Factors that affect the safety and profitability of international cargo transportation and ways to minimize logistics risks. Ramil Suleymanov, General Director of the logistics group of "ART Delivery" companies, shared his experience with the editors of Institute of Risk.
Usually, it takes a substantial period of time between the payment of goods and getting their sale proceeds. During this period, the product may get lost, damaged, or its final selling price may get reduced. In international trade, risks associated with currency exchange rate fluctuations, the economic situation, and the peculiarities of foreign laws and regulations add to the loss of time and money. Therefore, it is in the interests of the product owner company to minimize the risks between the period of paying for the ordered goods and getting profits. Ramil Suleymanov, General Director of the logistics group of "ART Delivery" companies, told us what risks should be taken into account, how to assess and minimize them.

Business risks — these are the probabilities that some events may occur with negative consequences for the development of the company or with one of their transactions. To minimize these risks, they make a forecast list of negative events that may occur from the side of a foreign partner.
Commercial risks — these are the dangers of losing or not getting something: income, goods, working capital, raw materials, equipment or transport. Sometimes they are related to internal reasons, such as staff negligence or outdated technological systems. However, in most cases, the threat is from the partner's side. They may delay payments, short-deliver goods, or refuse to accept the order.
Currency risks. Usually they are associated with a time gap between the date of the conclusion of the contract and the date of payment. During this period the exchange rate may change or a currency arbitrage may occur. Such risks are also associated with restrictions on foreign exchange transfers and foreign investments, as well as sanctions on export and import of goods. In any of these situations, one of the parties will incur losses.
Currency risks also include fluctuations in the exchange rates and inflation levels, their dependency on the political instability in the country, and its economical deficit. Sometimes they are associated with psychological factors, for example, the population of a country may begin to withdraw money from bank accounts en-masse, withdraw money from the capital markets and instead invest it in goods, real estate, foreign currency, precious metals, or shares in foreign companies. If money is devaluated and purchasing power is reduced, the company incurs losses.

For Russian entrepreneurs, foreign exchange risks affect both export and import of goods. If the exchange rate of the payment currency decreases against the ruble, the exporter receives less than he planned when concluding the contract. Losses are particularly noticeable when exporting expensive goods, when even a slight fluctuation in the exchange rate can lead to heavy losses. When importing, it is just the opposite: if the currency exchange rate increases, the importer suffers losses. For example, after the collapse of the ruble in 2014, some Russian companies were unable to pay for the ordered goods.
Political risks. They are associated with instability of the state structure: frequent changes of government and government regimes, inefficient domestic economy, and corruption levels of state officials.
«Political and economic risks in international trade include food sanctions - import bans. These are sanctions against legal entities, including the seizure of bank accounts, real estate, cargo or vehicles belonging to entities of a foreign state. On the side of a foreign partner, customs duties can be changed, requirements for import and customs clearance of goods can be tightened, and cargo transportation can be restricted.» Ramil Suleymanov, General Director of the logistics group of «ART Delivery» companies.
Operational risks. These include strategic and process risks. Strategic risks arise when external factors interfere with the fulfillment of the terms of the contract, for example, the country's fiscal policy or a natural disaster. In addition, the strategic risks include micro-factors over which the company has no influence: the actions of competitors, the decline in consumer purchasing pattern.
Process risks are associated with inefficient management and outdated technologies. The organization cannot fulfill the terms of the contract, or it fulfills them with delays or high costs. For example, business processes have not been defined, hence the delivery time is disrupted due to inconsistent work of different departments.
Legal risks. There are several types of legal risks; they are associated with the situation in the country and with the terms of a specific contract. If a foreign partner violates the law, it becomes a legislative legal risk; if the terms of the contract are vaguely formulated, it constitutes a contractual legal risk.
Legal risks also include copyright infringement when using a trademark, violation of property rights of third parties, and violation of consumer rights.
«Country risks include sea piracy and armed robbery, which pose a real threat to maritime navigation. Pirates hijack and rob vessels, including tankers and container ships, and take sailors hostage in order to demand ransom. The problems of piracy and robbery at sea are relevant in the areas of the Gulf of Guinea, Nigeria, Congo, Ivory Coast, Somalia, Indonesia, Malaysia, and the Philippines. According to the International Maritime Bureau, there were 180 cases of piracy in these areas in 2017, and 201 cases in 2018.

To counter the threats of piracy, warships escort merchant vessels with armed guards on board, and carriers strictly comply with the requirements of the International Maritime Organization. To protect the business against losses the cargoes are insured against unlawful and violent acts». Ramil Suleymanov, General Director of the logistics group of «ART Delivery» companies.

Sometimes, when it is difficult to establish the relationship between a specific event and a business, logisticians use a probabilistic approach. They predict how events may develop in the future. Each outcome is calculated and evaluated as a separate risk. There is no single and universal assessment tool. In each specific case, experts draw up a list of all possible risks and determine the risk share of each. There are three popular risk assessment methods.

