Emerging Economic Effects From Russia-Ukraine War

(March 25, 2022, 7:10 PM GMT) --
Jonathan Jordan
Jonathan Jordan
Sarah Primrose
Sarah Primrose
Mikhail Kalinin
Mikhail Kalinin
Economic ripples of Russia's invasion of Ukraine will permeate the financial, energy, retail and agricultural sectors, among others. While the full financial effects will only become clear with time, here are eight takeaways emerging as war grinds on.

Rise of the Petroyuan 

Since 1974, many international contracts for oil and gas shipments have required payment in dollars. Western sanctions on Russia cut off the country's access to dollars, spotlighting this vulnerability of China, Russia and India — among others — to American economic muscle.

Typically, oil importers are forced to hold large amounts of dollars in their banks in order to complete their purchases. This, in turn, allows the American dollar to serve as a de facto world currency.

China has accelerated diplomatic efforts to persuade Saudi Arabia, the world's second-largest petroleum producer, to denominate its oil contracts in yuan, and Russia has signaled that it will require payments of gas by "unfriendly" — sanctioning — countries in rubles.

Significant petroyuan inroads against the petrodollar could produce a tectonic shift in the world's current economic order, markedly affecting U.S. inflation, interest rates and cost of imports.

Foreign Asset Nationalization

Russia's government has authorized local airlines to seize $12.5 billion worth of leased Western-built aircraft.

United Russia, the country's ruling party, also announced a draft law providing for the involuntary bankruptcy sale of assets left behind by departing parent companies based in so-called unfriendly countries. A similar statute effectively allows theft of patent rights, and in practice the law has been expanded to permit broad infringement of trademarks and copyrights.

Companies with assets in Russia whose joint venture or subsidiary are assets seized may begin turning to their rights under investment agreements with a Russian governmental entity or treaties. 

Bilateral or Multilateral Investment Treaties 

Russia is party to a number of treaties providing for arbitration of disputes involving nationalization and restrictions on export of capital. As with previous arbitration cases against Venezuela, Iran and Russia, prosecuting a case under one of these treaties can be time-consuming — though it may be the best avenue for recovery.

Once arbitration awards against Russia are rendered, the next step for prevailing companies is to undertake a global asset search.

Asset Recovery

An award against Russia is enforceable through courts outside of Russia in one or more of the over-165 jurisdictions that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, one challenge will be to identify assets of the Russian state outside Russian territory and subject to collection.

Asset location — which may require navigation of layers of corporate entities, as was the case with Citgo Petroleum Corp., owned by Petróleos de Venezuela SA — will become an essential skill when arbitrations reach the execution stage.

Sovereign Debt

Contrary to widespread fears, a recent Russian payment of $117 million due on sovereign debt was made in dollars, rather than devalued rubles, staving off an immediate debt default. However, Russia has more than $400 million in Eurobond payments coming due in the next 10 weeks, and a $2 billion bond that will mature in April.

Whether Russia has the ability to convert oil and gas revenues to dollars on this scale, particularly given its newly limited marketplace, will have important implications for the many investment funds with exposed positions in Russia's sovereign debt. This will only continue to exacerbate the price of Russia's government bonds, which have climbed to a 13.6% yield.

Further, Russian corporations, which owe four times more than their government, may decide to default for identical or independent reasons.

Oil Issues

Energy prices jumped as the U.S. and other countries, and some businesses, embargoed Russian oil, driving inflationary pressures at home.

While the present crude spike is a godsend for midstream and exploration and production companies that have languished for the past decade, costs associated with this rise are likely to show up in Chapter 11 filings of companies that will lay some degree of blame on the macroeconomic factors of inflation and interest rates exacerbated by reactions to Russia's war.

"War, Riot, or Act of God" 

Businesses with suppliers or customers in Russia or Ukraine — big players particularly in the agriculture sector — will be evaluating force majeure clauses in their contracts to determine whether those contracts are terminable due to the effect of war on the contract's purpose.

The Above In Flux

Henry Wadsworth Longfellow's old line, "All things must change, to something new, to something strange" has never been more relevant. The immediate fate of Ukraine and long-term economic ripples already set in motion, are in a great deal of flux.

While successful businesses remain vigilant about their immediate economic environment, we are in an unusual moment, when macroeconomic and geopolitical factors impact local businesses more than at other times. As the world navigates sanctions, war and overall extreme tension, keeping an eye on the big picture will be more important than ever.

Correction: A previous version of this article incorrectly quantified Saudi Arabia's contribution to global petroleum production. The error has been corrected.

Jonathan W. Jordan is counsel, Sarah Primrose is a senior associate and Mikhail Kalinin is an associate at King & Spalding LLP.

King & Spalding partners Thomas K. Sprange and Egishe Dzhazoyan contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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