The third in a series of articles exploring the global economic and geopolitical fallouts of Russia’s war on Ukraine.
The Financial Re-alignment
The financial sanctions placed against Russia so far have included three main planks:
First, a dramatic expansion of sanctions against specific Russian individuals (mostly, billionaires and oligarchs).
Second, a series of sanctions against individual Russian banks, including–but far from limited to – the much-hyped ability of the EU to mandate their disconnection from SWIFT, the international interbank messaging system which is based in Belgium and thus under EU jurisdiction, now also known as “de-SWIFTing”.
And third, the incapacitation of the Russian Central Bank’s (CBRF) use of its international reserves in a number of jurisdictions that critically include the US, EU, UK, Canada, Japan, Australia, and Switzerland, namely all the core reserve-currency jurisdictions of the world bar China (China’s share of the world’s aggregate central bank foreign reserves remains in the low single digits, even though its share of the CBRF’s reserve is significantly higher).
The Peterson Institute for International Economics (PIIE) opines:
“the third action, targeting the CBRF, unambiguously counts as systemic and affects the entire Russian financial system and economy. The first is about individuals. The second occupies a middle ground: If only a relatively small share of Russian banks is affected, it is nonsystemic, but if most are, it becomes systemic. From that standpoint, the EU’s de-SWIFTing actions are still nonsystemic, since only seven institutions representing about a quarter of the Russian banking system are on the latest list. More could follow, however.”
In addition to these governmental decisions, some key financial firms are restricting their Russian services on their own initiatives, such as VISA and MasterCard, adding to the general disruption.
Following the news of the EU’s announcement of cutting almost 70% of Russian gas imports within a year, ‘self-sanctioning’ moves by major oil and gas corporations and official US and UK embargoes on Russian oil imports, most global organisations have altered their perceptions about the economic repercussions of the war on Ukraine.
Dutch investment bank ABN Amro, for example, now expects
“sanctions to lead to a lasting global trade re-alignment, with dependence on Russian energy and other commodities gradually – potentially more abruptly – reduced, and replaced with alternative sources. Even in the most optimistic de-escalation scenario, (ABN Amro) cannot foresee a return to the situation of two weeks ago.”
In their original base-case scenario drawn up around the time the war started, ABN Amro predicted a moderate price shock – not something akin to longer-lasting economically damaging situations such as disruptions to the physical supplies of commodities or energy. New developments have led to the alteration of these expectations, with supply chain disruptions already considered as in play. These disruptions are seen to get worse over time, with an increasing number of self-sanctions set to come into play as well.
While knock-on effects on supply chains are to be expected, retaliation in the form of capping Russian exports may be an option for Putin as well. Russia has already announced an intent to ban the export of certain commodities, with the details yet to be announced.
The effect on the eurozone and UK economies are set to be much heftier than the US, with inflation set to be an average 1.75 percentage points higher-than-expected and GDP 1.25 percentage points lower. While governments are expected to step in to stem the macroeconomic fallout by – for example – placing price caps and providing compensation to households and industries, the disruptions to business are set to continue.
“Already, some car plants have had to pause production, for instance, due to lack of cabling supplies from Ukraine. We expect these types of disruptions to intensify over the coming months”, says ABN Amro.
(Continue reading Part IV to understand how the Ukraine turmoil now hits global economic recovery as growth scales down)