Category Archives: Russia

On the Subject of Trade Treaties, Continued

On Tuesday, when we noted that Russian (Border) Trade Agreements are nothing new, we pointed out that it was the Six Hundred and Ninety First anniversary of the Treaty of Noteborg. Then, yesterday, when we wrote on the subject of Historical Trade Treaties, we noted that it was the Two Hundredth Anniversary of the Anglo-Dutch Treaty of 1814, also known as the Convention of London.

The reason for these posts were to point out a number of things:

  • Trade, Treaties, and Embargoes are nothing new,
  • Today’s trade agreements and partners are not necessarily tomorrow’s trade agreements and partners,
  • The outcomes are not always what you would expect.

Trade, Treaties, and Embargoes are nothing new

Written peace treaties, with economic ramifications, have been around for at least 4,500 years. For example, archaeologists have found clay cylinders dating from about 2,500 BC that record a treaty between the two Sumerian cities of Lagash and Umma that were looted 18 miles apart. The second cylinder describes a one-time penalty of 144,000 gur of grain that Umma had to pay Lagash.

And while the Continental System was one of the most comprehensive attempts at an embargo throughout all of history, the concept of an embargo, which is the partial or complete prohibition of commerce and trade with a particular country, the origin of the embargo is in the blockade, which was initially designed to cause military exhaustion and starvation, but which evolved over time to target the populace (to build internal dissension in the enemy) as well as the military. And blockades have been around for over 2,500 years. For example, back in 458 BCE, the Athenians blockaded the island of Aegina in the Saronic Gulf during the first Peloponnesian War.

Trading Agreements and Partners are in constant flux

A trading agreement generally only lasts as long as the agreement is beneficial to both parties. Once it is no longer beneficial, one of three things will generally happen:

  • it will be executed minimally to completion, if it ends soon,
  • it will be renegotiated, if it doesn’t end soon but both parties want to maintain a relationship, or
  • it will be broken, and one or both parties will risk penalty or retaliation because they feel it can’t be worse than the current agreement.

The outcomes of a Trade Agreement, Treaty, or Embargo are not always what you expect

In the case of an agreement, the agreement might go exactly as planned. The first party might deliver to the second party the exact quantity of goods specified for the exact duration specified in the agreement, and then stop. The agreement might work out so good for both parties that they double down and trade even more. Or, it might work out so bad that they almost immediately negotiate an end to the agreement.

In the case of a treaty, it might strengthen relations or it might weaken relations.

But in the case of an embargo, the exact opposite of what is desired can happen. It might be the case that all parties in the coalition respect the embargo and stop trading the designated goods and services to the party for which the embargo applies. And it might be the case that some parties in the coalition refuse to respect the embargo and continue to trade with the embargoed party anyway.

But even if the first case is the reality, it is not necessarily the case that the embargo will have the desired effect. It could be the case that the embargo, designed to weaken a party, actually strengthens a party. Sometimes the ancient* proverb is right and the enemy of my enemy is my friend and the embargo, instead of hurting the intended party, causes them to strengthen their trading relationship with another party and makes two parties you want weakened stronger.

And, going back to Tuesday’s post, just like the Continental System backfired on France, as it only made Britain and Russia stronger when Russia started trading with them again in 2010, any embargoes on Russia, which is no longer the Super Power they once were, is just going to backfire on any western country that hopes that the embargo is going to weaken Russia. All the embargo is going to do is strengthen Russian ties with its Middle Eastern and Asian neighbours, and China in particular. The New Silk Road will be here sooner than you think.

So what does this mean for your Supply Management Organization?

* An early expression of this concept is found in a Sanskrit treatise on statecraft dating to the fourth century BC.

On The Subject of Historical Trade Treaties

Today is the 200th anniversary of the Anglo-Dutch Treaty of 1814!

This historic treaty, also known as the Convention of London, was signed between Great Britain and the Netherlands 200 years ago today and it returned to the Dutch the colonial possessions that they controlled in the Americas, Africa, and Asia (with the exceptions of the Cape of Good Hope and British Guiana, where they still retained trading rights) before the outbreak of the Napoleonic Wars.

