The Russian Ruble has already lost 40 percent of its value forcing the country to raise its benchmark interest rate to 20 percent from the prevailing 9.5 percent. Russian banks and high-ranking officials have been denied access to the US financial system. The neighbouring countries to the conflict zone now have the challenge of providing relief and resettlement to a large number of refugees. The fear of supply chain disruptions of essential commodities have already caused the prices to soar. The global financial markets, too, have declined sharply. The direct exposure of Indian banks in Russia and Ukraine is limited, and, therefore, the impact is expected to be marginal. However, as India meets 80 percent of its crude need through import, the prevailing volatility in market may accelerate its woes on sharp price rise.
Crises may create opportunities for a few but a catastrophe for the most, be they caused by nature or man-made – corona or conflict. Even those who gain can do so only for a short while. The tech companies, the private healthcare providers, vaccine and medicine manufacturers, and their likes may have garnered gains during the pandemic but would not be able to sustain themselves if the pandemic perpetuates and prolongs forever. The manmade crises caused by conflicts and war are no exception. None stand to benefit in the medium to long term. That was true when the world was not so interconnected and interdependent and all the truer today when every nation depends on most others to a varying degree.
The ongoing war between Russia and Ukraine, which has already entered its 8th week, is yet another example of a man-made crisis. Like every war fought in world history, this, too, is causing havoc in terms of loss of precious human life, destruction of physical infrastructure, and rising uncertainties in the global world. Apart from the humanitarian crisis, this war has wider economic implications for economies across the globe. Call it an ‘attack on Ukraine’ or a ‘special military operation’, it has disastrous consequences not only for the oppressed but also for the oppressor, and in fact, the whole world. Since the war broke out in February 2022, Ukraine has suffered severe losses of lives and mass destruction of public and private infrastructure. Oleg Ustenko, the Chief Economic Adviser to the Ukrainian President, estimates the damage so far at about $100 billion. Rashkovan, the Alternate Executive Director for Ukraine on the IMF board, though has opined that despite the wide-ranging destructions suffered by Ukraine, it had managed to function and that the current forex reserve of $27.5 billion (as of March 1) would be sufficient to service its commitments (The Daily Star, 2022).
The worldwide support to Ukraine may have provided it with the strength for resistance but given the intensity of the Russian attack, how long would it be able to sustain it? It may be recalled that the FDI stock in Ukraine at the end of 2020, was as high as $48.9 billion (Dettoni & Irwin-Hunt, 2022). IMF has already provided emergency assistance of US$ 1.4 billion to Ukraine under the Rapid Financing Instrument (RFI). Other International institutions, too, have come up with financial support. The European Bank for Reconstruction and Development (EBRD) has approved a Resilience Package of EUR 2 billion, whereas the European Investment Bank (EIB) has committed a solidarity package of another EUR 2 billion. The World Bank too has extended over US$925 million of assistance (World Bank Group, 2022).
Implications of Sanctions
Most large countries of the world, probably with the only exception of China and India, have condemned the Russian aggression at various fora and responded generously to Ukraine’s call for help through humanitarian aid and financial package (Al Jazeera, 2022). The western world has imposed sweeping sanctions and embargos against Russia. They have, however, avoided involving themselves militarily to prevent further escalation of the war.
Russian banking and financial system have been cut off from SWIFT thereby making international transactions difficult. Its assets and reserves overseas have been frozen, thus preventing it from international trade (Edgerton, 2022). Russia’s own messaging system – System for Transfer of Financial Messages (SPFS) – and the Chinese Cross-Border Interbank Payment System (CIPS) have come to Russia’s rescue, but mostly for domestic transactions, and cannot become an effective alternative to SWIFT for international transactions (Times of India, 2022). Besides, the Russian central bank is banned from accessing foreign currency reserves worth over $640 billion which poses further hardship in meeting its international payment obligation. The properties and assets of Russian businesses and businessmen in western countries have been frozen. Russian flights have been blocked from accessing European airspace.
Many foreign companies, including Ikea, McDonald’s, Visa and Mastercard, have left the country or halted their operation and sale in Russia. Many have cut their ties with Russian companies and projects in other countries. Russian banks and high-ranking officials have been denied access to the US financial system thereby debarring them from acquiring the US dollar, a de facto global currency for cross-border payments and settlements.
As a result, the Ruble has already lost 40 percent of its value forcing the country to raise its benchmark interest rate to 20 percent from the prevailing 9.5 percent. Its stock market has seen a free fall losing close to 50 percent as compared to its previous peak. Large scale withdrawals from the market have forced the closure of the market since the invasion started. According to the World Investment Report of UNCTDA, the Foreign Direct FDI stock in Russia stood at $446.7 billion at the end of 2020. The prevailing situation has exposed these foreign investors to the impact of such restrictions.
