Doing Business

What effect does the Russia-Ukraine conflict have on the economy of Vietnam?

Trường Lăng

May 26, 2022

Doing Business

What effect does the Russia-Ukraine conflict have on the economy of Vietnam?

Trường Lăng

May 26, 2022

The Russia-Ukraine conflict has further deepened the global crisis that the world has been grappling with since the outbreak of the COVID-19 pandemic. Vietnam is without exception. The conflict has had certain negative impacts on the Vietnamese economy. Yet, the Vietnamese government has weathered the country through the volatile, uncertain, complex and ambiguous contexts by diversifying trade, supporting business and improving the business environment. 

The most conceivable impact of the Russia-Ukraine conflict was on import and export.

Being the largest trading partner of Russian in ASEAN and the fifth largest partner in APEC, Vietnam recorded 7.14 billion USD trade volume to Russia in 2021, increasing by 25.9% in 2020. In particular, the export of Russia to Vietnam reached 2.24 billion USD, up 38.3% compared to 2020. Meanwhile the import volume from Vietnam rose by 20,9% to 2020, standing at 4.89 billion USD, securing its 21st place in the main import partners of Russia. 

russia exports to vietnam
Russia exports to Vietnam (Source: Tradingeconomics)

Yet, the Russia-Ukraine conflict has exerted a widespread impact on Vietnam’s import and export activities. For example, many Vietnamese exporters have stagnated their orders due to the tension between Russia and Ukraine. Further, the conflict has caused a sudden and prolonged plum in the food exports in Ukraine and Russia, thus burdening the international commodities prices and causing damage to vulnerable economies. 

In addition, the USA and several EU countries have excluded some Russian banks from SWIFT- an international payment system. As a result, the cooperation between Russia and other nations has fallen into difficulties. Particularly, the blocking of Russia from SWIFT negatively hit the Russian investment projects in Vietnam, notably, power energy, oil and gas, and affected the contract payment in Euro currency. 

The export of agricultural products has encountered various challenges due to the Russia-Ukraine conflict 

In Vietnam, the prices of domestically produced and imported fertilizers have increased by about 60-80% in 2021. The animal feed prices also experienced a sharp increase while the output prices saw considerable fluctuations, doubling the financial burden on farmers. Additionally, when the Russia-Ukraine conflict escalated, not only Vietnam, but also many countries worldwide have suffered from a surge in agricultural  products. The reason behind this lies in the importance of Russia in the global fertilizer trade. 

In detail, Russia is the world’s largest fertilizer exporter, with a rich resource of urea and potassium. Therefore, the shortage of fertilizer supply from Russia has driven the input prices in food manufacturing in the world. Regarding Vietnam, the price of input materials, namely wheat, corn, among others, has increased by 10–20%, while the price of fertilizer has increased by over 20% (as of February 2022), adversely affecting the livestock and farming industry of Vietnam.

Russia fertilizer global export, 2019 (Source: Our World in Data)

As Russia is a potential export and import market for Vietnamese agricultural products, the Russia-Ukraine conflict severely affects the export and import quantities of these products between  Russia and Vietnam. Before the conflict, the annual export turnover of Vietnam’s agricultural products to Russia reached 550 million USD (2021). When the conflict broke out, export transactions to Russia were halted due to banking transaction risks, lack of shipping vessels and high costs. 

For nearly a month now, according to some Vietnamese exporters of vegetables and fruits to Russia, their orders to Russia have been suspended due to the difficulties in transportation. Many Vietnamese export shipments are impeded in Russia, Ukraine and some Eastern European countries. Further, international banks have also declined and blocked their export documents to Russia as payments have been prevented from the SWIFT network. 

In short, the conflict has sent food prices soaring in many parts of the world. The potential for agricultural disruption in these two essential commodity exporters could lead to a serious escalation of food insecurity globally. Under this situation, Vietnam’s livestock and farming industry will be subject to a sudden shock, causing high inflation of agricultural products. 

The supply chain has fallen back into deeper disruption. 

The Russia-Ukraine conflict has exacerbated the shipping and supply chain crisis. In particular, the logistics bottlenecks and a supply-demand imbalance have dramatically slowed the average shipping times, resulting in a dire shortage of shipping containers. Plus, the fierce competition among logistics companies on leasing or purchasing containers has pushed freight costs to unbelievable rates. As a result, it severely affected the exporting companies in Vietnam to the EU, Ukraine and Russian markets.  

Moreover, both Russia and Ukraine hold important positions in the global energy and supply chains. The two countries are one of the largest suppliers of niken, neon, krypton, aluminum and palladium. These natural resources contribute importantly to the manufacturing of electronic devices.  Hence, any restriction or stagnation in the raw material supply from Russia may disrupt the electronic equipment production chain, directly affecting Vietnam. This will result in an increase in fuel prices, leading to the skyrocketing of final product prices.

The global supply chain crisis has emphasized the need for companies to diversify their supply chains to mitigate the risks. The Russia-Ukraine conflict is only the latest example. The disruption of the COVID-19 pandemic is another recent example. Therefore, identifying alternative suppliers and sources other than a single-country sourcing can help future-proof your business against uncertainty. Thus, Vietnam is an ideal contender for sourcing and diversifying the supply chains.

Government of Vietnam

Vietnam will soon experience inflation, yet by stabilizing prices and preventing a shortage of input materials, the inflation will be contained. In this way, the Government hopefully will pay greater attention to soon launching the upcoming socio-economic recovery programs. 

In the short term, the Government would ensure sufficient supplies of petroleum products. But in the long term, the Vietnamese government should design a strategy to promote economic self-reliance, especially the development of renewable energy and a higher capability of data analysis in response to economic shocks. The Ministry of Industry and Trade has also warned businesses on the possibility of delays in delivery due to disruption in payment transactions. Therefore, local traders should take precautionary measures to avoid risks when engaging with foreign partners.

In conclusion

The Russia-Ukraine conflict has caused tremendous turmoil, which can put the global economy into the Second Great Recession. Without exception, Vietnam is under its influence. Yet, despite the risks, global experts still have a positive outlook on Vietnam’s economy. The potential growth can be accounted for by stable macro-and micro-economics, good Covid-19 containment, timely fiscal and monetary policies, along with the recovery of consumption and production.  

Therefore, it’s now time for both foreign and domestic businesses to diversify their supply sources and seek for new potential markets. For Vietnamese investors, if you want to search for new promising lands but are concerned about the current situation, let Viettonkin help you along. With a deep insight and practical knowledge, we can assist you throughout the whole process. For Russian investors, if you are looking for investment opportunities, Vietnam is the perfect country for you. As we know the Vietnam environment like the back of our hand, we are confident in supporting you through your business journey. Let us be your trustworthy companion!

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