Maintaining Export Advantage in the Face of a Rising Dollar: Part 2

In my previous post, I outlined the first two steps of the five-step framework that would enable U.S. exporters to maintain their competitive edge in the face of rising U.S. dollar, which makes all U.S. goods and services more expensive abroad. Those first steps were to recommit to exports and expand markets served.

Below, I describe the remaining three steps: READ MORE

Faeroe Islands Boom by Selling Salmon to Russia

Tiny territory dodged sanctions between Moscow and West over Ukraine

By ANTON TROIANOVSKI, WSJ.com

SØRVÁGUR, Faeroe Islands—As the tit-for-tat economic confrontation between Russia and the West nears its first anniversary, there are plenty of losers: associates of PresidentVladimir Putin barred from going to the U.S., European farmers banned from selling fruit to Russia, and German electrical-equipment companies that have lost a fifth of their Russian sales.

But one winner can be found in the rough sea between Iceland and Scotland: the tiny Faeroe Islands.

Because these 18 wind-swept rocky islands aren’t part of the European Union, the volleys of sanctions and counter-sanctions have passed them by. Russia’s food-import embargo last year retaliating against countries that sanctioned it thus handed the fishing-dependent Faeroes a virtual monopoly in Russia for their biggest export: fresh salmon.

“We are the lucky ones,” said Atli Gregersen, an owner of salmon farming brand Hidden Fjord, who has only been able to supply four of a dozen Russian importers who came to his factory looking for fish.

Salmon Exports Boost the Economy of Faeroe Islands

 Russia’s retaliation against Western sanctions over Ukraine left the Faeroe Islands, a non-EU country, as the only place in the world able to sell Russia large amounts of fresh salmon. Photo: Gareth Phillips for The Wall Street Journal

As Russia and the West descend deeper into a Ukrainian standoff with echoes of the Cold War, countries not involved in the fight are taking advantage of a shifting world order and the Kremlin’s push for new alliances. China has been securing more natural gas from Russia, Turkey might benefit from a new energy pipeline, and Mr. Putin personally promised last week that Moscow would help Egypt develop its nuclear-energy program.

Perhaps the starkest demonstration of just how far-reaching the global economic shifts wrought by the Ukraine crisis have been can be found here in the North Atlantic. The Faeroe Islands are the only major salmon producer in the world that wasn’t hit by Russia’s counter-sanctions last August and is close enough to send fresh fish to Russia by boat and truck.

Since September, Russia, a salmon-loving country of 145 million people, has been importing just about all of its fresh salmon from the Faeroe Islands, which has a population of 50,000. The Faeroes’ salmon sales to Russia totaled 27 million pounds or $79 million from September to December, according to data released Thursday, representing more than 40% of its total salmon exports by value and up from just 7% in that period of 2013. The average price of fresh salmon sent to Russia—around $3.13 a pound at the current exchange rate—was about 25% higher in those four months than the average price of the fresh salmon the Faeroes sold everywhere else, according to government data.

Behind that lucrative spike in exports were months of diplomatic and business maneuvering by the both the Faeroese and the Russians, telling a story of one nation’s scramble to feed its people while it confronts the West—and another’s push for economic gain from the new East-West standoff. The Faeroes’ tale shows that the showdown over Ukraine has turned into a confrontation with global consequences, redrawing trade routes, scrambling alliances, creating new economic winners and losers, and touching off national debates over countries’ allegiances and values.

“People need to have food. Russia needs to have food,” Kaj Leo Holm Johannesen, the Faeroese prime minister, said in an interview, rejecting criticism at home and abroad that his efforts to build ties with Russia amid the crisis have undermined the islands’ traditional bonds with the West.

Hunching forward in his chair and swinging his fist through the air, the 50-year-old former fish salesman added: “Other people can think about something else, but they will never stop us to deliver food. Never.”

The Ukraine crisis brought a new opportunity—and a new test of Faeroese independence and of how it balances trade interests with its Western ties.

A year ago—the night of Feb. 21, 2014—the pro-Russian president of Ukraine, Viktor Yanukovych, fled Kiev after huge protests calling for closer ties with the European Union culminated in deadly violence. As the new government took a pro-European tack, Russia claimed that Russian speakers in eastern Ukraine were threatened. Russia annexed the Ukrainian peninsula of Crimea and, Western leaders say, started fomenting a separatist war in eastern Ukraine.