Impact on Other Countries
Russia and Ukraine may be suffering the direct consequences of the conflict, but this crisis has already taken into its fold the rest of the world making most economies bear the brunt, albeit economically and financially. The neighbouring countries to the conflict zone now have the challenge of providing relief and resettlement to a large number of refugees. Critically, their excessive reliance on Russian gas has put them at greater risk of supply shortage and inflation.
Russia is the largest and Ukraine is the 5th largest exporter of wheat in the world (Sablok, 2022). The two countries together make for 30 percent of the global wheat export. Russia is also the 3rd largest exporter of crude oil and the 2nd largest supplier of natural gas in the World. Along with that, the two are also major exporters of maize, sunflower, and fertiliser.
‘The crisis could disrupt the supply of these goods’ mentions the recent report of UNCTAD on trade and development. The report further highlights the rising prices of fuels and food and its adverse implications for some of the poorest economies which are still struggling to revive from COVID-19 impact (UNCTAD, 2022). If the conflict persists, it could affect the plantation of crops leading to a severe shortage of global food supplies causing supply-side inflation. “War in Ukraine means hunger in Africa” states the IMF MD, Kristalina Georgieva (News18, 2022). European Union which is in direct conflict with Russia is dependent on it for about 40 percent of its natural gas requirements. Though the direct consequences may be marginal for the US because Russia and Ukraine collectively account for less than 1 percent of US imports and exports, it may feel the impact in an indirect way through global price rise and inflation. Such dependency and fear of the supply chain disruptions of essential commodities have already caused the price to soar, and would eventually lead to inflation in the global economy.
With ever-increasing uncertainty, the global financial markets have declined sharply. European bank stocks have lost around 20 percent of their value. Those with large exposure to the Russian financial system are facing the heat of sanctions and demands for Russian boycotts. Bureau of International Settlement (BIS) data indicates that the Italian and French banks have the highest presence with approximately $25 billion each at the end of September. The Austrian banks had an exposure of $17.5 billion followed by the US bank with an exposure of $14.7 billion. They are most vulnerable to suffering from the delay and default risks, besides heavy losses.
Financial giants like JPMorgan, Deutsche Bank and Goldman Sachs have already announced their exit from Russia. Other global financial players like Austria’s Raiffeisen and Italy’s UniCredit are likely to follow suit soon. Retaliatory measures, like the seizure of assets by Russian authorities, may further compound their difficulties. UniCredit estimates a cost of $8.1 billion on the write-off of its Russian business whereas Citigroup Inc. apprehends losing half of its $10 billion exposure, in a worst-case scenario.
Implications for India
In a globalised world, no economy would be able to escape the tangential and spillover effect of any event, even if they happen to be far from the economies in the crisis. However, their intensity would differ depending upon the level and type of exposure. In the context of the ongoing conflict between Russia and Ukraine, the impact on the Indian financial system would depend on its exposure to the two countries in direct conflict.
Going by the S&P Global rating analyst Deepali Seth, the direct exposure of Indian banks in Russia and Ukraine is limited, and, therefore, the impact is expected to be marginal (Reuters, 2022). Commercial Indo Bank LLC in Moscow, a joint venture of the State Bank of India (SBI) and the Canara Bank, is the only Indian bank in the conflict zone and has a total loan exposure of around US$527 million (Adhikari, 2022). Keeping in view the prevailing situations, SBI has decided to stop processing any transactions involving Russian entities. However, these Indian banks could be exposed to the conflict through indirect means, like financing or guaranteeing the Indian importers or exporters who deal with these countries or through investment in those entities that had exposure to these countries.
Given the fact that India meets 80 percent of its crude need through import, the prevailing volatility in market may further accelerate its woes on account of the sharp rise in the prices. The decision to import oil from Russia at discount and probably in Rupee or Ruble terms may lighten the impact. Soumyajit Niyogi, associate director at India Ratings and Research feels that the rise in energy price and its impact on the price of other commodities will pose a serious challenge to growth-inflation dynamics. However unlike other Central banks which move to tighten their monetary policy, RBI is expected to follow a wait-and-watch policy (Roy & Beniwal, 2022).
It would be interesting to see how long the regulator is able to hold to the present instances, especially when the retail inflation has already touched 6.07 percent in February breaching the RBI target range of 2 to 6 percent. This makes experts apprehend that the regulator might soon be forced to reconsider its position. The upward movement in the interest rate may provide respite to the savers and lenders but would seriously curtail the lending capacity of banks causing a decline in their revenue, investment, and overall economic growth. Taken as a whole, the longer this conflict stretches, the larger could be the implications for the world economy, in general, and for Russia and Ukraine, in particular.
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