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Ukraine Crisis Economic Impact to Vietnamese Investors and Businesses

While the Ukraine Crisis economic impacts are global, this article tackles the effects Russia-Ukraine war to investors and businesses in Vietnam.

Since Russian President Vladimir Putin’s stunning declaration of a “special military operation” in Ukraine’s south-eastern Donbass area on February 24, 2022, the nation has been under full-fledged invasion by the Russian military. Market jitters, commodity price rises, and supply chain disruptions have already been worsened as a result of the fighting. It has also triggered a well-coordinated campaign by the main economies of the United States, Europe, and Asia to increase Putin’s economic expenses. The following are the most important:

Financial

Some Russian banks have been removed from the secure network for global financial transactions (the Society for Worldwide Interbank Financial Telecommunication, or SWIFT) by the United States, the United Kingdom, Canada, and the European Commission, as well as Asia-Pacific countries like Japan and South Korea, disrupting their ability to operate internationally, including to finance international trade. As per the Russian National SWIFT Association, Russia has the second-largest number of users after the US, with more than half of Russia’s financial institutions using the system. Major Russian banks, such as the Russian Central Bank, have also been cut off from financial transactions with US, UK, and EU persons and entities.

Ukraine Crisis Economic Impact to Vietnamese Investors and Businesses

Exports

Foreign-manufactured commodities that are directly created in-country or incorporate US-origin software or technology are prohibited from being exported to Russia and Russian military end users under two new Commerce Department foreign direct product (PDR) guidelines. The EU, as well as other countries such as Japan and South Korea, have put minor limitations on defense and security sector exports to Russia.

As a result of the sanctions, a large number of foreign companies in the energy (Exxon, Equinor), aviation (Airbus and Boeing), auto (Ford, Daimer, Mercedes-Benz, Renault), consumer goods (Airbnb, H&M, Disney, Ikea, Budvar, Nike, Calsberg) and technology (Apple, Google, Facebook, Dell) sectors have begun to withdraw from Russia. Some, such as British oil companies Shell and BP, were under political pressure from their home governments to withdraw, while others left ahead of time due to the increased political and regulatory risk of operating in Russia.

Ukraine Crisis Economic Impact on Vietnamese Businesses

While the Ukraine Crisis economic impacts are global, the following examines the effects to investors and businesses in Vietnam:

The Effect of Sanctions

Vietnamese-owned financial entities or businesses that have joint ventures or commercial dealings with sanctioned Russian entities (banks) will have their financial assets withheld in foreign financial institutions or will be unable to make international transactions (mostly in dollars, but depending on the sanctioning countries, this could include euro/yen/pound, etc.). The key financial entities targeted (excluding the Central Bank of the Russian Federation, Russia’s sovereign wealth fund, the Russian Direct Investment Fund, and Russia’s Ministry of Finance) are mentioned below. This list might grow in the coming weeks as the US and European nations, in particular, strive to persuade other countries to join the sanctions system and plug any gaps.

  • Public Joint Stock Company Sberbank of Russia (Sberbank) and 25 subsidiaries.
  • VTB Bank Public Joint Stock Company (VTB Bank) and 20 subsidiaries – VTB’s subsidiaries include the Vietnam-Russia Joint Venture Bank (located in Vietnam).
  • Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie) and 12 subsidiaries.
  • Open Joint Stock Company Sovcombank (Sovcombank) and 22 subsidiaries.
  • Joint Stock Commercial Bank Novikombank (Novikombank).

Despite the absence of legal restrictions, Russian oil producers are said to be having difficulty selling their output because customers are hesitant to commit to purchases and transportation companies refuse to export Russian petroleum. Vietnamese oil and gas firms who have partnered with Russian energy giants will see a direct impact on their company. For example, PetroVietnam, Vietnam’s state-owned oil company, has two joint ventures with Gazprom and Zarubezhneft, respectively.

Ukraine Crisis Economic Impact on Oil Prices

Oil prices are expected to continue high, with global benchmark Brent oil firmly over the key $100 per barrel threshold, which it has held since 2014. This might lead to additional hikes in Vietnam’s gasoline prices, which are currently at an eight-year high and have been boosted three times by the government since early 2022.

