How the Russia-Ukraine conflict is affecting businesses in Vietnam

As the Russia-Ukraine conflict unfolds and completes a month, Vietnam Briefing looks at the impact of the conflict on Vietnam as well as businesses in the country. While it’s still early to determine long-term effects, we examine the short-term effects that will play a key role in how the economy moves forward.

The Russia-Ukraine conflict which began on February 24, sent shockwaves to global markets and led to an unprecedented response from countries around the world in the form of economic sanctions and other restrictive measures. In doing so, western countries and allies are sending a clear signal that they want to cut off Russia from the global financial system and isolate Putin politically.

While analysts state the impact of the Russia-Ukraine conflict is likely to have limited direct consequences on Vietnam, the fallout of the conflict is likely to have significant consequences on trade and businesses in Vietnam. From disrupting trade and global supply chains to causing tensions geopolitically, we discuss the impact that is likely to be felt by businesses operating in Vietnam.

Vietnam has maintained a neutral stance, refusing to either directly condemn or condone Russia’s actions and calling for a peaceful and diplomatic resolution to the conflict.

Nevertheless, it’s inevitable that businesses in Vietnam will be caught in the crosshairs due to sanctions imposed on Russia and subsequent indirect consequences.

Impact of the Russia-Ukraine conflict on trade

Businesses directly engaged in trade with Russia, Ukraine and Belarus will feel the most immediate impact of the conflict. Ukraine is now essentially closed to trade and business, and only essential goods and supplies are entering the country through the Polish border.

Vietnam-based businesses are already facing challenges regarding trade with Russia and Ukraine. Several businesses have complained about rising transport costs as Russian banks have been cut from SWIFT, the leading international payment system.

In addition, businesses are also facing supply chains issues caused by the pandemic. Vietnam is a major manufacturer of smartphones. While the US has not imposed restrictions as yet on imports and exports between Vietnam and Russia (except for high-tech goods using US machinery and technology), disruption to raw materials used to make smartphones may affect Vietnam’s smartphone manufacturing industry if alternate plans are not implemented.

In particular, wood processing industries that rely on imported timber from Russia and Ukraine are finding it increasingly difficult to obtain inputs.

Vietnam has been also facing inflation which is only likely to be further exacerbated due to an increase in oil and gas prices. Vietnam imported just around US$1.5 billion of fertilizer, iron, steel, coal, and agricultural products from Russia and Ukraine in recent years as per Dragon Capital. While Vietnam’s exports have totaled nearly US$2.4 billion for mobile phones, garments and textiles, and electronic equipment.

Bilateral trade turnover between Vietnam and Russia in 2021 reached US$5.5 billion up 13.8 percent compared to 2020. Vietnam-Ukraine trade turnover was estimated at US$720 million up 50 percent compared to 2020.

Nevertheless, Russia and Ukraine trade make up less than 4 percent of Vietnam’s total annual trade.

In light of this, we look at specific sectors that are likely to experience significant disruption.

Tourism

Vietnam is a major market for Russian tourists. Especially Nha Trang, Phan Thiet, and Phu Quoc are known for attracting Russian tourists with restaurants and businesses catering to this demographic. Already a large Vietnamese travel agency for Russian tourists has suspended its services for the market. In addition, Vietnam’s flag carrier, Vietnam Airlines will temporarily suspend flights between Hanoi and Moscow from March 25 in a further blow to Russian tourism. Russian tourists are valuable as they spend an average of US$1,600 per stay compared to an average of US$900 by other foreigners as per Vietnam’s National Administration of Tourism in 2019.

Energy

Energy projects back by Russia in Vietnam have also been put on hold due to the conflict. This includes the Long Phu 1 thermal power project which is already two years behind. This is followed by the Quang Tri gas project which is also two years behind schedule. Other projects include the Vinh Phong offshore wind power project with an MoU signed in April last year. Russian investments into Vietnam have mainly focused on the energy sector.

Transport

The Russia-Ukraine conflict has disrupted key rail routes to Europe which operate via China. Some companies have already suspended rail freight to Europe via China and Russia due to concerns over disruptions at the borders. In fact, the first freight train linking Da Nang to Europe scheduled in March has been suspended. The train was scheduled to carry furniture and would have gone through China before connecting to the Asia-Europe railway line.

Maritime shipping will be an alternative for businesses seeking to reroute shipments away from Russia and Belarus, but these routes are already facing significant delays as discussed below.

Shipping disruption

The Russia-Ukraine conflict has further exacerbated the shipping and supply chain crisis that the world has been grappling with since the outbreak of the COVID-19 pandemic. This will continue to impact companies that engage in shipping and depend on long-route logistics.

The logistics bottlenecks and imbalance in supply and demand have significantly slowed average shipping times and resulted in a severe shortage of shipping containers worldwide. Fierce competition between companies to lease or purchase containers has driven up costs of freight containers and freight services to sky-high rates.

Since the conflict broke out on February 24, the Ukrainian military has suspended commercial shipping at the port of Odesa, Ukraine’s largest port. Maersk, the world’s second-largest container shipping company, has begun diverting cargo to Port Said in Egypt and Port of Karfez in Turkey. In addition, several shipping giants have also announced they are suspending non-essential shipping to Russia in order to comply with sanctions. This will result in soaring freight rates along with shipping delays affecting goods trade.

The global supply chain crisis underscores the need for companies to diversify their supply chains in order to mitigate against force majeures and geopolitical risks. The Russia-Ukraine conflict is only the latest example of this; the disruption of the COVID-19 pandemic and volatility in global markets due to US-China tariff escalation are other recent examples.

Moving away from a single-country sourcing strategy and identifying alternative suppliers and sources can help future-proof your business against uncertainty. Vietnam is an ideal contender for sourcing and diversifying supply chains.

Payment challenges

The US, EU, and the UK, as well as other countries, have banned individuals and citizens from interactions with the Central Bank of Russia, Russia’s Ministry of Finance, and the National Wealth Fund.

International payments for foreign businesses operating in Russia using sanctioned banks may still make and receive payments, however, there may be transfer delays. We recommend opening accounts with non-sanctioned banks, ideally the Russian subsidiaries of international banks who use financial agent services to process international payments. Russian importers have proposed suspending payments in the short term until the situation stabilizes.

More recently, VISA and Mastercard suspended operations in Russia. This means any Mastercard issued in Russia cannot be used for transactions outside of the country, whereas any VISA card issued in Russia cannot be used inside the country either. 

Geopolitical conundrums

Vietnam will have to balance its relations with the US and Russia. Security threats from China have pushed it closer to the US, with the US one of the biggest markets for Vietnam’s exports. While Vietnam has sought economic and military ties with the US, as per the Stockholm International Peace Research Institute (SIPRI), in the last 20 years leading up to 2020, Vietnam purchased over 80 percent of its military hardware from Russia. This includes submarines, tanks, fighter jets, and weapons worth US$7.4 billion. This means that most of Vietnam’s military equipment remains Russian-made.

Russia’s military sales to Vietnam run a risk if the US places sanctions; further, Vietnam may be forced to buy military equipment from the West while also looking at alternate partners for investment in energy.

Takeaways

While it’s too early to assess long-term impacts, in the short term the conflict will influence everything from supply chains to fuel prices to trade. As Vietnam looks to bounce back after the pandemic, the conflict has dampened its economic prospects. In the meantime, businesses in Vietnam should look to diversify their trade, making use of Vietnam’s free trade agreements as well as opportunities to cater to new markets.

By Pritesh Samuel – Vietnam Briefing – March 25, 2022