War has never been easy on businesses! Thanks to the ongoing Russia-Ukraine conflict as it escalates and evolves to attain new dimensions each day, apparel industries of India and Bangladesh are on the tenterhooks!
Trade disruptions, shipment challenges and fears of payment delays and defaults today have apparel exporters on either side of the border spend sleepless nights.
In 2020, Bangladesh exported apparels worth US $ 473.54 million to Russia, which went up to US $ 687.81 million in 2021 marking a year-on-year increase of 45.25 per cent while as far as India is concerned, apparel exports to Russia stood at US $ 57.58 million in 2020, growing by 15.32 per cent Y-o-Y to touch US $ 66.40 million in 2021.
“We are just coming out of the COVID-19 pandemic and now this war…,” lamented a prominent apparel exporter from India even as Vice-President of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Shahidullah Azim claimed buyers are in ‘wait and watch’ mode as Russia decides to invade its southern neighbour.
This has come as a bolt from the blue for the garment makers, who are yet to come out of the pandemic-induced fallouts completely, and are now faced with all new challenges.
Russia in perspective…
Russia may not be a traditional export stronghold for Bangladesh but considering its market size and opportunities that are in offer, it has emerged as one of the most lucrative amongst non-conventional destinations with scores of Bangladesh garment exporters actively looking at increasing their footprints there.
The Russian market has been growing for Bangladesh since the fiscal year of 2009-10 when Bangladesh Government started paying additional 4 per cent cash incentive on exports to new or emerging markets to offset the impacts of the global financial crisis of 2007-08.
Bangladesh considers all countries as non-traditional markets except UK, European Union nations, Canada and the USA.
As is evident from the export figure which shows India making a 15 per cent year-on-year growth in apparel exports to Russia, it is pretty much evident how the transcontinental country encompassing one-eighth of earth’s inhabitable landmass is strongly gaining in relevance for the Indian apparel suppliers as well, who along with their Bangladesh counterparts, look to boost shipments to Russia as they cater to the same set of global clients- brands and retailers of the likes of H&M, Inditex, adidas, Mango and so on, which vie to consolidate their position in the exciting Russian apparel market, boasting of revenue to the tune of US $ 38,196 million (in 2022) and expected to grow annually by 2.75 per cent (CAGR 2022-2026), as per Statista.
For H&M, Russia remains its sixth-biggest market, accounting for about 4 per cent of group sales in the fourth quarter of 2021 while for Inditex,Russia constitutes about 8.5 per cent of its net global operating profit and is also the second largest market after Spain by number of stores while for adidas, 50 per cent of total Russian/CIS revenue and 1 per cent of overall worldwide revenue comes from Russia and Ukraine even if Mango boasts of a massive 120 stores in Russia.
For others having their presence in Russia, the market is no less important, to say the least.
However, all the din and excitement in the Russian fashion retail sector seem to have come to a sudden halt following host of retailers and brands including Levi’s, Burberry, M$S, LVMH, Chanel, Prada, Kering, PVH Corp., Nike, Boohoo deciding to suspend their Russian operations even as this list continues to grow by the day.
This has the garment exporters at their wit’s end, who are now worried when will they get their dues, not to talk of the consignments that are ready to be shipped.
“There has been a slowdown in payments from Russia. We have to see how the situation unfolds…,” maintained the Chairman of India’s Apparel Export Promotion Council (AEPC), Narendra Goenka even as the BGMEA has cautioned industry players to stop exports to the Russian market for the time being.
“We have already directed our members to stop shipments to Russia due to the war while also considering the potential ban on SWIFT use,” underlined BGMEA President Faruque Hassan.
The situation has turned even more concerning for around 3,000 factories in Gautam Budh Nagar in the Indian state of Uttar Pradesh, whose 10 per cent of annual exports till 2020 were delivered to Russia and Ukraine respectively.
Also Read: Russia is mindful as it plans to combat economic sanctions
SWIFT angle to payment worries!
The Western nations announcing harsh set of sanctions on Russia for its invasion of Ukraine, including blocking some banks from the SWIFT international payments system, has apparel exporters from both sides of the border in a fix.
SWIFT(Society for Worldwide Interbank Financial Telecommunication) is the global financial artery that allows the smooth and rapid transfer of money across borders. However, on account of the ban, exporters will face difficulties in receiving payments from the Russian importers.
According to reports, as many as 150 Bangladesh apparel exporters are anxiouslywaiting as receiving the export receipts is increasingly becoming uncertain for them after the European Union made clear it was excluding a good number of Russian banks from the SWIFT even if USA lost no time to announce sanctions on four large Russian banks, following suit.
