The Fallout: Russia in Ukraine – Part IV: War Hits the Global Purse

The fourth in a series of articles exploring the global economic and geopolitical fallouts of Russia’s war on Ukraine.

While first and foremost a humanitarian crisis, the Russian invasion of Ukraine risks adding materially to existing economic and supply challenges for the global economy, just as the world was emerging from the shadow of the COVID-19 pandemic. The world’s financial system is in a fragile state after two years of pandemic-induced disruption, with many economies facing high debt burdens and the challenging attempt of normalising interest rates without derailing the recovery. The war has hit global economic growth prospects, with GDP projections now scaled down to 4%. High energy prices will lead to inflation while supply chain disruptions will impact manufacturing once again.

Global inflation to rise 5%

Despite visible green shoots from key macroeconomic indicators in the first half of 2021, the emergence of the new COVID-19 variant, Omicron, and its fast spread had made the global economic recovery increasingly uneven towards the end of the year. Although the spread of Omicron has somewhat reduced globally by the second month of 2022, the Ukraine turmoil has dimmed the prospects for any global economic resurgence. Against this backdrop, GlobalData forecasts the world economy to grow at a slower pace of 4% in 2022 following a 5.9% growth in 2021. At the same time, the global inflation rate is projected to rise due to supply-chain disruption caused by the Ukraine-Russia conflict, from 3.5% in the previous year to 5% in 2022.

Finance weaponized

Increasingly punitive sanctions on Russian banks, leading companies, and prominent individuals – including the restriction of certain Russian banks from access to the SWIFT payments system – have precipitated a collapse in both the Russian stock exchange and the rouble exchange rate. Russia is likely to see the most severe hit to GDP growth beyond Ukraine itself as a result of the current crisis.

Unlike other industries, banking and payments are being used as a tool to arrest Russia’s military invasion of Ukraine predominantly through the exclusion of major payment systems, such as SWIFT, cutting Russia off from international trade. Attempts to move to alternative payment methods like crypto have also been disrupted (although crypto being outside of Russian governmental control, Kremlin is unlikely to rely on it in any case).

Banks face insolvency

Consumer confidence in Russia’s financial system has been damaged as the purchasing power of customer deposits has declined rapidly, leading to an increased demand for cash, particularly foreign currencies. In addition, European subsidiaries of Russian banks are being forced into insolvency as a direct result of sanctions. The two largest banks in Russia – VTB and Sberbank– have so far not come under the sanctions. Western-based digital challenger banks and FinTechs have been at the forefront of facilitating customers who want to support Ukrainian citizens via money transfers and charity payments.

In a bid to cripple Russia’s economy, the US and its allies (EU, Canada, and the UK) have disconnected key sanctioned Russian banks from the global financial system SWIFT. Moreover, the nations/institutions have agreed to prevent the Russian central bank from deploying its €640 billion of international reserves. The assets of the biggest Russian banks, including VTB, Bank Rossiya, and Promsvyazbank, have been hit with asset freezes and new business restrictions. Russia can no longer conduct transactions through the US and EU systems. While the EU has imposed sanctions on all 351 members of the Russian parliament, the US, UK, Australia, Japan, and New Zealand are selectively punishing individual members.

The UK has imposed a £50,000 limit on bank accounts held by Russian nationals in the country, and the EU a limit of €100,000 in EU banks. More than a dozen billionaire oligarchs with ties to Putin’s regime have been targeted by an asset freeze and travel ban lists around the world. The US has announced sanctions targeting big Russian banks (Sberbank and VTB) holding nearly 80% of all the country’s banking assets. Canada has imposed sanctions that will target 58 people and entities, including members of Russia’s elite and their families, the paramilitary Wagner Group, and major Russian banks.

Global impact

For the global economy, the magnitude of the impact will likely reflect exposure to Russia/ Ukraine in terms of overall trade as well as, crucially, for energy supplies. Existing tensions in the global economy will be heightened. Inflation rates are likely to stay higher for longer and then fall slower than usual, with additional pressure on energy and commodity prices (with maize and wheat being more in focus). Policy responses may be more muted, as central banks balance inflationary pressures with risks to economic growth, suggesting an easing of plans to tighten currently ultra-loose monetary policies.

Consumer-facing sectors will likely feel the greatest chill, with disposable income already under pressure from rising energy and petrol prices. Food prices will come under focus because Ukraine is the leading global exporter of sunflower oil, and the fifth-largest wheat exporter (Russia is the largest). Wheat prices were already under pressure due to poor harvests.

More generally, we are likely heading into a period where geopolitics becomes a normal part of boardroom discussions. Even without a new Cold War, tensions with Russia are unlikely to ease in the short term, with Germany already committing to a significant new investment in its armed forces. Combined with a more assertive China and ongoing tensions in the Middle East, the global geopolitical backdrop has rarely appeared so unsettled since the Cuban missile crisis.