Trade Finance to Support Ukraine in Times of Dire Need

By Kateryna Chechel

Amid Russia's invasion of Ukraine, local businesses need support now more than ever. Unfortunately, there are no quick-fix solutions for this situation. Alex Lissitsa, the CEO of IMC, a top Ukrainian agricultural company, can vouch for that. In early March 2022, his company was directly impacted, with 100,000 hectares of land and five of the company's six silos falling under Russian occupation. This was a nightmare, but they have survived, for now.

"Without external support in financing and exports, I'm not sure we can keep delivering," Lissitsa says. Businesses in Ukraine are finding it extremely difficult to continue their operations. The high risk of damage to infrastructure across the country makes direct investments in this type of assets challenging. While the biggest problem is liquidity, limited access to logistics, which results in higher costs, are also major obstacles.

Given the urgent need for assistance, trade finance is one of the immediate options which will ensure that the export and import of essential goods, especially grains and fuel for agricultural equipment, are able to continue.

Scholars suggest that trade finance has ancient origins. The first known letter of credit dates back to Ancient Egypt, where a clay note recorded a debt to be paid upon the delivery of wheat, with a right of execution to the noteholder should payment not be made.

Trade finance continues to remain as essential today. In Ukraine's case, it can play a key role in supporting the economy while also enabling healthy production in the approaching agricultural seasons. According to Ukraine's Ministry for Agriculture and Food, planting and exports have been severely disrupted by the lack of fertilizers, low or no fuel supply for tractors, port closures, and military activity.

Lissitsa points out, "Ukraine, known as the 'breadbasket of the world,' faces extraordinary challenges in terms of sowing, harvesting, and exporting wheat and other produce."

The country's agriculture sector was thriving before Russia's invasion of Ukraine. One of the world's top agricultural producers and a critical supplier of oilseeds and grains globally, Ukraine's agricultural exports totaled $27.8 billion, accounting for 41 percent of the country's overall exports in 2021. As of February 2023, the sector had already suffered losses worth up to $8,7 billion, impacting the millions of Ukrainians whose livelihoods depend on agriculture. This has also triggered a global food crisis, especially for net import countries in the Middle East and North Africa.

Though the UN-brokered grain deal has helped more than 28 million tons of agricultural goods safely cross the Black Sea and reach 45 countries since August 2022, this is still a far cry from the country's earlier capacity, which in 2021 averaged over 4 million metric tons a month.

Responding to the prolonged crisis, IFC announced a support package of up to $2 billion for Ukraine's private sector. As part of this effort, it provided Ukraine's banks with trade finance guarantees through its Global Trade Finance Program (GTFP). Critically for the Ukrainian economy, this allowed them to facilitate cross border trade finance operations to local importers and exporters.

Since February 2022, the program has facilitated over $77 million in trade finance guarantees for banks in Ukraine to enable imports of essential goods. These included diesel and natural gas for tractors and combine harvesters to cultivate land during the agricultural seasons, critical to domestic food security and continued exports. In addition, it supported exports of Ukrainian grain, corn, sunflower seeds, and oil to other countries through its local partner banks.

Wheat is one of the commodities most affected by Russia's invasion of Ukraine. Photo: Courtesy of IMC

"Providing trade finance can help support cross-border trade right now," said Lisa Kaestner, IFC's Regional Manager for Ukraine. "Through the program, we can reach entrepreneurs who are involved in cross-border trade and have limited access to finance, while also ensuring Ukraine's critical industries continue to run, which is vital to generating stable tax revenues and preserving jobs."

Card power

The GTFP can also help to ensure individuals have access to finance. In February and March last year, nearly 8 million Ukrainians were forced to leave their homes and find shelter in neighboring countries.

Amid this humanitarian crisis, the National Bank of Ukraine (NBU) recommended that Ukrainians deposit money in their bank accounts in Ukraine rather than holding onto the currency in cash. Two factors lay behind this advice. Firstly, NBU realized that as refugees in a foreign country, Ukrainians may have a tough time exchanging Ukrainian currency at fair value. Secondly, the regulator wanted to retain confidence in the country's banking system to ensure that it could continue functioning, forestalling any weakening of the national currency or outflow of capital.

NBU's farsightedness enabled the Ukrainian refugees, who are account holders in Ukrainian banks, to use their cards to pay for goods and services as well as to withdraw money in foreign currency.

Despite the economic turbulence in Ukraine, it is still possible to make online payments through Ukrainian credit cards when abroad. Photo: Anna Zdorova

Looking back, Anastasia Tiutina is thankful she paid heed to NBU's advice before fleeing. Once she managed to land in Finland, she was lucky to be hosted by a generous couple. While they were more than happy to support her, she felt shy and obliged.

"While escaping, I was terrified. So, I essentially focused on my passport and investment papers, imagining I will be back in three weeks. But once I was safe and somewhat settled, the practicalities started hitting me. I needed my contact lens solution, my allergy medication, and most certainly, a small gift for my hosts to express my gratitude." Anastasia was relieved she could use her Ukrainian credit card and did not have to bother her hosts to help her out at the foreign exchange office. It was a face saver.

Anastasia could use her card without hassle because of the global payment systems' continued access to cards issued in Ukraine. This is also possible because of GTFP's support to partner banks in the country. In this case, the guarantees - issued through GTFP - provide financial insurance for global payment system providers like VISA or Mastercard, allowing European banks to efficiently serve people who hold cards issued by Ukrainian banks.

Meanwhile, Anastasia is grateful she has control over her finances. "Even if everything falls apart, I'd want to live life on my own terms, wherever I am," she says.

IFC is ramping up its work in Ukraine, including supporting cross-border trade finance operations of Ukrainian banks at a time when their access to international trade finance facilities is limited. To date, GTFP has issued more than $70 billion in trade finance guarantees, of which more than $6 billion have been issued, amid challenging conditions in fragile and conflict-affected states, since July 1, 2022.

Published in May 2023

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