Russia Ukraine Crisis – Impact
on Financial Services Industry
Trigger
• Trigger
• NATO
• Russian Invasion
Russia-Ukraine Crisis
Actions to Curb Russian Aggression
Banks exposure to Russia
Financial Sactions – Impact on Banks/ Other Firms
Trade Exposure to Russia/Ukraine
Impact on Commodity Prices
Impact on Supply Chain
Overall Impact on Financial system
Way Forward
Conclusion
Actions to Curb Russian aggression
Sanctions-Countries
• EU, Switzerland, France, Japan, Australia, New Zealand, Taiwan, the United States, and the
United Kingdom, Singapore
Swift ban
• Removing a handful of Russian banks from SWIFT messaging system for international
payments
Freezing the assets
• Freezing the assets of Russian companies and oligarchs in western countries
Access to foreign reserves
• Restricting the Russian central bank from using about half of its US$630 billion (£473 billion)
of foreign reserves
National Wealth Fund
• Prevents Russia from tapping its emergency sovereign wealth fund
Embargos
• Banks and tech companies are announcing their own embargoes against Russia
Export Ban
• Technology exports ban will hamper technology sector growth for many years to come
Financial sanctions – Impact on Banks
Bank Exposure to Russia
• US$100 billion of Russian debt in foreign banks
• European banks exposure (Austria, France and Italy) to Russian debt is the most
• US Bank Citigroup has $10 billion exposure, small portion of the US$2.3 trillion in assets the bank
holds
• European banks with the largest operations in Russia & most exposed to Russian debts - Société
Générale and UniCredit
Bank Exposure to Ukraine
• French banks BNP Paribas and Credit Agricole because of their local subsidiaries in the country
Rating downgrade
• Several ratings agencies have cut Russia’s credit rating to junk status or signalled the cut
• Ukraine circa US$60 billion of bond debt has also been downgraded to junk status
• According to a group of global banks, Russian default is “extremely likely“
Access to foreign reserves
• Restricting the Russian central bank from using about half of its US$630 billion (£473 billion) of foreign
reserves
Margin Pressure for
Europian banks
• Sharp rise in the cost of raising US dollar funding in the euro swaps market; dollars needed for
international trade
Business Loss
• Financial institutions in Switzerland, Cyprus and the UK likely to lose business with Russian oligarchs
because of the sanctions
Risk
• Solvency risk insignificant (European & US Banks)
• European, US and Japanese banks could face serious losses, to the tune of US$150 billion. Source:
Morning star
Financial sanctions – Impact on other
Firms
Losses
• Substantial losses for many businesses with interests in Russia
Trade Exposure
• US companies have about US$15 billion of exposure to Russia (as per Reuters)
Write-downs
• Oil companies like Shell and BP, mining group Glencore could be looking at
substantial write-downs.
Worst case scenario
• Firms to withdraw from the Russian market completely
• Declare bankruptcy (if other revenue streams or financial aid cant compensate)
Pension funds/Investment
funds
• Pension funds/Investment funds with money in Russian assets potentially looking at
serious losses.
Panic selloff?
• Could lead to a panic sell-off in the shares of effected companies that creates a
domino effect across the market similar to what happened with banks in 2007-08.
Trade Exposure-Russia
• European Union's fifth-largest trading partner-Russia (5% share of
trade)
• U.S. trade with Russia < 1%
Russian Trade exports
Impact on Commodity prices
Prices will remain inflated for months to come
Factors effecting price
• Concerns around supplies
• Destruction of physical infrastructure
• Sanctions.
Oil prices
• Russia - world's second-largest crude producer ; provides around 35% of Europe's and 50% of
Germany's natural gas supply
• Crude prices surge above $120 a barrel for the first time since 2013; prices will remain above
US$100/b as long as conflict rages in Ukraine.
• Even if conflict ends, its difficult for these countries to be able to import gas.
