Russia’s invasion of Ukraine has already had devastating and long-lasting impacts on people and communities across many nations. In addition to the devastating social impacts, this war is likely to impact the Australian (and world) economy in a number of ways.
As Russia’s invasion adds to economic uncertainty, businesses can be put in a difficult position. Deloitte partner Richard Hughes said, “uncertainty is a problem for the economy. People might be wondering, ‘is it a bad time to buy that new piece of equipment, or invest in property, or build a warehouse?’ The uncertainty weighs heavily on business decisions and can cause a significant indirect outcome on the economy.”
While Australians navigate the uncertainties around this world event, it’s important to remember, “the flip side to disruption and uncertainty is opportunity. As much as there’s uncertainty about the future and how everything might play out, if you believe in the long term prospects of the Australian economy, it does present opportunities sometimes. We live in a great country with a lot of positive factors and great opportunities. We'll always have disruptions happen from time to time, but the long-term trajectory for the Australian economy is actually quite strong,” Hughes said.
We discuss which industries and businesses are likely to be affected the most, and potential solutions.
How will the Russian invasion affect the Australian economy?
There are a number of potential impacts, including:
- Higher fuel prices (which can be a trigger for inflation).
- Trade sanctions.
- Stock market turbulence.
- Higher wheat, corn and precious metals prices.
- Increased risk of cyberattacks.
Higher fuel prices
Like many countries, Australia is heavily dependent on oil for fuel. Fuel prices around Australia are already at 14-year highs, and the price of oil is only likely to increase with Russia’s invasion. Russia is the second-largest world exporter of oil behind the US.
Fuel — regardless of its price — is a big contributor to transport costs. Being geographically isolated and such a large country, Australia has always had significant transport costs. But over the last couple of years, there have been other external factors causing pressure for the transport industry. Gary Mahon, CEO of Queensland Trucking Association (QTA), said, “costs are increasing across the board with the supply chain. There have been increases in capital costs as well as shortages of drivers during COVID, which has pushed up labour costs. Throw escalating fuel, oil and AdBlue prices into the mix, it’s forming acute pressure for businesses to increase freight rates because there simply aren’t the margins in the profit to continue to absorb the price. In order to survive, the prices need to go up.”
Higher distribution costs are usually passed on to consumers in the form of higher prices and inflation. This can then encourage a vicious cycle:
- Higher inflation levels can trigger higher interest rates as the Reserve Bank of Australia (RBA) try to control monetary policy.
- In turn, Higher interest rates make it more difficult to borrow money and make repayments on your existing debts.
- Higher interest rates also reduce the amount of disposable income that many consumers have to spend on goods and services, especially people with large mortgages. Mortgage amounts in Australia are currently at record levels due to the recent property boom. So an increase in interest rates could impact millions of Australians.
“As prices rise, they are likely to be passed through to the consumer. There are occasions when the industry needs to absorb price rises, but when prices escalate more than approximately one percentage point, it needs to be passed on through the freight rate as the businesses just don’t have the margins to absorb significant increases in costs,” Mahon said.
With many expenses increasing in response to various world events, Mahon noted, “There has already been a trend of exits, with decades-old, notable fleets choosing to wind up in the last 18 months. It’s a reflection of how difficult it is to keep these businesses going when there are pricing pressures, but also shows that, because of the small margins in the road-freight industry, there aren’t too many businesses willing to buy out these larger fleets.”
Trade sanctions
Prime Minister Scott Morrison has announced trade sanctions against Russia as Australia’s first response to the Russian invasion. According to the latest government figures, Australia exports $680 million worth of goods and services to Russia each year, and imports $210 million.
Our major Russian exports are:
- alumina,
- wheat,
- live animals,
- starches, and
- inulin.
Therefore, trade sanctions are likely to affect the mining and agricultural sectors in these areas.
Our major imports from Russia are:
- crude petroleum
- fertilisers, and
- wood manufacturing products.
Transport, agricultural and manufacturing sectors in these areas are likely to be impacted.
While some sectors of the agricultural and mining industries will be negatively impacted by the economic fallout of the Russian invasion, there will be opportunities for others. These opportunities will be in areas where Russian exports are currently strong, such as wheat, corn, aluminium and palladium.