“…we fear payments from the Russian buyers will be late due to the SWIFT-restrictions. There is no certainty when we will get relief from the crisis,” underlined BGMEA Director and Chief Executive Officer of Clifton Group MDM Mohiuddin Chowdhury.
Echoing the concerns of the Clifton Group CEO, Executive President of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Mohammad Hatem said, “We are not getting work orders from Russian buyers since the Western nations agreed to ban some Russian banks from using the SWIFT system. It will create a major barrier for us in the Russian market.”
Rupee-Rouble payment mechanism to help India!
The situation does not seem to be as grim for the Indian exporters though, thanks to the India-Russia payment mechanism.
People in know of things underlined India has attempted the Rupee-Rouble payment mechanism with Russia on a very small scale earlier as well for a few items like tea.
But it has happened in normal times and never on a large commercial scale.
A Rupee-Rial payment mechanism, however, successfully worked in India’s favour in trade with Iran in 2012.
Rupee-Rouble trade is a payment mechanism which can allow Indian exporters to be paid in Indian Rupees for their exports to Russia instead of standard international currencies such as Dollars or Euros even if under this arrangement, a Russian bank will need to open an account in an Indian bank while an Indian bank will open its account in Russia and both sides can then mutually agree to hold currency worth a specified amount in the local currencies in their respective accounts.
Meanwhile, as per latest available report, some Russian banks have approached the Indian exporters with plans for a Rupee-Rouble payment mechanism — as per the modalities, an Indian exporter will have to sign another agreement with the Russian buyer and the buyer’s bank will then transfer the payment in Roubles to the Russian bank’s branch in India at the rate of the day, which will then be transferred to the exporter’s bank in Indian Rupees and, given that Russia has a trade surplus with India, there will always be some money in the Indian account— even if two Russian banks namely Sberbank and VTB, have been identified by the Government and Reserve Bank of India for the same.
A final decision on whether India will take this route or adopt any other plan is awaited nonetheless.
“The decision will be taken at the highest level. We have identified the banks from the Russian side and will finalise the Indian counterpart soon,” assured an unnamed official in know of things, interacting with the media.
This is not the first time economic sanctions have been imposed on Russia. In 2014, after Russia’s annexation of Crimea, the US and other Western nations imposed economic sanctions, limiting the Dollar trade between Russia and the rest of the world even if in 2019, India selected Chennai-headquartered Indian Bank for transacting with Russian bank VTB for payments for their imports.
Similarly, in the aftermath of Western sanctions on Iran in 2012 because of its nuclear programme, India had designated Kolkata-based UCO Bank as the payment bank for Iranian oil as the account maintained deposits in Euros, avoiding exposure to the US banking system.
“I have been given assurance my Russian buyer will make the payment from Turkey as it has an office there. So, this time I may not face any challenge in receiving the payment…,” claimed in the meanwhile Managing Director of the Bangladesh-based Young4ever Textiles Ltd., Rajiv Chowdhury, who started exporting knitted hoody jackets to Russia recently as he sees the country as a promising foreign market.
Rajiv has so far exported garment items worth US $ 0.4 million in two consignments and received US $ 0.2 million as the payment for the first batch.
To bypass the sanction and continue the financial transactions with Russia, the Finance Minister of Bangladesh underlined the two countries may go for currency swap mechanism.
A framework in this regard has already been developed as the matter was in bilateral talk for a year.
This is not a unique system as at least a dozen of countries including India have the currency swap arrangement with Russia, maintained industry people in Bangladesh.
The problem for Bangladesh however is it is yet to do any real swap and now, amidst the Ukraine crisis and intensified financial sanction; it will be a difficult proposition to do much in this direction as such a move would entail the risk of annoying the Western trade partners.
Some buyers have but assured if SWIFT blocks Russian banks, they will make payment via Italy, China or Hong Kong, claimed former BGMEA President and an apparel exporter to Russia, Siddiqur Rahman.
Supply chain concerns
It’s not just the payment woes and how India and Bangladesh would manage to work out alternatives to ensure payments are not impacted, shipping to and from Russia has emerged as an even bigger problem for the garment exporters.
Several of the world’s largest freight forwarders have already suspended services to Russia, citing growing restrictions from shipping lines and air carriers that are cutting off the country’s access to global trade lanes even as Switzerland-based Kuehne + Nagel International AG and Germany’s DB Schenker both said in customer advisories they are halting deliveries to and from Russia by air, land and sea while Denmark-based DSV A/S and France’s Geodis said they were also suspending deliveries to Moscow ally Belarus.
DHL, a unit of Deutsche Post AG, had earlier halted handling of inbound shipments for Russia.
