Almost immediately after the Russian convoy that had been threatening Kyiv slowed to a crawl, pictures and videos began to emerge showing its military vehicles appear to have been damaged, which Ukrainian residents interpreted as evidence that one front of Russia’s invasion had been successfully repelled.
It is a suitable metaphor: A lack of access to critical goods and services including software, payment processing, and insurance has brought Russian economic activity to a grinding stop. These are often-overlooked gears in the wheel of business, but they are critical nevertheless.
According to industry analysts, the transportation, energy, and financial sectors are the most likely to be hit the hardest by these abrupt exclusions.
In his analysis of the situation at George Washington University, Professor Michael O. Moore compared it to the waves of supply chain crises caused by Covid, such as unfinished vehicles sitting on assembly lines that had gone dormant for lack of a small computer chip or an adequate quantity of seat-cushion foam, which were caused by a lack of a small computer chip or an adequate quantity of seat-cushion foam.
When it comes to the Russian economy, Moore believes that the potential effect might be much higher since it involves not just the export of commodities but also the huge network of professional services that contemporary businesses rely on to enable trade.
“A lot of commerce is not just about the movement of products — it’s also about the movement of transportation services, insurance services, and software services, all of which are possible targets,” he said.
While firms are most concerned about falling foul of sanctions, international trade experts have noted that any relationship to Russia, no matter how little or indirect, has grown poisonous in recent years.
To illustrate, take the case of SWIFT, a key communications network for the worldwide banking sector that had been operating more or less beneath the radar until approximately a week and a half ago. Despite the fact that it is mostly invisible on the surface of trade, it performs a critical purpose by preventing the big Russian financial institutions that are subject to the lockout from doing business in an effective manner.
Despite the fact that financial transactions are not completely prohibited, “sanctions are making it tough to connect with Russian enterprises since it is difficult to conduct the transactions,” says the author. Jeffrey Schott, a senior scholar at the Peterson Institute for International Economics, shared his thoughts on the subject.
Additionally, the insurance business is rapidly retreating from Russia, with the ramifications of this decision already evident. According to analysts, one of the reasons why oil prices jumped last week was because Russian oil was not moving, despite the fact that the country’s energy industry had been exempted from international sanctions. It became more difficult for shipping firms and oil importers to find insurance companies willing to cover tankers or their cargoes, which exacerbated the situation.
The global economy relies heavily on insurance, which serves as a lubricant in that very little in the way of products can be carried around the world without the active engagement of insurers. According to Robert Hartwig, associate professor of finance and insurance at the University of South Carolina, this includes energy and the infrastructure that supports it.
In his words, “It is basically unlawful to allow ships that are not properly insured to access ports all over the globe.” Insurance companies’ decisions to withdraw from certain markets, even if no penalties are in place, would “increase the impact of such measures,” according to the report.
This abrupt inability to insure boats and cargo is occurring both in the air and on the oceanic surface. In a recent announcement, the United Kingdom announced that it would bar Russia’s aviation and space industries from participating in the world’s largest insurance and reinsurance markets in London. This will make it much more difficult for airlines flying either passengers or cargo to obtain insurance.
The lack of access to insurance isn’t the only stumbling block for Russia’s aviation industry. In order to speed bookings and reservations, global airlines depend on one or more of three software companies: Sabre, Amadeus, or Travelport. Russian national carrier Aeroflot has been essentially banned out of all three companies’ worldwide distribution platforms, according to reports. Customers seldom see or realize the worldwide distribution network, which is a vital connection between enterprises, travel agents, and airlines’ reservation systems.
As Cullen S. Hendrix, a Professor of International Studies at the Korbel School of International Studies at the University of Denver put it: “The private sector is doing what the United States and the European Union were more hesitant to do: Punish Russia’s oil and gas industry directly.”
Hendrix explained that part of the reluctance stems from a desire not to be in violation of current sanctions but also to avoid any additional penalties that might be imposed in the future. He cited the refusal of some firms to deal with Russian products, even when offered at steep discounts, as an example of this reluctance. However, he believes that the public relations consequences will be an even greater concern. In the face of such appalling realities and optics, is it worthwhile to conduct business with Russian state-owned or state-aligned enterprises? Is it worth it to have your company’s name referenced in articles about the shelling of civilian targets and an unprecedented refugee crisis?”
SAP and Oracle, two of the world’s largest enterprise software companies, announced on Wednesday that they were halting operations in Russia. Oracle said on Twitter that it has “completely halted all activities” in Russia. According to SAP CEO Christian Klein, “We are ceasing all business operations in Russia in accordance with sanctions, and we are also suspending all sales of SAP services and products in Russia.”
Microsoft president Brad Smith said in a blog post on Friday that the software business has halted new sales in the Russian market. As part of the sanctions compliance effort, “[w]e are suspending several areas of our business in Russia,” he said. Apple has suspended online sales of its goods in Russia, as well as the availability of its Apple Pay service in the nation.
While it is unknown to what degree these corporations are distancing themselves from their Russian clients, experts warn that any move that prevents Russian business customers from accessing the critical technology services provided by these companies may soon turn into a quagmire.
Because most of corporate information technology architecture is based on a foundation of interlocking technologies, said Moore, the George Washington University professor, “anything requiring a database, accessing information… would potentially be subject to difficulties.”
“The DNA of a system is the way in which various computers communicate with one another,” Moore said.
“Because we live in a data-driven and consumer-driven economy, these software businesses are actually going into the bones and sinew of commercial interactions.” “It’s not a flesh wound,” says the doctor.