On July 17, Malaysia Airlines Flight 17 was shot down over eastern Ukraine with 298 people on board. Western governments believed pro-Russian separatists were responsible. The rebels have suggested Ukrainian forces downed the plane. On July 29, amid public outrage over the tragedy, the U.S. and Europe dramatically expanded their sanctions against the Russian economy. Among other things, the U.S. limited transactions with three major Russian state-owned banks while the EU banned trading in certain military-related goods and stopped exports of oil-production technology.

In August, Moscow retaliated, insisting Kiev was at fault for Ukraine’s bloodshed. It banned the imports of a wide range of food products, including fish, from the U.S., Canada, the EU, Norway and Australia. European economies felt the brunt of the pain from the sanctions volley and Russia’s broader economic woes. Germany, for instance, saw its exports to Russia in 2014 fall by around $7 billion—a decline of 18% from 2013. U.S. exports to Russia fell by just $369 million, a 3% drop.

When news of Russia’s retaliation came in, the Faeroe Islands’ Mr. Johannesen said he directed his staff to get an urgent message to Moscow: “We are not part of EU—we are totally outside.”

Faeroe Islands Prime Minister Kaj Leo Holm Johannesen, shown in his office, lobbied hard to expand salmon sales to Russia after Moscow stopped buying the fish from Norway, as part of tit-for-tat sanctions over the Ukraine crisis.PHOTO: GARETH PHILLIPS FOR THE WALL STREET JOURNAL

The locals here still speak Faeroese, a Nordic language derived from the tongue spoken by Vikings who settled the islands 1,200 years ago. The islands have been under Danish rule for almost all of the last six centuries, but negotiated a home-rule agreement with Denmark after World War II that grants the Faeroes trade independence while giving Copenhagen control of other aspects of foreign policy, the currency and the legal system. The islands chose not to join the European Union and to make trade policy on their own.

Selling fish through peace and war has long been the Faeroe Islands’ economic lifeblood. The tiny country supplied Great Britain in World War II and signed a fishing agreement with the Soviet Union in the 1970s.

These days, a grid-like underwater glow visible from the coastline highway in the winter darkness is evidence of a more recent boom: salmon farming. The circular pens are sometimes lighted from below to speed up the fish’s internal clocks. The choice salmon specimens sometimes end up sliced into sushi in Midtown Manhattan. The less attractive salmon often goes to fish processors who salt or smoke it. In all, the Faeroes are perhaps more reliant on fishing than any other country. In 2013, fish sales abroad represented 95% of exports and 40% of total economic output.

After Mr. Johannesen’s urgent message, it quickly became clear to the Faeroese that Moscow had no intention of boycotting them. Critical Russian food imports, including around a billion dollars a year of Norwegian fish, had just come to a halt. Trucks filled with fresh salmon were turning around on their way to the Finnish-Russian border.

The Kremlin needed the Faeroe Islands to feed its people—and to underscore the point frequently heard from government officials and state media that Russia could thrive even with reduced ties to Europe and North America.

 

“We had no way out,” said Azamat Yusupov, a supplier to high-end Russian restaurants who had previously relied on Scottish salmon and flew to the Faeroes days after the ban was announced.

Hidden Fjord welcomed Mr. Yusupov with a spread of sashimi and took him out to their marquee salmon farm, a set of roughly 500-foot-diameter rings of netting off the island of Vágar, framed by dramatic, rocky crags.

Mr. Yusupov was sold. He calls Faeroese farmed salmon some of the best he’s eaten and says he would consider staying with it once sanctions lift.

There was just one problem: Hidden Fjord still had no approval from Russia’s veterinary inspection agency, even though the company had first applied back in 2011.

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A worker processes fresh salmon at the Hidden Fjord factory in Sørvágur. PHOTO: GARETH PHILLIPS FOR THE WALL STREET JOURNAL

To try to smooth things over for Faeroese exporters, Mr. Johannesen decided to go to Moscow himself. He flew there with two aides on Sept. 7, kicking off one of the more unusual trips in Faeroese diplomatic history. Danish officials lived up to their legal obligations by helping organize the visit—even though the talks would help the Faeroes benefit from Russian sanctions targeting Denmark and others in Europe.