During the Napoleonic Wars, which pitted France against a series of coalition forces, France, under the leadership of Napoleon, conquered a significant amount of mainland Western Europe. By 1811, after the defeat of three consecutive coalition forces (in the Wars of the Third, Fourth, and Fifth Coalitions), the French Empire occupied much of what is modern France, Beligum, and the Netherlands and controlled, or occupied, satellite states that included large territories that are now part of Germany, Italy, Poland, Spain, and Portugal. (Check out this Wikipedia Map to see how far Napoleon’s armies were able to advance in a mere eight years.) As Napoleon conquered states and countries, he also took control of their territories and colonial possessions around the globe. The third coalition saw France defeat aligned British, Russian, Austrian, and Swedish forces and the withdraw of Austria from the coalition. The fourth coalition saw France defeat aligned British, Prussian, Russian, Saxon, and Swedish forces and the withdrawal of Saxony. The fifth coalition saw France defeat aligned British and Austrian forces. And then, in 1810, Napoleon married Marie Louise, an Austrian Archduchess, and formed a stable alliance with Austria. At this point, in addition to the French Empire, France controlled the Swiss Confederation, the confederation of the Rhine, the Duchy of Warsaw, and the Kingdom of Italy and its allies included the Kingdom of Spain (ruled by Joseph Bonaparte, Napoleon’s brother), the Kindgom of Westphalia (ruled by Jerome Bonaparte, Napoleon’s brother), the Kingdom of Naples (ruled by Joachim Murat, Napoleon’s brother in law), the Principality of Lucca and Piombino (under Elisa Bonaparte, Napoleon’s sister), Prussia and Austria.

At this point France effectively controlled most of mainland Europe, a number of it’s colonies (including those that Britain restored to the Dutch under the treaty of 1814), and the majority of trade in and out of mainland Europe, which it regulated under the Berlin Decree of 1806 that ushered in the Continental System. Under this decree, the importation of British goods into European countries allied with or dependent upon France was forbidden and required all connections with Britain to be cut, including mail! In addition, the French Empire, under the leadership of Napoleon, threatened Russia with invasion if they did not comply.

This was an early example of large-scale economic warfare, undertaken because France didn’t have the resources to invade the United Kingdom or to take on the Royal Navy at sea. Since Great Britain was emerging as Europe’s manufacturing and industrial center, Napoleon believed the trade embargo would result in inflation and great debt in the UK.

However, even though Britain took a hit to its trade, especially in 1808 and 1811, the effects of the embargo were mitigated by Britain’s control of the oceans, as Britain could pretty much sail where it wanted and trade with who it wanted. Moreover, the embargo ended up hurting France more in the end than it hurt Britain. It hit the economies of France’s allies hard and these allies were eventually forced to ignore the Continental System. This ended up weakening France’s coalition, as the French and Dutch economies were hit hard, Portugal and Sweden refused to comply with the demands, and Russia, chafed under the embargo, eventually re-opened trade with Britain in 1810. (Then Napoleon kept his word, invaded Russia, and this was the undoing of Napoleon and the last great French empire.)

So what’s the lesson here?

Russian (Border) Trade Agreements Are Nothing New

So why is everyone fretting about the $20 Billion Oil Deal between Iran and Russia? Yes, it delivers another blow to the US-based petro-dollar, but is it really any worse than China and it’s efforts to not only reign in the value of the western dollar but control the valuation of its yen at the same time? We should not forget that the GDP of China is more than FOUR times that of Russia and that Russia and Iran used to be neighbours. Even though Russia is now two countries away from Iran border-wise — as it now borders Kazakhstan which borders Turkmenistan which borders Iran — it wasn’t always this way. The Russian Empire began to expand into what is present day Kazakhstan back in 1813 and essentially all of present day Kazakhstan was annexed by 1907. Similarly, Turkmenistan was annexed by the Russian Empire in 1881 and became a constituent republic of the Soviet Union in 1924, only regaining its independence upon the dissolution of the Soviet Union in 1991.

And Russia has a long history of either conquering, annexing, trading, or negotiating with its neighbours. For example, 691 years ago today, the Treaty of Noteborg was signed between Sweden and Novgorod (present day Russia, more or less), and for the first time the border between the two countries was regulated. The conclusion of the Swedish-Novgorodian Wars, the treaty awarded three Karelian parishes to Sweden who, in return, would stay out of the conflict between Novgorod and Narva (present day Estonia, more or less). In addition, both sides would refrain from building castles on the new border. So it should be no surprise that, given the opportunity to reclaim Crimea — and to do so relatively peacefully — that Russia took it or that they took the opportunity to trade with Iran on local terms.

But it’s not worth fretting about. One has to look at the bigger picture. When it comes to the BRIC, Russia is essentially the weakest player. India has considerably more population and a long-term outlook of becoming a top 5 GDP player. Brazil has a larger GDP (by as much as 20%) and very bright prospects as the new near-shoring destination for North America. And China has 4 times the GDP, 9 times the population, and a heck of a lot more clout when it comes to global trade!