Ukraine Crisis Economic Impact to Vietnamese Investors and Businesses

There are still geopolitical concerns about Russia’s capacity to continue exporting oil in the face of growing sanctions and supply interruptions in an increasingly lengthy Russian invasion. (Russia is the world’s third-largest oil producer and second-largest oil exporter, and thus has a significant impact on oil price movements.) Local factors such as rising fuel demand as Vietnam’s post-lockdown economy opens up and local fuel shortages (Vietnam’s largest refinery, Nghi Son, is experiencing financial problems and has reduced production by about a fifth since January 2022) are also contributing to global oil price movements.

Higher oil prices may exacerbate inflationary pressures in Vietnam’s recovering economy, although this danger appears to be manageable for the time being. In February 2022, HSBC raised Vietnam’s annual inflation projection from 2.7 percent to 3 percent, which is still a full percentage point below the government’s aim of 4 percent. The bulk of workers returned to work following the Tet holidays (early February), relieving labor shortages and putting downward pressure on salaries.

Ukraine Crisis Economic Impact on Bilateral Trade

Vietnam’s exports, such as seafood, spices, coffee, footwear, and electronics, do not go to Russia. However, current trade restrictions will make it impossible for Vietnamese exporters (including American, Japanese, and South Korean multinational corporations domiciled in Vietnam) to interact directly with Russian buyers who are blocked off from global financial systems. Due to the fighting, exporters may experience shipment delays and higher freight expenses.

Vietnam’s reliance on Russia for most of its military imports (84 percent of total arms imports by value from 2000 to 2019) is jeopardized due to Russia’s war effort, as well as sanctions-induced trade transaction problems and supply chain disruption. Other large Vietnamese imports, such as Russian and Ukrainian wheat, Russian coal (which will account for nearly 10% of Vietnam’s total coal imports in 2021), and Ukrainian sunflower oil, are also threatened by sanctions and supply chain disruptions.

Ukraine Crisis Economic Impact on Inbound Tourism

Prior to COVID-19, Russia was the sixth-largest contributor of tourism arrivals in Vietnam. When Vietnam’s borders reopen to international travelers on March 15, 2022, this influx will help to revive the country’s battered tourism industry. Vietnam, which has a long history of friendship with Russia and considers it a comprehensive strategic partner, has been cautious not to denounce Russia’s invasion directly, instead opting for neutral language in its foreign policy announcements that calls for moderation and commitment to the UN charter.

Russia, for its part, has signaled a business-as-usual approach, with its tourist office classifying Vietnam as a safe destination with no limitations for Russian travelers. Vietnam’s airlines (and those of other Southeast Asian countries) are not barred from flying through Russian airspace. However, Russia’s decision to prohibit US, Canadian, and EU airlines from its airspace may result in rerouting of Europe/US to Asia air routes, thereby discouraging general tourism travel to Southeast Asia, including Vietnam.

Looking Beyond

As long as the economic impacts and political dangers to Putin’s administration remain manageable, he is unlikely to forsake his thinly veiled goal of regime change and demilitarization in Ukraine. The chances of a diplomatic agreement are slim (evident from the unsuccessful peace talks). Fundamental demands of both Russia and Ukraine remained unfulfilled, similar to the pre-conflict impasse. Two scenarios that might heighten political/regulatory and business risks for Vietnamese investors/exporters are worth keeping an eye on:

The first is a protracted battle, which might occur even if the Russian military finally captures Kyiv and installs a puppet regime after a slow campaign, because Western nations are likely to continue supporting a Ukrainian insurgency to oppose Moscow. A tighter sanctions regime is likely to stay in place, and the amount of response by a more desperate Russia is unknown. Commodity price increases, inflationary pressures, and ongoing trade and travel impediments would be disastrous for Vietnamese firms and exporters.

The second is a larger NATO-Russian conflict. This would be a terrible situation, with NATO nuclear-armed states and Russia fast escalating into brinkmanship. Russia’s status as a pariah state in the international economy would be fully realized, with its financial, economic, people, and even digital linkages to the rest of the world severed. This trajectory might be set in motion by an unintentional escalation caused by a Russian strike on one of NATO’s border states (e.g. the Baltic states of Latvia, Lithuania, and Estonia, Poland, or Turkey), or if NATO nations take the perilous step of intervening on the ground (e.g. sabotaging Russian targets and maintaining a no-fly zone over Ukraine)

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