Tanks herald financial chaos as well as physical destruction. Russia knows this as well as any other country. The First Chechen War emptied government coffers and precipitated the Russian financial crisis of 1998. The question this time is how far the repercussions will spread beyond Russia.
The most alarming omen is the ruble’s free fall after Western leaders proposed much tougher sanctions. They plan to freeze the assets of the Russian central bank, ban relations with it and expel some Russian banks from the Swift international payments network.
The shock via Russia’s estimated $630 billion foreign exchange reserves is reduced by its transfer to assets the West cannot touch and relatively low levels of public debt. Even so, the sanctions package is a declaration of financial warfare.
The central bank doubled interest rates to 20% to protect the ruble. But the currency lost almost a fifth to 104 against the US dollar. Russians lined up at ATMs from Sunday.
Liquidity evaporated in the blink of an eye. The stock exchange did not open. Ruble-denominated bonds were not trading. Dollar Eurobonds were halved. The cost of swaps to insure against a Russian default soared to 37% of the face value of the bonds.
The global financial system is fragile. The pandemic is not yet over and government balance sheets are loaded with debt. It is possible that the Russian financial crisis amplifies other shocks – soaring food prices in emerging markets, for example. Financial crises overlapped in Russia and Asia in the late 1990s. Victims included the US hedge fund Long-Term Capital Management.
War and sanctions will hamper domestic economic growth and inflate prices, exported to the rest of the world via hard-currency-denominated oil and gas.
Of course, the exhibits this time around are usually less pronounced. Russia has declined in importance as an investment market, accounting for less than 4% of the MSCI Emerging Markets Equity Index.
But there will be many pockets of financial difficulty, from companies leasing planes from Aeroflot to swanky British boarding schools with Russian pupils. Bond coupon payments will be disrupted. There is an increased risk of cyberattacks of the type suffered by Toyota.
The more subtle threat is that of dislocations we cannot predict: the Lehman moments when panic spreads and markets seize up. Small or medium business setbacks then become existential threats. War means that this threat is greater now than it has been since the early days of the pandemic.
The Lex team wants to know more about readers. Please tell us how serious a threat the war in Ukraine is to financial stability in the comments section below.