Russia’s attacks on Kyiv and other Ukrainian cities have increased uncertainty in the global economy. To condemn Putin’s war, Western leaders have announced some restrictive economic measures targeting Russian financial institutions and individuals.
Sanctions include: Remove some Russian banks from the Swift messaging system for international payments. Freeze the assets of Russian companies and oligarchs in Western countries. Restricts the Central Bank of Russia from using US $ 630 billion (£ 473 billion) foreign exchange reserves to undermine sanctions.
In response to these moves, some rating agencies have suggested that Russia’s credit rating could be downgraded to junk status or soon. In other words, they think Russia is more likely to default. According to a group of global banks, the default is “very likely”.
Threats to banks
With Russian debt of over US $ 100 billion in foreign banks, the risk to banks outside Russia and the potential default to cause a 2008 liquidity crisis where banks panic about the solvency status of other banks I have a question about. Stop lending to each other.
European banks are the financial institutions most exposed to new Russian sanctions, especially Austria, France and Italy. Banks in France and Italy each have unpaid claims of approximately US $ 25 billion for Russian debt, while banks in Austria hold US $ 17.5 billion, according to Bank for International Settlements (BIS) figures. increase.
By comparison, US banks have reduced their exposure to the Russian economy since the 2014 Crimean sanctions. Nevertheless, Citigroup’s exposure is $ 10 billion, which is a relatively small portion of the bank’s $ 2.3 trillion assets.
There is also the issue of exposure to the possibility of Ukrainian default. Ukraine’s US $ 60 billion bond debt has also been downgraded to junk status, raising the risk of default from a weak probability to a real risk.
In addition to debt exposure, many banks offer banking services in Ukraine or Russia and will be hit. According to rating agency Fitch, the French banks BNP Paribas and Crédit Agricole are most exposed to Ukraine due to their domestic subsidiaries. Societe Generale and Unicredit are the largest European banks in Russia, both of which are one of the most exposed to Russian debt.
To make matters worse for European banks, the cost of raising US dollars has skyrocketed in the euro swap market. Banks use this market to raise the dollar, which is essential for most international trade, so higher interest rates put more pressure on margins.
So how serious is the risk to the bank as a whole due to defaults? Morning Star, a US investment research firm, believes that the exposure of European banks to Russia, as well as US banks, is ultimately “insignificant” in terms of their solvency. Nonetheless, banks in Europe, the United States and Japan can face serious losses and are reported to reach US $ 150 billion.
Banks will probably be affected in other ways as well. For example, Switzerland, Cyprus and the United Kingdom are the largest destinations for Russian oligarchs seeking to store cash abroad. Cyprus also attracts Russian wealth with a golden passport. All financial institutions in these countries can lose their business due to sanctions. For example, the stock prices of British banks Lloyds and NatWest have both fallen by more than 10% since the invasion began.
Beyond the bank
Aside from banks, the war will cause considerable losses to many companies interested in Russia. Companies borrowing money from Russian companies will have a hard time paying back, given that the rubles will be reduced by 30% and Swift restrictions will make payments very difficult. For example, Reuters reports that US companies have about US $ 15 billion of exposure to Russia. Many of these debts are potentially amortized and can cause serious losses.
Some oil companies like Shell and BP have said they plan to offload their assets in Russia. Other companies, such as the trade and mining group Glencore, which have significant interests in two Russian-related companies, Rosneft and En + Group, said they are considering them. However, if the value of these assets evaporates due to the lack of wisely priced buyers, such companies may be considering significant write-downs.
One danger is that this leads to panic selling of stocks in these companies, with a domino effect similar to what happened in banks in 2007-08 to the entire market.
The pension fund is also on the firing line. For example, the Universities Superannuation Scheme (USS) team wants to sell Russian assets. USS is the UK’s largest independent pension scheme, with approximately 500,000 pension customers and £ 90 billion in funding. Its Russian assets are worth more than £ 450 million. The decline in the value of these toxic assets can be a daunting blow. In a broader sense, many mutual funds also have funds in Russian sovereign debt and stocks of Russian companies. They are also seeing potentially serious losses.
In short, the spillover effect of this war is potentially huge, and perhaps even more will be revealed in the coming days and weeks. The global economy is still recovering from the pandemic and the market is very volatile as it already has to deal with significant inflation. Russia’s invasion of Ukraine has exacerbated this situation, and finances will be very cautious to see how things will unfold.
Nacil Aminu, Senior Lecturer in Economics and Finance, Cardiff Metropolitan University
This article has been republished from Conversation under a Creative Commons license. Please read the original article.
..
