Russia-Ukraine war: ramifications for Russia and the West

  • US equity/bond market: US investors flee to money-market funds from equity funds. In the week to 23 February 2022, money-market funds accumulated capital worth a net USD5.98bn in their first weekly inflows since 26 January 2022. In contrast, equity-market investors sold US equity funds worth USD1.92bn, marking the first weekly outflow in three weeks. US bond funds lost USD3.66bn in a seventh consecutive week of net selling, but net selling was 92% lower than in the previous week 1.
  • Fed rate hike: With the growing uncertainty, expectations for a rate hike have come down from 50 bps to 25 bps at the Fed meeting in March
  • Monetary policy in the EU: The war has forced the EU market to face the risk of stagflation amid higher energy and food prices. If the situation worsens, the EU could be forced to engage in more quantitative easing while opening up the possibility of hiking rates. Germany’s 10-year nominal rates slumped to their lowest since 2011 as expectations of rate hikes evaporate.
  • Steep rate hike in Russia: The Central Bank of the Russian Federation (CBR) is to assist exporters and importers with forex requirements. It also more than doubled the benchmark rate to 20% to check inflation and devaluation risks.
  • Commodity prices: The Brent crude price has increased c.20% since the attacks on fears of Russian supplies being restricted. On 2 March 2022, OPEC+ announced there would be no additional supplies from the coalition in an effort to balance the market; the attacks triggered an increase of USD8–10/barrel.
  • SWIFT-related sanctions — a double-edged sword for the EU: While SWIFT- and energy-related sanctions would have a far-reaching impact in isolating Russia, the EU would also bear the burden of these sanctions. The two economies are closely connected, as shown below:
  • The EU and Russia engage in EUR80bn worth of trade with each other; these sanctions would mean the EU cannot trade with 50% of the Russian banking system.
  • Russia exported 5m barrels of oil per day in 2020; 48% of it was to European countries 2.
  • While crude oil requirements could be met through other suppliers, there is no substitute for Russian gas supplies in the short term. Russia’s reliable gas production and pipeline network have provided ready access and clean energy to Europe over the years as it looks to reduce its carbon footprint and nuclear-based power generation. Imports of Russia’s natural gas account for 38% of the EU’s total natural gas imports. Major economies such as Germany and Italy import 65% and 43% of their gas requirements from Russia, respectively 3. In late 2021, Russia reduced its gas supply to Europe due to the deepening crisis with Ukraine; spot deliveries were restricted, although it delivered on its long-term contracts. This pushed Dutch TTF gas futures from EUR65/megawatt hour (MWh) in October 2021 to EUR180/MWh in December 2021 4. This came against the backdrop of high inflation in the EU and UK that ate into personal consumption. Inflation remains well above the respective central banks’ tolerance levels.
  • Germany was scheduled to phase out all its nuclear plants in 2022 and was in the process of getting direct gas supplies from Russia through the Nord Stream 2 pipeline. This USD15bn pipeline owned by Gazprom (the state-owned gas supplier) as operator 5would meet more than half of Germany’s annual consumption. The German regulator has put the final certification on hold.
  • Restrictions on the CBR: After the Crimea-related sanctions, Russia’s access to forex funding was restricted. Since then, the country has built up its forex reserves, which stand at USD630bn against USD386bn in 2014. The Western allies have wiped out 65% of these reserves through an asset freeze. Overall, the West has collectively targeted 10 of Russia’s largest financial institutions, which account for nearly 80% of the Russian banking sector. Sanctions target Russia’s financial institutions and the ability of state-owned and private entities to raise capital, be it equity or debt. Furthermore, Russian financial institutions conduct c.USD46bn worth of foreign-exchange transactions globally on a daily basis; 80% of these are in US dollars. These transactions will now be disrupted.




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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.

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