As 2022 draws to a close, and the spectre of recession in 2023 looms, what can we make of the Black Swan events that shaped the past 12 months? Just as we were getting back to a new normal after Covid-19, the Russia-Ukraine crisis unfolded, with profound effects on energy markets.
“Trade flows have changed because of a ban on Russian oil and also sanctions,” opens analyst Ehsan Ul-Haq in our panel discussion. “Europe has been dependent on Russian supply.”
We’ve seen the global supply disruptions from Covid, the Russia-Ukraine conflict and US-China tech frictions adding to a more complicated trade and supply picture, adds economist Peter Sidorov.
This year has been pivotal for trade finance, reflects banker Sapna Sapra, as “we have seen a lot of focus on energy security – look at the US$3bn Trafigura deal. We have also noted a lot of activity between banks and export credit agencies in ESG and transition financing.”
Tune in to hear more from our expects as they look back an extraordinary year
- Ehsan Ul Haq, Oil Analyst at Refinitiv (part of LSEG)
- Sapna Sapra, Head of Structured Trade and Export Finance UK, Deutsche Bank
- Peter Sidorov, Senior Europe and Russia Economist, Deutsche Bank
- Katharine Morton, Head of Trade, Treasury and Risk, TXF Media Ltd
- Clarissa Dann, Editorial Director, Deutsche Bank AG
Transcript of interview:
Clarissa Dann: I’m Clarissa Dann and you’re watching Trade Finance TV.
Please welcome Ehsan Ul-Haq, Sapna Sapra and Peter Sidorov and of course, my co-presenter Katharine Morton from TXF.
We are looking back at 2022, from the Black Swan event in the form of the Russia-Ukraine crisis and the very real possibility of power rationing in Europe and we’re going to look forward to 2023.
So what has all this instability done to the economic landscape and trade finance?
Ehsan Ul-Haq: Trade flows have changed because of the ban on rationale and also sanctions. And now the introduction of the price cap will probably change it much further. Europe has been dependent on Russian supply. Several refiners in Europe, they were designed to process Russian crude. And now, in the absence of Russian crude, it has become a problem for them and they have to look for alternative sources. Same is the case with gas.
The US has had it sourcing these supplies, but Europe has a double whammy of high food prices as well as energy prices, and this has affected almost everybody in Europe.
Peter Sidorov: I think what we have seen is really the global supply disruptions which were already there with COVID last year, before this year, and now Russia-Ukraine and the kind of gas energy crisis adding on top of that and also the US-China tech rivalry adding to this overall really more and more complicated, should we say, trade and supply picture.
Sapna Sapra: This year has actually been really pivotal for trade finance. We’ve seen a lot of focus on energy security. We saw the recent Trafigura transaction, which was announced recently. 3 billion of energy of gas supply secured.
Separately we want to see suppliers or companies recalibrating their supply chain strategy, moving offshore to near-shore, really. And finally, all of the discussion around net zero, the transition financing, where we are seeing lots of activity, mega investments and collaboration between banks. They have really stepped up their game. They’ve become very focused on supporting domestic requirements, whether it’s domestic companies, exporters or requirements such as energy. HERMES under the Untied Finance Program, they completely stepped up. The transaction was closed in a very short span of time. We’ve seen that with UK export finance in the back of the pandemic. They did some really massive transactions for the aviation sector or the aerospace sector when those companies were really struggling and how they really developed their products to adapt to the changing macroeconomic requirements from the markets.
Clarissa Dann: Peter, maybe you can take a bit of a picture of the macro backdrop in Europe. And what’s been the macro backdrop?
Peter Sidorov: I think Europe started the year on quite a good footing with a strong post-COVID recovery. Energy prices were already rising, but really the big stress came kind of with the Russian invasion of Ukraine and then the cuts in gas supplies, which happened during kind of Q2, Q3 and in particular the kind of full shut off of flows by Nordstream to Germany.
Europe has done well to really get alternative gas supplies. It has reduced gas consumption by about ten, 15%. So net net, I think we are still on the verge of recession. But really these sharp, dramatic risks of gas rationing, kind of power outages are looking less severe than they did a few months ago.
Ehsan Ul-Haq: Each year used to have this quality of supply problem. This is now haunting Europe. I mean, Europe was always short of supplies, but now it’s much more of a problem for Europe and less of a problem for Asia.
On the other hand, we have strong dollar and they have to pay a higher price for their fuel purchases. And I think it’s a problem for India. In spite of discounted Russian crude, in spite of their demand going up and the middle class gradually expanding as their middle class develops, there is more purchasing power, which is helping India. And if you look at oil demand, if you look at gas demand, I mean, gradually things are shifting towards India instead of China.
Gradually we are moving in other directions. I mean, a new refinery is being built in Nigeria, which will have a significant impact on Africa because they will be able to have their own refined products instead of being dependent on Europe or the US. But on the other hand, Europe will have once again a problem because there will be less supply from West Africa. There are all these things which are shaping the developing world and we will see almost the same thing in 2023.
Peter Sidorov: I think it’s still going to be a challenging global macro outlook in 2023 for sure. And we expect both U.S. and Europe to be in recession. If you think about how this energy inflation and real income shock, at the same time, you have the fastest pace of central bank hikes we’ve seen since the eighties. So with those things put together, it’s going to be very hard to avoid this kind of recession.
But we do expect it to be kind of a moderate rather than a severe recession. And looking at emerging markets, I think has been a very difficult 2022. For next year I think there should be some silver linings if we think kind of the three really negative narratives this year have been strong Fed tightening, the Russia Ukraine war and the resulting energy food price shock and also the China’s zero-COVID strategy which has kind of weighed on production and supply. All of those things should gradually improve over the course of next year.
Sapna Sapra: There could also be portfolio issues for institutions that have been long uncertain issuers which will be struggling going forward. However, there is a massive requirement for investment in the EM space. There was a big hiatus of two years. We’ve seen more trade flows actually going into developed markets as opposed to developing markets, which is really counter-intuitive, especially when you come to think of ECF Finance.
From a developed market perspective, I do think energy security will continue to be the major theme going forward. And what we are hearing about from this is really murmurs and discussions amongst the trade finance community for the rebuilding and reconstruction of Ukraine, and I think that’s going to take up our time.
However, what I’m really excited about for 2023 and the years beyond is all of the efforts that are being put in for transitional financing, whether it’s the ammonia projects, hydrogen projects, new green projects. The fact that everyone’s currently focused on energy security is also giving some of the sponsors time to think about these new technologies. So I think in 2023 we’ll see a lot more of new transition financing, new green projects coming up, and a lot more collaboration.
Clarissa Dann: Yeah.
Peter Sidorov: Where could there be financial cracks in the system? It’s hard to predict. I think net net we don’t have the extent of imbalances. We saw, for instance, pre financial crisis. So I think that’s why we’re not we’re not super bearish in that sense. On the energy crisis, I think the worst is behind. It’s going to take a long time to get better, but I think by next spring I think we’re going to have the worst of it behind us.
Clarissa Dann: On that note, I’d like to thank my wonderful guests that have been here in the studio today, Peter, Sapna, Ehsan, and of course, Katharine, my co-presenter. And thank you all for watching.
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Here’s to a safe and prosperous 2023.