Not long after the Russian convoy menacing Kyiv slowed to a crawl, pictures and videos began to emerge showing its military vehicles apparently damaged in what Ukrainian locals said was evidence that one front of Russia’s invasion was repelled.
It is an apt metaphor: Russian economic activity has ground to a near halt, stymied by a sudden lack of access to such products and services as software, payment processing and insurance — often-overlooked cogs in the machinery of commerce but vital nevertheless.
Transportation, energy and banking are three sectors in which these sudden omissions are likely to cut the deepest, according to experts.
Michael O. Moore, a professor of economics and international affairs at George Washington University, likened the scenario to the waves of supply chain crises created by Covid, such as unfinished vehicles sitting on assembly lines that had gone dormant for want of a small computer chip or a quantity of seat-cushion foam.
In the case of the Russian economy, Moore said the potential impact could be that much greater because it pertains not only to goods but to the vast network of professional services modern companies depend upon to facilitate commerce.
“A lot of trade is not just the movement of goods — it’s transportation services, it’s insurance services, it’s software services and all of those are potentially targets,” he said.
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While companies are most afraid of running afoul of sanctions, international trade experts observed that any connection to Russia, no matter how small or indirect, had become toxic.
Consider SWIFT, the critical communications network for the global banking industry that operated, until about a week and a half ago, more or less under the radar. Although largely invisible on the surface of commerce, it provides an essential function — leaving the major Russian financial institutions subject to the lockout without an efficient way to conduct business.
“There isn’t a full cutoff of financial transactions but … sanctions are making it difficult to interact with Russian companies, because how do you execute the transactions?” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics.
The insurance industry is also quickly backing away from Russia, with consequences that are already visible. Analysts say one reason oil prices spiked last week was that Russian oil wasn’t moving, in spite of energy sector carve outs to international sanctions. The problem: Shipping companies and oil buyers were having much greater difficulty finding companies willing to insure tankers or their contents.
“Insurance is very much the lubricant to the global economy, in that very little in the way of goods can be transported across the globe without the effective participation of insurers. This includes energy and energy infrastructure,” said Robert Hartwig, a professor of finance and insurance at University of South Carolina.
“It’s effectively illegal to allow ships that are not appropriately insured to enter ports around the world,” he said. “Even without the sanctions in place, the actions by insurers to step back from these markets will … broaden the effectiveness of those sanctions.”
This sudden inability to insure vessels and cargo is taking place in the air and at sea. The U.K. announced last week it would ban Russia’s aviation and space industries from the London-based insurance and reinsurance markets — the world’s largest — making it much more difficult for airlines flying either passengers or cargo to obtain insurance.
A lack of access to insurance isn’t the only hurdle Russia’s aviation sector faces. Global airlines rely on one or more of a trio of software companies — Sabre, Amadeus and Travelport — to expedite bookings and reservations. All three have effectively kicked the Russian national airline Aeroflot off their global distribution systems. The global distribution ecosystem is a part of the airline business rarely seen or noticed by passengers, but it is a critical link between corporations, travel agencies and airlines’ booking systems.
“The private sector is doing what the U.S. and E.U. were more reticent to do: Punish Russia’s oil and gas sector directly,” said Cullen S. Hendrix, a professor at the Korbel School of International Studies at the University of Denver, in an email.
Part of that reluctance stems from an unwillingness to be in violation of not just current sanctions but to avoid any additional penalties that might be added later, Hendrix said, citing the unwillingness of some firms to touch Russian products, even at steep discounts. But the PR fallout looms as an even bigger worry, he said. “The reality and optics of doing business with Russian state-owned or state-aligned firms are just terrible; is the discount worth having your name mentioned in stories about the bombardment of civilian targets and a massive refugee crisis?”
Enterprise software giants SAP and Oracle both said on Wednesday they were suspending activities in Russia. Oracle said via Twitter it had “suspended all operations” in Russia. SAP published a post from CEO Christian Klein that read, “We are stopping business in Russia aligned with sanctions and, in addition, pausing all sales of SAP services and products in Russia.”
Microsoft president Brad Smith said in a blog post Friday the software company had suspended new sales in Russia. In addition, “[W]e are stopping many aspects of our business in Russia,” to comply with sanctions, he said. Apple halted online sales of its products in Russia and also stopped its Apple Pay service inside the country.
While it is unclear to what extent these companies are separating themselves from their Russian customers, experts said any action that cut off Russian business customers from having access to the vital tech services these companies provide could quickly become a quagmire.
“Anything involving a database, accessing information … would potentially be susceptible to problems,” said Moore, the George Washington University professor, since much of corporate IT architecture is built on a foundation of interlocking technology.
“The DNA of a system is how different computers speak with each other,” Moore said.
“We’re a consumer and data-driven economy, so these software companies are really getting into the bones and sinew of commercial transactions. It’s not a flesh wound.”