DHL, Kuehne + Nagel, DB Schenker and DSV are the world’s four largest freight forwarders by revenue, according to research group Armstrong & Associates.
Container shipping lines A.P. Moller-Maersk A/S, Mediterranean Shipping Co. and CMA CGM SA had earlier suspended their freight services to and from Russia, with exceptions for foodstuffs, medical shipments and humanitarian aid.
“I have some containers ready, stuffed with garment items, for shipment. But I had to halt their sailings,” said Mohammad Ajmir Hossain Chowdhury, Deputy General Manager at MSC Bangladesh underlining the shipping line has stopped sending containers to Russia even as he maintained MSC will not take cargo bookings for Russia for the time being.
The abrupt calling off of Russian operations by the major players has the Director of Chittagong-based Sonnet Textile Industries, Gazi Mohammad Shahid Ullah, in a bind, who received work order of around 600,000 pieces of T-shirts from Russian popular sports and outdoor product retailer Sportmaster sometime ago and is now struggling to ship the next lot of the ready order.
“We are yet to book a ship for the delivery of the remaining 300,000 pieces as container lines are reluctant to take bookings for Russia,” stated a worried Gazi.
According to the Bangladesh Inland Container Depots Association, at least 166 containers which were supposed to be shipped to Russia remained stuck in different privately-run depots after the suspension of operations in Russia by the shipping line.
With all major shipping lines suspending services to and from Russia, along with those routed via the Baltics, the Black Sea and the Russian Far East also getting affected, exports would be disrupted, expressed apprehensions most in Indian apparel sector as well even as some trade organisations have already cautioned the Indian exporters to reconsider shipments via the Black Sea route amidst insurers’ hesitation to cover any damage or delay that might happen on account on the ongoing fight between the two republics of the erstwhile Soviet Union.
“In addition, there may be complications in payment options and challenges in access to credit guarantee cover,” said the industry people.
Effects beyond the war zone
The Russia-Ukraine crisis intensifying further at the time of writing of the report amidst Ukrainian claims of several of its big cities coming under renewed and intense attack from Russia including Lutsk, a city near the Polish border, the ripple effects are set to be felt and rather strongly in many parts of Europe, so feel the experts.
And this is no good news either for Bangladesh or India, as Europe is an important export destination for both.
India exported goods worth US $ 60.33 billion to Europe during the first three quarters of the current fiscal, of which over 40 per cent of the product value can be attributed to engineering goods while the share of textile exports to Europe is 12 per cent.
The implications are already being felt in India.
An apparel shipment bound to France has reportedly been asked by the buyer to put on hold amidst the uncertainty. “…in the morning, we were intimated by our buyers to put shipment on hold. In a couple of days, it will be clear how many consignments were cancelled or put on hold,” said Harish Dua, Managing Director of India’s Ludhiana-based KG Exports, a diversified manufacturer of ready-to-wear fashion for domestic as well global market.
Meanwhile, many within the industry claimed European exporters were postponing fresh orders for summer while the general feeling is any impact of the war on Europe would adversely impact the Indian apparel sector, which has just about started to recover from the pandemic-induced slowdown.
“We are not frightened but worried over the Russia-Ukraine war. If it prolongs, Bangladesh’s exports will be hampered in Russia and some neighbouring countries of Russia and Ukraine, including Poland,” expressed Md Fazlul Hoque, former President of the BKMEA and MD of Plummy Fashions Limited, the LEED-certified Platinum knitwear manufacturing unit of Bangladesh even as another prominent Indian garment maker, ominous as it may sound, stated, “No one knows what is in store if the war prolongs. However, it does not augur well…”
The fears of these two garment makers sum up the general sentiment on both sides of the border and rightly so considering nations such as Poland, Hungary, and the Baltic countries, including Estonia and Lithuania, have already expressed apprehensions the conflict might impact them too given their geographical proximity with Russia.
More than US $ 22 billion worth of garment items is shipped from Bangladesh to European countries, representing around 64 per cent of the annual apparel export. So, any impact on Europe on account of the Russia-Ukraine conflict is going to have wide-ranging ramifications for Bangladesh garment industry.
Many are also worried, even if the war comes to an end anytime soon, the post-war period would nevertheless be marred by uncertainty over LCs, payments, and more, at least for some time to come as sanctions imposed on Russia and its retaliation may affect the economies of several countries indirectly.
Given the unfolding humanitarian crisis, not to mention the overall implications that the Russia-Ukraine conflict — which seems to be loaded with much grimmer ramifications in case it assumes bigger dimensions lest anything further goes wrong — brought in its wake on trade and economy, evident as it is from the plight of the garment makers, all one would want now is for the war to get over.
