Estimated reading time: 4 minutes

Trade is becoming increasingly weaponised, not only due to sanctions but also through physical retaliatory violence across crucial routes. In this context, banks and financial institutions find themselves at the forefront of a new kind of warfare. 

Dr Rebecca Harding, Managing Director of Rebeccanomics and Co-Chair of the Environment, Social, and Governance (ESG) Board at ITFA, shares her insights on the evolving landscape of trade finance and the critical need for strategic thinking in the face of global uncertainties.

The shifting sands of global trade

Damaging a country’s economy for a military advantage is no new tactic. During the Second World War, for instance, Germany adopted submarine warfare: sinking transport ships carrying supplies for the war effort. In response, the Allied ‘oil campaign’ targeted Germany’s oil and petroleum reserves in strategic bombings.

But in recent years, economic warfare has been much more coerced than physical warfare, and it reverberates beyond warring nations across the world. 

Harding explains, “We’re seeing an acceleration of that sense of deep uncertainty. Increased use of sanctions, increased use of export controls, increased use of economic levers for coercion, for influence, and all of those things by governments.”

According to Harding, the trigger for this shift is the Russia-Ukraine conflict. “What’s different is that we have actively used sanctions and export controls to deter a country and also as a means of defence,” she said, since NATO is hesitant to turn to arms.

Banks are tanks

In this new landscape, the role of banks has transformed. They are no longer mere implementers of government policies. 

“Banks aren’t foot soldiers anymore,” Harding explains. “Banks are tanks. They’re actually the weapons themselves, and they don’t realise that.”

This shift requires banks to take a more strategic overview of global events, especially in the trade finance space. They need to understand how they might be used as instruments in economic warfare and develop stronger lines of communication with governments.

Economic war games: New approaches to trade and risk management

The polarisation of the global economy has significant implications for trade, receivables, and supply chain finance. For Harding, an organisation must constantly asking itself questions and holding itself accountable.

“Where are the risks with digital? Do we know what our supply chains are? Do we know what our risks of cyber attack are? Do we know where all of our supply chains are, and of their transparency? Do we have any idea what’s going on at tier three or tier four?”

The sanctions landscape changes every six to eight weeks – sometimes even more frequently. This has created a markedly complex and volatile regulatory environment.

Harding emphasises, “We’re talking about investing in Africa. We’re talking about sustainability. All of those things are also being weaponised… It’s actually very, very, volatile and quite scary at the moment.”

In a similar way, financial institutions must constantly ask themselves hypothetical questions. Harding introduces the concept of economic war gaming as a tool, rather than merely a response. Such exercises can help organisations anticipate potential geopolitical and economic scenarios, assess their impact on trade and finance, and develop strategies to mitigate risks – preemptively. 

“We need to do that in economics as well,” Harding argues. “What happens if China suddenly launches a central bank digital currency? Or what happens if there’s a huge climate event that allows ships to sail through the Arctic Circle, where Russia has primacy?”

The need for strategic thinking

The need for comprehensive and 360-degree reviews of economic risks, considering existential geopolitics, are essential for businesses to survive unprecedented crises. Yet, Harding has noticed, 

Despite the clear need for comprehensive risk planning, Harding notes a concerning trend: “Over four events where I’ve asked that question [whether businesses include scenario modelling as part of their risk planning], not one single audience has had the majority of people put their hands up.”

She urges banks and businesses to adopt a more strategic approach to risk management in trade finance. When exploring and developing risk mitigation strategies, if there’s one place to be looking, it’s in the intersection – between geopolitical, economic, and environmental factors.

Harding proposes, “Let’s think about them strategically. Let’s war game them.

“Let’s think about what the worst, in a military sense, could happen, because that way it makes our own industry resilient.”

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As the global trade landscape continues to evolve, banks and financial institutions must adapt their approach to risk management. The message is clear: hope for the best, but prepare for the worst. 

Considering economic war gaming when deciding strategy is the only way to remain an active participant rather than a pawn in someone else’s war game.