The war in Ukraine and its effect on international trade

A version of this article was first published by The DCN in April 2022.

Please note that this was prepared in the middle of March 2022, before our other updates on more recent developments in sanctions and trade controls. It is provided by way of providing more detail on the background on the basis for these measures. 

The war in Ukraine is upending world trade, and there is no sign of an end to the disruption, Andrew Hudson writes.

I have previously provided comments on the imposition of Australian sanctions on Russia and others following the Russian invasion of Ukraine. However, as that invasion and subsequent military engagement continues and shows no signs of abating, I thought it would be worthwhile to provide updated comments about some of the developments in sanctions against Russia and the effect of the conflict on the wider trade agenda.

Nature of Australian sanctions

The Australian sanctions regime includes the implementation of United Nations (UN) sanctions, autonomous sanctions (not requiring UN action) and “thematic sanctions”. In large part, the actions have been financial, travel and economic autonomous sanctions aimed at prohibiting dealing with specific, named individuals and their businesses. UN sanctions have not been forthcoming due to vetoes by Russia and its allies. However, these autonomous sanctions need to be taken seriously. As the relevant part of the Department of Foreign Affairs and Trade (DFAT) website provides:

It is a serious criminal offence to contravene a sanctions measure. The penalties include up to ten years in prison for individuals and substantial fines for individuals and bodies corporate.

Targeted financial sanctions prohibit:

• directly or indirectly making an asset available to (or for the benefit of) a designated person or entity; and
• an asset-holder using or dealing with an asset owned or controlled by a designated person or entity. As these assets cannot be used or dealt with, they are referred to as ‘frozen’.

Unlike trade restrictions which usually apply to specific goods and services, targeted financial sanctions prohibit the supply of any asset whatsoever to designated persons or entities.

The sanctions have been implemented by the continuing issue of new autonomous sanctions effected by successive amendments to the Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Russia and Ukraine) Instrument 2022.

The DFAT website reminds parties that it is their responsibility to check on whether a party or its assets are affected where it states:

You are responsible for undertaking the due diligence checks necessary to ensure the persons or entities connected with your proposed activity are not subject to targeted financial sanctions. The Consolidated List is designed as one tool to assist you to undertake your due diligence checks. You are also responsible for undertaking due diligence to ensure no asset is indirectly provided to any individual or entity on the Consolidated List.

If a party believes it is dealing with an asset owned or controlled by a designated person or entity, that party should hold (or “freeze”) that asset and inform the Australian Federal Police (AFP) as soon as possible with specific information as required by regulations in the UN Sanctions Regulations and the Autonomous Sanctions Regulations. If a party is unsure whether an asset is owned or controlled by a person or entity on the Consolidated List, then the asset holder can refer the issue to the AFP for determination.

Other Australian actions

Australian actions have not been confined to the issue of sanctions. Australia has continued to provide financial assistance and deliveries of military equipment. There is also a reference to Australia providing additional shipments of coal to Ukraine to assist with the provision of power.

Further, Australia has now moved to prohibit the export of aluminium ores (including bauxite), alumina and related products to Russia pursuant to the Autonomous Sanctions (Export Sanctioned Goods – Russia) Designation 2022 pursuant to sub-regulation 4(3) of the Autonomous Sanctions Regulations 2011. That designation commenced on 20 March 2022 and includes items referred to in the Australian Harmonized Export Commodity Classification (AHECC) at classifications 2606.0000, 2818.1000, 2818.2000 and 2818.3000.

Other “export sanctioned goods” for Russia are set out in Regulation 4 of the Autonomous Sanctions Regulations 2011, which includes arms and related material and certain goods used for offshore oil and gas exploration and production.

It remains to be seen if Australia would impose similar sanctions on Chinese entities or persons should China aid Russia in its invasion of Ukraine and whether Russia will impose its own retaliatory sanctions or other trade controls on dealings with Australia.

Other international sanctions

As stated in my earlier commentary, both the United States (US) and the European Union (UN) have imposed far-reaching financial sanctions and export prohibitions. Accordingly, parties dealing with Russia, its entities and persons would need to review whether their dealings are caught by those US and EU sanctions and controls, including seeking legal advice and possible “clearances” from relevant agencies in the US and the EU. The Consolidated List does not include reference to overseas sanctions and controls.
Further recent international actions have included the move by New Zealand to create sanctions and prohibit dealings with Russia. While New Zealand can introduce sanctions pursuant to the UN sanctions, it does not have the ability to impose its own autonomous sanctions, as is the case in Australia. This required New Zealand to implement its own Russian Sanctions Act to “freeze” Russian assets in New Zealand and stop yachts, ships and aircraft from targeted individuals from entering New Zealand’s waters or airspace. The act extends to wealthy Russian individuals and countries that support Russia.

Other effects on trade

As you would expect, there have been significant practical effects of the war in Ukraine on the international supply chain, which will further restrict supply chains when combined with the impact of COVID-19 restrictions and the increasing costs of sea freight and air freight. These include the following:

• Countries looking to pivot away from a reliance on Russian resources.
• The impending lack of seafarers for commercial cargo fleets as Ukrainian and Russian seafarers represent nearly 15% of the industry’s 1.9 million seafarers and a high proportion of senior crew.
• Fears for the safety of seafarers, vessels and their cargoes.
• Vessels being trapped or damaged in Ukrainian waters.
• General uncertainty in the availability and movement of vessels and whether the war constitutes “Force Majeure”, allowing for the termination of contracts or voyages.

Further, a “rapid assessment” of the economic effects of the conflict dated 16 March 2022 from the United Nations Conference on Trade and Development (UNCTAD) includes a sobering summary of its assessment as follows.

The results confirm a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertiliser prices, heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs. This rapidly evolving situation is alarming for developing countries, and especially for African and least developed countries, some of which are particularly exposed to the war in Ukraine and its effect on trade costs, commodity prices and financial markets. The risk of civil unrest, food shortages and inflation-induced recessions cannot be discounted, particularly given the fragile state of the global economy and the developing world as a result of the COVID-19 (coronavirus disease) pandemic.

The assessment then identifies a series of key areas of concern, including the adverse effect on markets for various grains where Russia and Ukraine provide significant proportions of world supplies, the impact on transport from the likely movement of cargo shipped by rail west from China to the EU to the Asia-Europe Ocean freight routes and the effect on finance, investment and sustained energy transition, especially as they impact developing economies.

There is no way to know how this conflict will progress and how any possible resolution may be reached, let alone how the world will continue to engage with Russia in the future. Those affected will need to review contracts and practices considering the ongoing effect of the conflict on markets for food, finance, insurance and investment and the additional pressure on the supply chain. Any planning will need to factor in the effects of this and any future conflicts.

For advice on all aspects of Australian and international trade and customs obligations, please contact our Customs & Trade team.