The unexpected loser: Russia sanctions to cost Israel immensely
The Israeli Credit Insurance Company Ltd. (ICIC) warns that the worsening crisis in Ukraine could harm Israeli exports. It estimates that if Western countries declare sanctions against Russia, European exports would fall by 15% and the $1 billion in Israeli exports to Russia would fall by the same amount, or $150 million.
ICIC's estimate is partly based on the nature of Israeli exports to Russia and an analysis by its controlling shareholder, Euler Hermes.
Economic sanctions against Russia if the situation in eastern Ukraine deteriorates will reportedly include an arms embargo, and restrictions on the import and export of certain goods and of capital inflows. Most Israeli exports to Russia are agricultural produce, chemicals, and telecommunications equipment.
There have been reports about defense deals for the supply of Israeli unmanned aerial vehicles (UAVs) to Russia, and that the Russians are very interested in procuring other Israeli military systems. "Even without the worsening of the crisis, the 2.5% growth forecast for Russia in 2014 is changing. It won't happen. Under the current circumstances, growth will be just 0.7%. If the crisis worsens to the point of Western sanctions, industries that will be most affected are pharmaceuticals, telecommunications equipment, and machinery. At the same time, the price of a barrel of oil will soar to $130, reducing the European economy's growth rate by 0.4%," says ICIC CEO David Milgrom.
Milgrom says that most Israeli exporters to Russia and Ukraine have foreign trade risk insurance, which will indemnify them in the event of tighter sanctions against Russia. "If there is further escalation in the crisis, if these companies become distressed because of payment problems by customers, most Israeli exporters are covered. They are mostly longstanding exporters which take precautions and hedges. However, there are fairly new companies, such as in high tech, which are exposed to risks in this situation and market, but which have not taken suitable hedges," he says.
The crisis in exports to Russia could further weigh on Israeli exports, which have been struggling for a long time with a difficult foreign currency problem due to the appreciation of the shekel against the dollar. Manufacturers and exporters report eroding export profit margins because of the dollar's weakness in foreign markets. ICIC warns that sanctions against Russia will deal another blow to Israeli exports.