakthroughs in the petroyuan against the petrodollar could produce a tectonic shift in the current global economic order, markedly affecting US inflation, interest rates and import costs.
- Nationalization of foreign assets:The Russian government has allowed local airlines to seize $12.5 billion worth of leased Western-built planes. United Russia, the country’s ruling party, also announced a bill providing for the involuntary bankruptcy of assets left behind by outgoing parent companies based in “hostile” countries. A similar law does allow the theft of patent rights, but in practice the law has been expanded to allow broad infringement of trademarks and copyrights. Companies with assets in Russia whose joint venture or subsidiary are seized assets can begin to enforce their rights under investment agreements with a Russian government entity or…
- …Bilateral investment treaties: Russia is party to a multitude of treaties providing for the arbitration of disputes involving nationalization. As with previous arbitration cases against Venezuela, Iran and Russia, pursuing a case under one of these treaties can be expensive to litigate and take years to go through arbitration courts. Additionally, Russia has no such treaty with the United States and has previously declared its refusal to ratify the Energy Charter Treaty. Thus, appearing before an arbitral tribunal may require the removal of preliminary obstacles. Once the arbitral awards against Russia are issued, the next step for the winning companies is…
- … A global Fabergé egg hunt. An arbitration award against Russia is not worth much without assets located outside the federation that can be seized and executed. Finding assets that have not yet been seized by sanctioning governments can be difficult. Countries friendly to Russia, such as China or India, likely hold the bulk of unseized Russian assets, but these countries may not cooperate with Western companies seeking to seize Russian assets to satisfy judgments. Locating assets – which may require navigating through layers of corporate entities (as was the case with Citgo in Venezuela) – will become a critical skill as arbitrations reach the execution stage.
- Rapid execution of sovereign debt: Russia announced on March 17 that it was paying a coupon of 117 million dollars on its external debt. These payments were made in dollars, rather than devalued roubles, thus avoiding an immediate default. However, Russia still has $488 million in Eurobond payments due in the next ten weeks, and a $2 billion bond that will mature in April. Whether Russia has the ability to convert oil and gas revenues into dollars on this scale, especially given its newly constrained market, will have significant implications for the many investment funds with exposed positions in Russian sovereign debt. This will only exacerbate the price of Russian government bonds which last week were selling for just 12 cents on the dollar, a far cry from their status as frequently traded assets last month. Moreover, Russian companies, which owe four times more than their government, may decide to default for the same or unrelated reasons.
- above a barrel: Energy prices surged as the United States and other countries (and some companies) imposed an embargo on Russian oil, leading to inflationary pressures in the country. While the current crude spike is a boon to E&P and midstream companies that have languished over the past decade, the costs associated with this surge are likely to show up in Chapter 11 filings that will lay some blame. macroeconomic factors of inflation and interest. rates exacerbated by Russia’s war reactions.
- “War, riot or act of God”:Companies with suppliers or customers in Russia or Ukraine – large players, especially in the agricultural sector – will assess force majeure terms of their contracts to determine whether such contracts are terminable due to the effect of war on the subject matter of the contract.
- Points 1 to 7 are in flux: Longfellow’s old phrase, “Everything must change, into something new, into something strange” has never been more relevant. Ukraine’s immediate destiny, and the long-term repercussions already underway, are in flux.
While successful companies remain vigilant about their immediate economic environment, Western companies are going through an unusual period, where macroeconomic and geopolitical factors are having a greater impact on local businesses than before. As the world navigates sanctions, war and extreme tension, it will be more important than ever to keep an eye on the bigger picture.