The Danish ambassador invited Mr. Johannesen for dinner at his Moscow residence. Mr. Johannesen brought along Dmitry Dangauer, the chief executive of Russian Sea Group, a fish importing giant. The next day, the Faeroese delegation arrived at the headquarters of Russia’s federal fishing agency to meet a phalanx of government officials and seafood-company executives.

After the meeting, the fishing agency announced that Russia had accelerated veterinary approval of Faeroese fish and promised the customs service would work closely with Faeroese officials.

Mr. Johannesen later told a Faeroese newspaper, “It was an extremely constructive meeting. Maybe one of the best meetings I’ve ever had.”

Danish Foreign Minister Martin Lidegaard said his government understood the Faeroes’ decision to continue exporting fish to Russia. But, he added, Denmark and the EU expected the Faeroes “to refrain from exploiting the situation by significantly increasing their export of goods to Russia that are subject to embargo.”

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On Sept. 11, Hidden Fjord finally dispatched its first-ever shipment to Russia: 19 tons of salmon bound for St. Petersburg. By thenBakkafrost , the largest Faeroese salmon producer, had received Russian veterinary approval for an additional factory. Its share price on the Oslo stock exchange surged, in part because of Russia, an analyst said. A Danish newspaper noted Bakkafrost’s rally had created the first Faeroese billionaire family as measured in Danish kroner: Bakkafrost CEO Regin Jacobsen and his mother Oddvør, the two largest owners of Bakkafrost stock (although in dollar terms their combined shares are worth just under $200 million).

While Russian imports of frozen Chilean salmon have also surged, just about all of the country’s imported fresh salmon this fall came from the Faeroes, according to Russian government data and research firm Customs Inform.

The future is uncertain: Demand could decline with the fall of the ruble, and Russian officials have signaled they may lift the food embargo in exchange for concessions from the West. The Faeroese hope the premium segment of the market they target will be less affected than the average Russian consumer by economic travails, and that even if Russia ends the embargo, the islands will have won new customers for the long term.

Regardless, for some Faeroese, the sanctions’ economic boon and the prime minister’s efforts to strengthen ties with Russia raised uncomfortable questions. Was the country crossing the line from legitimate economic pursuits to “stabbing the West in the back,” as Sjúrður Skaale, a leading opposition politician here, asked?

Mr. Jacobsen, the Bakkafrost CEO, has said the Russian embargo allowed his company to build up a new customer base and to demand higher prices—but even he voiced concern about actively seeking to boost the Faeroes’ business with Russia during the Ukraine conflict.

“It does not come to the Faeroe Islands to speak out too much in this,” said Mr. Jacobsen. “If we speak out, we should speak out as a part of the West.”

Mr. Johannesen, who became prime minister in 2008, makes no apology for his actions. Asked about Mr. Jacobsen’s criticism, he shot back: “If he should speak as part of the West, then he would not export a kilo to Russia.”

Write to Anton Troianovski at anton.troianovski@wsj.com

Maintaining Export Advantage in the Face of a Rising Dollar – Part 1

WhartonMagazine

It has been a great run for U.S. exporters. The Department of Commerce just announced that our nation’s exports of goods and services were $2.35 trillion in 2014—a record for the fifth year running. Yet clouds are gathering on the horizon, as the economic growth in many foreign markets, specifically those in the emerging and frontier category, has been slowing. Some markets like Russia and Ukraine are set to experience outright GDP contractions brought on by political upheaval.

The single biggest threat facing U.S. exporters is ironically the rising U.S. dollar, which continues to strengthen significantly as the result of the improvement of U.S. economy in the face of the international weakness.

How can U.S. exporters maintain their competitive position and continue to play a leading role in the international export space?

While there is no magic bullet and the process is a comprehensive long-term endeavor, below, most U.S. exporters can use the following five-step approach to maintain and expand their exports, while swimming upstream against the rising dollar:

• Recommit to exports
• Expand the markets served
• Offer open account terms and buyer financing
• Reduce focus on price
• Use available resources more effectively

Recommit to exports.

