Ukrainian steel, grain and other commodity export deals have virtually ground to a halt as violence in Kiev that has killed dozens this week triggered fears of port closures and defaults, driving up risk premiums on prices for future shipments. Ports were operating on Thursday, allowing goods to leave the country, but traders said new deals were proving difficult on concerns that violence may spread beyond the capital to Ukraine's Black Sea ports in the south.
Banks are reluctant to finance new deals while traders are worried about meeting existing contract deadlines, sources say. Demonstrations erupted in November after President Viktor Yanukovich bowed to Russian pressure and pulled out of a planned trade and co-operation deal with Brussels. Ukraine is the world's No 2 grain exporter and about No 7 in steel. "Since it became more violent I haven't seen any trade. People are working from home, our office is closed," said a grain trader at an international commodities trade house. "We already have commitments and you don't want to add to the current commitments," he said.
One Ukraine-based coal trader said that demand for his products had been weak recently, while a steel-products trader said that he had done much less business than usual. The effects of the escalating violence were also filtering through to prices. Traders said that weather-related logistical problems were supporting grain prices but that they expected a risk premium to be built into corn and wheat. Banking sources said that the cost of financing exports was rising as the situation deteriorated.
"The most recent deals were done with an interest margin of around 5.25 to 5.5 percent per annum, whereas earlier in 2013 the best rates were around 3.25 percent," a source involved with Ukrainian commodity trade finance said. "Soft commodities companies have been asking about when they can get more financing but in the short term banks are taking a wait-and-see approach. The worrying thing might be if the EU come up with sanctions."
EU foreign ministers will hold an emergency meeting in Brussels later on Thursday to decide whether to impose sanctions on Ukrainian officials for the deadly violence. Diplomats said those discussed as possible targets for sanctions included oligarchs, as well as some ministers - possibly defence, justice or interior - but no decision had been made.
"If the EU put in sanctions against individuals who own Ukrainian industry, which is a possibility, the Russian banks would love to leap up and say they will provide Ukrainian companies with commodity financing. The only people it would hurt is the European banks," the commodity finance source said. Lawyers said they were receiving a surge of queries from commodities clients studying their contracts trying to anticipate what it would mean if the situation deteriorated.
"People are very concerned about potential defaults and delays in performance in the Ukraine so they're looking at their contracts for force majeure, prohibition and even sanctions clauses. It's a concern for those buying from the Ukraine," Chris Swart, senior partner in the commodities team at law firm Holman Fenwick Willan, said. "If there is a widespread breakdown of authority in the Ukraine and if it spreads to the export areas and ports of the Black Sea you will see force majeure being claimed to excuse or delay performance of contracts."
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