Trade sanctions are likely to reduce the supply of all of these products on world markets, which will push up prices. Australia is a significant world producer of all of them.
Stock market turbulence
Like many stock markets around the world, the Australian Securities Exchange plunged upon news of the Russian invasion, dropping 3% in a single day. This was its largest fall in 17 months. A downturn in share prices affects the value of listed Australian businesses, as well as the wealth of most Australians with superannuation funds.
The stock market is no stranger to turbulence with the recent Coronavirus Crash of 2020. Regarding the stock market through COVID, “there was a massive decline, but it recovered quite quickly. Many people who looked beyond COVID and were optimistic about the long-term outlook have achieved a great return from investing during that time,” Said Richard Hughes of Deloitte.
History shows that the economic impact of war encourages investors to move to more secure sectors such as gold, fixed interest and property in the short term. However, share markets also tend to rebound within six months of the initial fall. Whether that will be the case this time around remains to be seen.
Increased risk of cyber attacks
Modern warfare is increasingly digital as well as physical. Australia was already experiencing an increase in cyberattacks prior to the Russia-Ukraine conflict, and it’s likely this trend will continue in a climate of heightened internal conflict.
In an increasingly digital global economy, sophisticated cyberattacks can have a major impact on the operations of businesses and governments. They are a potential Russian response to trade sanctions.
Which Australian industries will be most affected by the Russian invasion?
Any business that relies heavily on transport to either produce or supply their goods (for example, wholesalers) is likely to be heavily impacted by the economic fallout of the Russian invasion. The supermarket industry will inevitably be affected, and rising grocery prices will affect all Australian consumers.
What should you do if your business is affected?
There are a number of strategies you can use, depending on how your business is affected. Deloitte’s Richard Hughes stresses the importance of stakeholder management, saying, “if there is financial distress, the business needs to look at where they are currently, and then determine where they need to be. The next step is to develop an initiative to get from the current level of performance, to the goal level. A big part of this is stakeholders. Look at who’s in your corner and who you can work with to help get you through. For example, it could be Earlypay, a main supplier, a bank, an employee, or the ATO. Stakeholder management is key to navigating financial distress. Put thought into who the stakeholders are, what their stake in the business is, and how you can partner with them to help get you through”.
How to combat rising costs
The most obvious way to combat rising costs is to increase the price of your own goods and services.
Another option is to look at ways to reduce your costs by increasing your operational efficiency. For example, purchasing or upgrading assets and equipment that can help you increase productivity in your business. This doesn’t need to involve an upfront cost if you use asset finance.
If your cash flow is affected by rising costs, you could also look at other finance solutions like Invoice Finance. Invoice Finance allows you to access cash from your customers’ unpaid invoices, instead of waiting for them to settle their accounts.
Trade finance allows you to pay your suppliers upfront without eating into your cash flow.
How to capitalise on rising prices in export markets
If you’re fortunate enough to be in one of the agricultural or mining sectors mentioned earlier, where global prices are likely to increase as a result of the Russian invasion, then you may be able to capitalise by increasing your production levels.
Finance solutions like Asset and Equipment Finance, Invoice Finance or Trade Finance can enable you to do that.
Richard Hughes stated that “uncertainty is possibly the highest it’s ever been, but for more than 80% of Australia’s senior finance executives, optimism is high too.” This interesting mix of uncertainty and optimism could be key for many businesses to grab hold of lucrative opportunities.
Ensure the online protection of your business
Taking steps to protect your business against cyberattacks is becoming increasingly important. Ways that you can do that include:
- Regularly back up your data to prevent the loss of crucial business and customer information.
- Installing the latest cybersecurity software and systems to protect your business information.
- Encrypting your business data.
- Having strict security protocols for who can access your business information.
- Monitoring the access and use of your online systems.
While the Russian invasion will impact different businesses in different ways, it’s important to remember that Australians and the economy have shown great resilience in the face of economic uncertainty — and we will this time too.
If your business is experiencing cash flow difficulties and you’d like to learn how Earlypay can help, please contact our helpful team today on 1300 760 205.
If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].