Despite its undisputed success in the export arena, the U.S. as a nation has been a very anemic exporter. Unlike in countries such as Germany, the Netherlands or Chile, where exports have for years been part of the business’ DNA due to the small size of the home markets, a great number of companies in the U.S. have been treating exports as an afterthought to their domestic sales strategies. Other than the Fortune 500 companies, the majority of U.S. companies export to fewer than three markets. The primary export drivers are either organic demand from overseas, natural affinity of the owners to a particular country, commonality of language or geographic proximity.
In good times, as we know, the tide raises all boats, yet in the face of the upcoming slowdown, it is vital that U.S. companies recommit to exports in a strategic fashion.

To succeed in this endeavor, U.S. firms must make exports an integral part of their sales mix. Whether through building internal export departments or outsourcing to export management firms, the focus on international sales must be relentless and deep. Companies developing or expanding their in-house export departments should invest in training, product adaptation, international network and market analytics. Managers responsible for exports in organizations, along with top management, must make ongoing efforts to follow events in target markets and understand the culture and business customs and attempt to learn as much of the foreign language as possible.  Departments not directly involved in exports should undergo inclusionary training to ensure that exports do not become orphans within the organization when it comes to issues such as service, exchanges, spare parts supply, collections, payments and financing.  READ MORE

U.S. Export Volume Expected to Climb in 2015

Written by Michael White, GlobalTrade.com

Baltimore, MD –   U.S. exports are expected to grow by $88 billion or 5 percent, in 2015, despite tepid global GDP growth, according to a research report just released by trade credit insurance provider, Euler Hermes.

According to the company’s latest Economic Insight report, the U.S.’s biggest export gains in 2015 will come from Canada, China and Mexico.

The report also projects strong export increases to smaller countries in Asia, Latin America and the Middle East, “reflecting recent rapid growth in these emerging markets, while also providing the U.S. with more diversification in its export composition.”

Export gains will primarily come from the agrifood, chemicals, energy and mechanical sectors. Textiles and ferrous metals show the smallest increases as the U.S. has become a much smaller player globally within these industries.

As U.S. energy companies are expected to start exporting natural gas globally by the end of 2015, revenues from this sector could be significant, growing from $16 billion in 2012 to $42 billion in 2040 or nearly 1 percent of GDP.

The planned 2016 expansion of the Panama Canal, which may double its capacity, “will also boost U.S. trade by allowing larger ships to carry exports from the U.S. through the canal, significantly reducing costs and making those exports more competitive.”

The U.S.’s largest trade deficit is with China, but several factors could shrink it, especially as China pivots toward a more domestically driven economy, and as the U.S. natural gas boon and favorable labor conditions have reduced China’s competitive wage advantage to the point that a growing number of companies are opting to ‘in-source’ their manufacturing.

In the coming year, the value of the U.S. dollar is expected to rise in 2015 making U.S. exports more expensive and less competitive with export financing faces several challenges, including tight lending conditions and risk-averse bankers.

Rising rates in 2015, the report says, “may make financing more costly and/or harder to obtain, especially given fragile global growth and geopolitical uncertainty.”

In addition, global business insolvencies “are expected to fall 3 percent, a much slower rate than 2014’s decrease of 12 percent.”

At the same time, insolvencies still remain 12 percent above 2007’s pre-crisis levels, meaning that exporters will need to continue stringently evaluating their partners for insolvency risk.

To further promote U.S. exports, two major trade agreements – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership – are currently being negotiated.

Both agreements  are being structured to reduce the burden of Customs, regulations, tariffs and taxes, lower barriers to trade, and allow increased access to new markets.

“Demand for U.S. exports is, of course, dependent on the strength of the global economy,” said Dan North, senior economist for Euler Hermes Americas.

“While the global economy is set to enter its fourth straight year of lackluster growth, the U.S. economy continues to grow and many of our industrial sectors are showing strength both at home and abroad.”