Economic and mathematical assessment. Since risk is the danger of losing or not getting something, the method of economic and mathematical analysis can be used for its assessment. For example, a logistician predicts a rapid increase in the currency exchange rate. In this situation, the final cost of the product will increase, and some of it will remain unrealized. To assess financial risks, the estimated volume of unsold goods is multiplied by the unit price. The result shows how much the company may lose.

Statistical evaluation. In logistics, one can apply the method of statistical risk assessment. To do this, the expected result of the transaction is compared with the average statistical indicator for the same pre-risk period. The resulting value is the magnitude of the risk.

To determine the degree of risk in international logistics, one can use a statistical assessment of all variations in the possible outcome. In this case, the variation indicator will be the difference in the square of deviations of the expected results from the square of the average indicators.

Quantitative assessment. This method gives the best insights of the evaluation and is carried out in three stages. In the first stage, the value is determined for all event development scenarios. In the second stage, the degree of risk of each option is determined. It can be determined by the Laplace criterion — orientation to the average value, by the Savage criterion - the calculation for the best value, by the Wald criterion - the calculation for the worst result, or by the criterion of extreme optimism - faith in luck. In the third stage, it is calculated how adequately the expected profit compensates for the consequences of a possible risk.

The quantitative assessment method allows to obtain the most accurate information. Its disadvantages include its foreign origin, it is derived on the basis of a foreign business model. Therefore, when using the quantitative assessment method, it is necessary to take into account the economic and political environment of Russia.

«To minimize the risks of losses in international trade, logisticians calculate different scenarios of events, and experts should have detour routes and solutions in reserve. They regularly monitor the requirements and conditions of regulators: which products or companies are subject to sanctions, whether customs duty rates have changed, whether coding requirements are met, in what mode does the customs terminals operate, what transport and what communication routes would remain available.

For economic security, it is recommended to regularly check the financial stability of partners in the supply chain. I would like to emphasize that the golden rule of international trade is having a cargo insurance against all risks with international insurance companies.»
Ramil Suleymanov, General Director of the logistics group of «ART Delivery» companies.

BERI - Business Environment Risk Index. BERI evaluates the state of the business environment of a particular country. This index takes into account a set of political, socio-economic and technological factors that affect the activities of foreign companies and investors in the market of a particular country. Modern models of the BERI index include the assessment of operational, political and non-return on investment risk.

To calculate the index of a particular country, the risk of the business environment is evaluated and the assessment is quantified. In the first stage, 15 risk criteria of the business environment are identified and an expert evaluation is assigned to each criterion.

Business environment risk criteria

In the second stage, the criteria are evaluated from 0 to 4, where 0 is the least favorable indicator, 4 is the most favorable indicator. In the third stage, the weight of each criterion is multiplied by an expert judgment. The sum of the products for each of the 15 criteria is the BERI index.
The BERI index should be taken into account when it comes to concluding large international transactions, paying and issuing loans, planning long-term investments in politically and economically unstable regions.
Ways to reduce costs

Ramil Suleymanov, General Director of the logistics group of "ART Delivery" companies, explains how to minimize the impact of risks on business development citing examples of world practices.

Quotas for international cargo transportation.

International cargo transportation is regulated by international agreements. To protect the interests of national carriers, each country sets its own annual quotas — permission for a certain number of cargo transportation. Due to a lack of quotas for transportation, delivery times may be disrupted leading to increased costs.

When planning deliveries, it is important for logisticians to take into account the number of quotas and provide for possible increase in costs; only then can the profitable economic efficiency of transactions can be achieved.

Documents for customs clearance of goods.

For customs clearance and import of products to Russia, an impressive package of paperwork must be provided: declarations or certificates of compliance, classification details, fire certificates, and so on. However, if the certification center gets its license revoked, the customs will not allow the cargo to pass, even if the certificate is registered in the Rosreestr database.

There are often cases when the certificate did not cause any doubt to the controlling authorities during shipment, but turned out that the document was annulled during customs clearance process. It takes about 3-4 weeks to reissue a new permit, excluding delivery of product samples for testing.

Therefore, in international logistics, it is important to check whether the certification documents have been issued correctly, whether the certification center has passed accreditation, and how reliable it is.

Force majeure and inability to transport.

Sometimes, for political reasons, due to threats to national security or the health of citizens, States cancel international air, rail, road or sea transport, close borders and customs terminals. These risks are usually stipulated in the terms of the contract.

The most recent example of force majeure is the COVID-19 pandemic, when many countries closed borders and restricted transport links. In such a situation, it is impossible to fulfill the terms of the contract. In the event of force majeure, a way out of a difficult situation should be sought through negotiations with the foreign trade partner to review the terms and conditions of deliveries, providing loans and payment by installments.

International trade is characterized by a high degree of uncertainty, therefore the risks of international logistics form an important part of the work by experts. They must clearly understand the concept of the business environment, be able to classify, identify and assess risks, and make decisions that will help reduce or avoid losses: take into account quotas for international cargo transportation, check customs and certification documents, insure cargo against damage and loss, seek revisions of conditions in case of force majeure.