April 28, 2022

[Webinar Recap] HOW THE RUSSIA – UKRAINE CONFLICT IS AFFECTING BUSINESSES IN VIETNAM

The conflict between Russia and Ukraine has been occurring with new developments on the sanctions imposed on Russia by the international community. On 15th April 2022, EuroCham organized the webinar “How The Russia – Ukraine Conflict Is Affecting Businesses In Vietnam”, addressed by Mr. Tran Quoc Hung, Non-resident Senior Fellow, Geoeconomics Center, Atlantic Council in Washington DC, USA to discuss details about the impacts of this war to Vietnam businesses.
         

          
According to Mr. Hung, it is totally wrong to conclude that there are just a few impacts on the world’s economy since Russia’s share of GDP and trade in the world is small (between 1% – 2%). In his opinion, the effects can be widespread and long-lasting.
    
Mr. Hung mentioned certain direct impacts that business community may confront. First of all, Russia and Ukraine, to some extent, have quite high shares in the export market of a few important strategic commodities. For instance, Russia takes 11.4% over the world’s oil export market, 25% in gas export market, 30% in wheat and grain export (together with Ukraine), 49% in nickel export, 42% in palladium export, and so on. Meanwhile, Ukraine also supplies about 70% of the world's neon gas, which is important for the manufacture of semiconductors. All of these strategic commodities play an important role in the world’s manufacturing industries. Therefore, the conflict has resulted in shortage of these goods, delayed production, declined economic activities, and is pushing the general commodity price to increase.
             
Moreover, according to Mr. Hung, more severe impacts may come from the set of sanctions imposed on Russia by the US, EU and their allies, especially when Russian banks were excluded from SWIFT international payment system. The Central Bank of Russia has already been banned from dealing in US dollars, Euros and Pound Sterling, and its foreign reserves in Western institutions have also been frozen. These sanctions may cause a lot of issues for those who are in business relations with Russian companies, especially in the high-tech areas. They can reduce business confidence and trust, reduce activities, as well as make the international transactions with Russian entities become much more difficult.
             
Mr. Hung also mentioned a significant change in the global political, economic and trade order resulted from the conflict. In his opinion, the world is currently divided into two spheres or two systems: one is Russia, China, and the countries following them; and the other one is the US, EU or the West in general. In a long term, the conflict may lead to the division of capital flow, trade flow, economic relations, and technological development, etc. Besides, Mr. Hung believes that since after the conflict, political and national security factors will be taken into consideration in a more careful way before any party make a business decision, the world’s economy may confront more impacts and become less productive.
            
For the impacts of the conflict to Vietnam, Mr. Hung emphasized that the trade between Russia and Vietnam is quite small, only taking over around 1% of Vietnam’s total trade. However, the effects would be indirectly far-reaching. Vietnam is a net importer of oil and oil products with the deficit of 7 billion dollars/year. Therefore, higher oil price in the long term will have negative effects on Vietnamese economy. The consumers will be affected directly, and Vietnamese businesses will also experience an increasing production cost since fuel usually presents 3.5% of the production cost in most of the Vietnamese companies. According to the economic rule, each 10% increased in fuel prices will lead to 0.5% decline in GDP and 0.3% increase in CPI, so the conflict will definitely reduce the GDP gross weight for Vietnam this year to 4 – 5% instead of the target 6.5% set by the government at the beginning of 2022.
           
Another economic sector that will be affected according to Mr. Hung is tourism and air transport. Before the emergence of Covid-19 pandemic, Vietnam used to receive about 4.5 million visitors from Russia, which means the tourism sector in Vietnam will be strongly affected in the post-covid recovery period. In addition, the conflict will also have impacts on air transport as the flights over Russia have been banned for many Western Airlines. The flights from Vietnam to North America or to Europe were diverted to go through China and Northern Africa, adding 1 or 2 more hours to the total estimated flight time, leading to higher cost of flight operation and more delays. The shortage of strategic minerals can also cause procrastination and disruption in terms of automobile and semiconductors production, two of the most important factors in Vietnamese manufacturing activities.

              
In spite of the above impacts, however, Vietnam companies may still seek for new chances to develop their business, especially in terms of grain and food production and exports. The global shortage of food and grain supply has increased their price worldwide, opening opportunities for Vietnam to become a net exporter of rice, seafood or other agricultural products. In Europe, there is urgent demand for replacing suppliers of grains, wheat and other food stuff coming from Russia and Ukraine. This is a good chance for Vietnamese businesses to take advantage of the EVFTA agreement concluded last year to support the country’s economic growth as long as they can ensure the quality of the products.
            
According to Mr. Hung, one of the challenges for Vietnamese companies is finding out new channels of transaction when dealing with business in Russia without violating the sanctions. For example, India and Russia have arranged to set up local currency payment to buy commodities from each other (paying by Rupee in India and Ruble in Russia). Mr. Hung suggested that Vietnam can make use of the Renminbi of China to settle the payments with Russian businesses. He emphasized the importance for Vietnamese government and business associations to understand and follow the sanctions particularly set by the US as well as the sanctions that can be put on a third country in case it fails to follow the rule.
             
As a conclusion to his presentation, Mr. Hung believes that Vietnam under this new era of global geopolitical tension will continue to benefit from the tendency to diversify investment and trade instead of relying on a certain country such as China, which also has a rising tension with the US. He mentioned that FDI is one of the key drivers for Vietnam’s economic growth, accounting for 70% of export activities from the country. With this view, Vietnam should create more conditions to attract FDI especially in terms of higher value added and high-tech activities.
           
The webinar ended after a 40-minute Q&A session following Mr. Tran Quoc Hung’s presentation and brought about valued insights for the participants.

 

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