Bracing for Another Storm in Emerging Market

By Kevin Gallagher, Associate Professor of International Relations at Boston University. Triple Crisis

In 2012, Brazilian President Dilma Roussef scolded U.S. Federal Reserve Chairman Ben Bernanke’s monetary easing policies for creating a “monetary tsunami”: Financial flows to emerging markets that were appreciating currencies, causing asset bubbles, and generally exporting financial instability to the developing world.

Now, as growth increases in the United States and interest rates follow, the tide is turning in emerging markets. Many countries may be facing capital flight and exchange-rate depreciation that could lead to financial instability and weak growth for years to come.

The Brazilian president had a point. Until recently U.S. banks wouldn’t lend in the United States despite the unconventionally low interest rates. There was too little demand in the U.S. economy and emerging market prospects seemed more lucrative.

From 2009 to 2013, countries like Brazil, South Korea, Chile, Colombia, Indonesia, and Taiwan all had wide interest rate differentials with the United States and experienced massive surges of capital flows. The differential between Brazil and the U.S. was more than 10 percentage points for a while—a much better bet than the slow growth in the United States.

According to the latest estimates from the Bank for International Settlements (BIS), emerging markets now hold a staggering $2.6 trillion in international debt securities and $3.1 trillion in cross border loans—the majority in dollars.

Official figures put corporate issuance at close to $700 billion since the crisis, but the BIS reckons that the figure is closer to $1.2 trillion when counting offshore transactions designed to evade regulations.

Now the tide is turning. China’s economy is undergoing a structural transformation that necessitates slower growth and less reliance on primary commodities. Oil prices and the prices of other major commodities are stabilizing or on the decline. It should be no surprise then that many emerging-market growth forecasts are continually being revised downward. Meanwhile, growth and interest rates are picking up in the United States. The dollar gains strength; the value of emerging market currencies fall.

Some analysts predict that emerging-market and developing countries can weather the storm through floating exchange rates, the development of local bond markets, interest rate hikes, or by using some of their foreign exchange reserves. These tools are important, but may not be available or enough.

Floating exchange rates and resulting depreciation can cause the debt burden of firms and fiscal budgets to bloat overnight. Given that most of the capital inflows were in dollars, depreciating currencies mean that nations and firms will need to come up with ever-more local currency to pay debt—but in a lower growth environment.

What is more, most countries didn’t properly invest their commodity windfalls into increasing the competitiveness of their industries. Thus, exports may not pick up at all. An IMF study shows that while Latin America saw one of the biggest commodity windfalls in its history, it has the least to show for it in terms of savings or investment relative to other booms. What is more, the massive exchange rate appreciation that occurred as a result of the tsunami in short-term inflows made many industries uncompetitive and pulled them out of key global commodity chains.

Thus, weak currencies and more debt may be apt to lead to falling confidence rather than surges in exports that will help their countries adjust to the new shocks.

Local bond markets help, but most debt is indeed in dollars and most local debt is held by foreigners who are always the first to dump such debt for foreign shores. Interest rate hikes can also be dangerous. They are often not enough to reverse the flight to the U.S. and can choke off what little growth there is to be had in a downturn. Depleting foreign exchange reserves doesn’t always work, and non-Asian countries whose reserves are a function of the commodity boom will be reluctant to disperse such reserves in the wake of commodity price declines.

The problem is that too many countries failed to regulate during the boom and instead let capital flows storm into their countries to bloat balance sheets and currency values. They are left with increasing debt as currencies slide, and not enough competitiveness to benefit from currency depreciation. The result could be more financial instability that could further threaten prospects for growth and employment.

Emerging-market and developing countries may need to resort to regulating the outflow of capital alongside these other measures. Such moves have traditionally been shunned by international institutions and capital markets alike.

New research on the cutting edge of economics and by the IMF now justifies the regulation of capital outflows to prevent or mitigate a full-blown crisis. The IMF was bold in recommending the regulation of inflows during the surge, but has shied from noting the utility of regulating capital in flight. Worse, new U.S. trade agreements such as the Trans-Pacific Partnership have stripped out balance-of-payment exceptions that would have allowed nations to regulate capital.

If we have learned anything from the global financial crisis it is that nations need as many tools at their disposal to prevent and mitigate financial instability. Instability anywhere can lead to instability everywhere so let’s make sure all tools and hands are on deck.