The conflict between Russia and Ukraine will seriously affect the world economy in many ways. Shifts in supply and demand for energy and commodities will undoubtedly exacerbate global inflationary pressures.
The main sanctions against Russia include: the removal of Russian banks from the Swift messaging system established for international transactions; freezing the assets of Russian companies and oligarchs in Western countries; and prevent Russia’s central bank from using its $630bn (£473bn) in foreign exchange reserves. In response to these movements, Russia has been placed by the financial institutions in junk status. In other words, the Russian default is certain.
It is estimated that between the Bank of Russia and the private sector, Russia contributes about $1 trillion to global liquid wealth, of which about $300 billion is deployed in money markets. The sanctions have nearly disrupted the global balance sheet by $1 trillion, which will contribute to inflation and commodity prices.
Following the sanctions, major Western companies like Apple, Audi, BMW, Boeing, Coca-Cola, Dell, Ford, Netflix, Nike, Nestlé and Renault either left the country or closed their stores and stopped sales. Since Russia is one of the main producers of some important base metals such as titanium, nickel, palladium and aluminum, their prices are also expected to increase. This increase will affect global industries, especially the automotive industry. There will also be an increase in the prices of agricultural products because of the war. More than a quarter of the world’s wheat is produced by Russia and Ukraine. At the same time, prices for corn, barley and rapeseed will increase.
Geopolitical fault lines form slowly over time, making it tempting to delay difficult strategic realignments. But once those lines are broken, it’s often too late to do anything.
European banks, especially in Austria, France and Italy, are being hit hard by the sanctions against Russia. French and Italian banks each have outstanding claims of around $25 billion on Russian debt, while Austrian banks had $17.5 billion.
Since 2014, financial institutions in the United States have reduced their interaction with Russian banks. Still, Citigroup has a small portion of $10 billion of exposure in Russian banks.
Ukraine is also on the verge of default. Ukraine’s $60 billion bond has also gone to junk status.
French banks BNP Paribas and Crédit Agricole are the most exposed to Ukraine due to their local subsidiaries in the country. Societe Generale SA (SoCGen) and UniCredit, the main banks in the EU, with the largest operations in Russia, are also among the most exposed to Russian debt. European, US and Japanese banks could suffer heavy losses, potentially in the order of US$150 billion.
Switzerland, Cyprus and the United Kingdom are the main destinations for Russian oligarchs looking to store their money abroad. Cyprus also attracts Russian wealth with golden passports. Financial institutions in these countries are all at risk of losing business because of the sanctions. Share prices of British banks Lloyds and NatWest have fallen more than 10% since the start of the invasion.
Besides the banks, the war will cause substantial losses for many companies with interests in Russia. Any companies that Russian companies owe money will struggle to get reimbursed, given that the ruble is down 30% and Swift restrictions will make payments very difficult. American companies have approximately US$15 billion of exposure to Russia. Many of these debts will potentially end up being written off, leading to serious losses.
Some oil companies like Shell and BP have decided to offload the assets they hold in Russia. Others, such as trading and mining group Glencore, which has large stakes in two Russia-linked companies, Rosneft and En+ Group, are reviewing their investment status. But if the value of these assets evaporates because there are no buyers at reasonable prices, companies like these could face substantial write-downs.
This means that international capital is looking for new safe havens, bringing additional international capital to China’s domestic capital market, making China’s financial market one of the beneficiaries of the crisis. However, China’s ability to maintain the stability of its surrounding environment remains a major consideration for international capital flows in the face of increasing geopolitical competition and conflict.
The economic and financial sanctions imposed by the United States and Europe will deepen the Russian recession. Nevertheless, Russia can still use its energy resources for its geopolitical interests. Russia is said to have dramatically increased natural gas prices. Natural gas prices in Europe soared 41%. In addition, almost 35% of palladium, an important element used in the American semiconductor industry, was imported from Russia. Once Russia stops supplying palladium to the US, the US chip shortage will be exacerbated. At the same time, 90% of neon, another element used in the American semiconductor industry, was imported from Ukraine. A sharp increase in the price of neon following the war could also have an impact on the American semiconductor industry. Some market institutions have analyzed that crude oil prices could rise above the USD 140 mark again, which will benefit Russia, a major energy exporter, enough to offset the losses caused by rising financial settlement costs. Russia is heavily exposed to the UK and following the conflict the impact on the UK is expected to reduce GDP growth by around 0.8% to 4.0 % in 2022 and 0.5% in 2023. The UK derives most of its gas imports from Norway and produces a significant share of its own gas needs, so supply disruptions would be less likely, but it would suffer from the rise in wholesale gas prices.
The Russian-Ukrainian conflict has become an economic skirmish as much as a geopolitical war.
As geopolitical conflicts escalate, this shift will have implications for the long-term evolution of global financial markets. Geopolitical fault lines form slowly over time, making it tempting to delay difficult strategic realignments, but once these fault lines are formed, it is often too late to do anything but react. The Russian-Ukrainian war is a warning about how the geopolitical movement can suddenly accelerate. Businesses need to carefully consider their risk exposure. These recent events should increase the premium for home market strength and increase the discount for distant holdings.
The author holds a PhD in International Relations from QAU and can be contacted at email@example.com.