So don’t fret about a 20 Billion Oil deal, the return of what is essentially a small province to Russia, or the fact that Russia has agreed to pay China in domestic currency. It’s a drop in the bucket. The real shocks to global trade will come from China and the new Silk Road they are building.

Don’t get caught up in the meaningless media frenzy focused on Russia. Just because the media has forgotten that the cold war is over doesn’t mean we should.

The New Silk Road Might Be the Biggest Boon to Supply Chain Finance This Year

In yesterday’s post, we asked what impact will the new silk road have on global trade. Specifically, what impact will the new Russia, China, and Germany trade partnership have on global trade — besides simplifying and building Eurasian trade relationships.

One thing it will do is strengthen the resolve of these countries to not only de-couple their currency from the dollar and launch a new reserve currency backed by their union, but to trade in local currencies as well. As trading in local currencies becomes more and more common, banks will become more and more inclined, and even comfortable, to lend in foreign currency denominated debt as well as local currency. Private lending institutions will not only follow, but begin to lead the way.

This will be a great boon to foreign companies which, until now, have been limited to either borrowing from local lenders, at high interest rates, but in the local currency, or a handful of global lenders, at slightly lower interest rates, in a foreign currency, that could cause their debt to skyrocket if their currency weakens with respect to the foreign currency.

The whole point of Supply Chain Finance is to help the cash-strapped supplier. Early payment or dynamic discounting doesn’t help the supplier if the discounts are too high. Arranging for third party lenders to lend using your credit score, and not the suppliers, doesn’t help if the supplier has to take a risk in a foreign currency. And factoring isn’t a solution at all! (Since a third party will only buy your suppliers’ receivables if it can make money off of them — loan sharks at their finest.) Arranging for lending in your suppliers’ local currencies on your credit score when you can’t pay early is safest for your supplier and probably the best supply chain finance solution we’re going to see for a while.


What Impact Will The New Silk Road Have on Global Trade?

Russia is decoupling its trade from the dollar, decoupling its hydrocarbon trade from the petro-dollar, and working with China to re-open the old Silk Road between China, Germany, and Russia. Powered by the Eurasian Land Bridge that is a rail transport route for moving freight and passengers overland from Pacific seaports in the Russian Far East and China to seaports in Europe using a transcontinental railroad and rail land bridge (by way of the Trans-Siberian Railway and the New Eurasian Land Bridge through China and Kazakhstan), the New Silk Road will increase Eurasian trade, most likely at the expense of North America.

The immediate consequences of Russia’s actions will amount to the BICS, and BICS partner countries, following Russia’s lead and decoupling their trade from the dollar, especially in hydrocarbons (which is a Trillion dollars a year in Russia alone), to local currencies and trading partner currencies. Furthermore, China has been in the process of decoupling from the dollar for months and is focussed on the yuan’s ascendancy.

The follow-on to this, as described in this recent article over on on Russia and China announce decoupling trade from Dollar – the End for the USA is nigh, is that the BRICS are preparing to launch a new currency — backed by a basket of their local currencies — to be used for international trading, as well as a new reserve currency. As a follow on, a new international payment settlement system, replacing SWIFT and IBAN, is expected, which will bust up the effective monopoly held by the Bank for International Settlement (BIS) in Basle, Switzerland. Currently, China has two small operations in London and Frankfurt to process trading cash flows directly between Euros and Yuan, but that is expected to grow.

But the new economic Silk Road, which is going to use Duisburg, the world’s largest inland harbour (and a historic transportation hub in Europe), and link Russia and China through the world’s fourth largest economy, as well as with Kazakhstan, Belarus, and Poland, has the potential to overshadow all of this from a trade perspective. The effect of decoupling from the dollar just means that some currencies rise at the expense of others that fall. It doesn’t alter trading volumes substantially. Some countries, not having to buy an overpriced dollar, might be able to buy a little more, or some, for which the dollar was relatively weak to their currency, might have to settle for a little less, but overall, the change will likely be limited and controlled.

But a new trading route, which can get things from China to Duisburg in 18 days or less, could significantly shift the global balance of trade, see less trading between the West and the East, and even increase trading on the Eurasian continents. It’s hard to say what will happen, but chances are some ocean carriers will lose considerably, as more goods will be moving over land, and carriers servicing the ports along the New Silk Road will gain, as trade shifts to minimize the amount of time cargo needs to spend on the ocean (as time is money). It’s a situation to be aware of at least.