Gas prices
• Prices will rise by at least 50% this year, on top of a fivefold rise last year
Base Metals
• Russia is also a major producer of several base metals (aluminium, titanium, palladium and nickel), all
of which hit record high
Agricultural
commodities
• Russia and Ukraine - two of the world's biggest exporters of grain and oilseed supplies
• Ukraine and Russia account for more than a quarter of the global wheat trade. Wheat prices highest
since mid-2008
• wheat, maize, barley and rapeseed) will soar
Impact on Supply Chain
Land routes
• Land-based trade routes between Asia and
Europe will be disrupted
• Transit through Russia becomes more difficult
Air freight
• Air ties between Russia and Europe (and, in
turn, Asia and Europe) will be severely
hampered
• EU countries closed their airspace to Russian
aircraft and cargo and Russia reciprocated
• About 35% of global freight was being
transported by air prior to the pandemic
Sea route
• Sea freight routes through the Black Sea will
be cancelled for several weeks
• Ukraine shut down commercial shipping
• Turkey restricts transit through the Bosphorus
(Image: NationalWorld/JPIMedia)
Charts showing dramatic market moves
Euro/dollars: Biggest weekly fall since 2020; Euro/Frank: Biggest fall since 2015
Crude: Highest since 2013; Gas: Record high
Commodities: Hit record high
Negative yield territory
• Rubee: Tumbled 30%, worst recorded week
• Wide bid-ask: Evaporating liquidity
• Divergence bw Onshore/Offshore trade; Disconnect from International
markets
Overall Impact on Financial system
Inflation fears
• Global inflation will jump above 6% this year
• Soaring energy prices impacting inflation-linked bonds
• Real yields after inflation adjustment
• Yields on Treasury Inflation Protected Securities (TIPS)
Monetarytightening plans
• Federal Reserve and the European Central Bank May change their monetary-tightening plans??
Stagflation
trend
• Crisis accelerates stagflation trend rattling bond traders
• Heading towards persistent inflation and weak economic growth.
• Short-term inflation expectations jumped to a record
• The gap between short- and long-term yields narrowed, indicating expectations of an economic slowdown.
• Investors stocked up Treasury Inflation Protected Securities (TIPS)
Overall Impact on Financial system
Stock market
volatility
• Last trading day’s market rout wiped nearly $1 trillion off the value of the global stock market on fears of major
central bank rate hikes
• Since February 16th, Indian markets have seen a wealth erosion of about ₹15 lakh crore( > GDP of Ukraine)
• Russian stock market remains closed since invasion; Longest closure of stock market since 1998
• Share prices of UK banks Lloyds and NatWest are both down more than 10% since the start of the invasion
• London Stock Exchange similarly suspended trading in more than 50 Russian securities to “maintain orderly markets.”
Global growth
• Global growth to take a hit
• Downward revisions to growth forecast Europe/EU regions. US is relatively insulated
Russian Cyber
attacks?
• Possibility of direct, retaliatory attacks against western financial institutions
• Putin’s weapon of choice - Distributed denial of service (DDoS) attacks, put Ukrainian banking sites offline near
the start of the war,
• National Cyber Security Centre (NCSC) , European Central Bank (ECB) advised banks to shore up their
defences.
• Furthur interventions by Western states might lead to cyber-attacks by Russia – if not nuclear war eventually
Sanction –
challenges
• Implementation challenges
• Russian companies could restructure subsidiary companies to change classification from “Russian-Owned”
• Banks to review their current clients and understand their ownership structure, while comparing the latest
companies and individuals that have been sanctioned
Key changes to be noted
SWIFT exclusion
•Russias response : the Financial Message Transfer System ,FMTS (Handles a fifth of Russian internal
traffic)
•FMTS Membership today constitutes mainly Russian and Belarusian banks
Alternative currencies
•Cryptocurrency and related services will benefit.
•Loss of trust in central currencies due to political instability; will become less valuable
•Alternative currencies – those besides Bitcoin – will rise in price (Eg Monero and other cryptos with
privacy by design)
•Ukraine Has Raised More Than $54 Million as Bitcoin Donations Pour in to Support the War Against
Russia
Fintech Ukraine support
•People migrating from Ukraine will need new accounts, methods to pay abroad
•Banks and fintechs are bearing fees for international funds transfers to Ukraine
•U.S. payment card firms Visa and Mastercard blocked multiple Russian financial institutions complying
with government sanctions
Conclusion
• History shows that while geopolitical crises like this can temporarily
roil markets, they don't typically have long-term consequences for
investors.
• Can leave significant and lasting impact if they have a sustained
macroeconomic impact on major economies.
• Russia's economy ranks as the world's 11th largest, at only 1/20th
the size of the US and 1/15th the size of China
• Not big enough by itself to affect global markets or economic growth,
even if it suffers significant economic damage as a result of
sanctions against it by the US and Europe.
• North American energy companies could benefit
• Growth impact in Europe will be quite substantial alongside a big hit
on inflation, For US & Asia the direct linkages/impact is quite small.