Geo-Political impact of the Russia-Ukraine crisis on Financial Services

by EZDynamic |
May 24, 2022 |
Russia-Ukraine Conflict

Geo-Political impact of the Russia-Ukraine crisis on Financial Services

by | May 24, 2022

Three months ago, on February 24-2022, Russian armed forces attacked Ukraine.

People and institutions, globally, watched the attack in Ukraine with apprehension, dismay and disbelief. The large humanitarian crisis it has caused. And the havoc on an already fragile global economy, just about recovering from the uncertainty and hardships due to the pandemic. In addition to its humanitarian toll, the ongoing crisis continues to have a range of consequences for businesses and the global economy.

The economic sanctions imposed by NATO allies and other countries were unprecedented in terms of speed, scope, scale and severity. They are, however, a double-edged sword and could cause significant disruption to the wider global economy, in the long run. The crisis has led to a significant rift between the Russian government and the West, not seen since the Cold War era. In a global economic climate, already characterized by high inflation, including rising energy costs, supply chain disruptions and other economic hangovers from the pandemic, the conflict and the impact of the sanctions are causing commodity chaos. Especially, energy prices are expected to remain at an all-time high for a while and we certainly know the domino impact of this one!

In these past couple of months, equity and bond markets have experienced significant volatility and the macroeconomic impact of these geopolitical tensions effectively demonstrates how uncertain the current environment is in which financial services companies operate today. In Europe, the risk of stagflation has increased and markets are closely watching the next steps central banks around the world are taking. Increasing inflation, together with low economic growth could lead to lower profit generation for banks and negatively impact the results derived from retail operations.

When it comes to US-headquartered financial institutions, some asset managers and banks have physical assets exposure to Russia and Ukraine. However, the evidence seems to suggest that such direct assets exposure (whether these are leased airplanes, real estate, equity investments, Russian and Ukrainian debt/bond investments denominated in USD / Russian Rouble / Ukrainian Hryvnia etc.) and other related exposures are in low single digit percentage points.

Underwriters expect US-based financial institutions to conduct full write-downs of their investments in Russia and Ukraine during fiscal 2022. It is also likely that the US assets in Russia will be nationalized in response to the US-imposed sanctions, ruling out any possibilities of future recoveries. Additionally, a number of US asset managers have highlighted that sanctioned Russian institutions are limited partners in their funds and that they are working to buy back their interests in these private funds in order to cease the affiliation with these limited partners.

Russia is experiencing an economic contraction due to the ruble collapse, the Russian central bank’s struggle with foreign currency reserves and the Russian government defaulting on dollar bonds. Some reports indicate that current sanctions could possibly translate to a 10% contraction of the Russian economy and a 1% reduction in global growth.

The decision to cut out Russian lenders from the global bank messaging system as punishment for its invasion of Ukraine could boomerang and hurt the West. Concerns still exist over the decision by the U.S., the European Union and Canada to oust Russian banks from the interbank system, called SWIFT. Exclusions from SWIFT would lead to missed payments and giant overdrafts.  Commenting on this, Zoltan Pozsar, an analyst at Credit Suisse stated “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

4 Trends 

The 4 major trends, we see, emerging from the current geo-political environment:

Sticking by ESG Values: Companies are being forced by a mix of public, investor, reputational and social media pressure to take a stand, forcing businesses out of their ‘safe’ apolitical stances.

Heightened Cyber Risk: There’s a heightened cyber security threat globally, especially entities in Ukraine. Countries participating in sanctions against Russia could be victims of tit-for-tat retaliations via cyber-attacks. Building cyber security plans and resilience is a number one priority across many organizations and they need to be in a position of heightened alert when it comes to cyber security and protecting their most critical assets.

Sanctions Compliance: Many countries have announced a rolling program of sanctions, including asset freezes and prohibitions on transactions — with changes coming on an almost daily basis. Many businesses, especially those in the financial sector, have been focused on ensuring they have taken the necessary steps to comply with local legal sanctions in their geography.

Supply Chain Potential Impact: We’ve already seen the impact on fluctuating oil prices, and delays in the procurement of basic metals like nickel, aluminum and palladium that have hit industrial production and the wider supply chain. However, other possible disruptions could be harmful. Russia and Ukraine account for one-fifth of all global wheat production and 70 percent of sunflower oil exports. These are critical inputs for agri-food businesses across the world, and they may soon feel the supply crunch. Countries like Algeria, Egypt and Nigeria are some of the largest importers of Russian and Ukrainian food staples.

No one can predict how long the conflict will last and how soon we can return to an acceptable level of stability.  Winston S. Churchill put it succinctly in his recall of an interaction with President Roosevelt, “one day President Roosevelt told me that he was asking publicly for suggestions about what the war should be called. I said at once ‘The Unnecessary War’.”

EZDynamic is a boutique management consulting firm that caters exclusively to the Financial Services sector.  We provide client-centric solutions for Financial Services firms, helping them achieve their business, strategic, and technology goals. EZDynamic works in the areas of Business Strategy, Regulatory Implementation, Technology, Change Management and Staff Augmentation.

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