Russia has been severed from the global financial system. Prepare for shocks to come
https://www.theweek.co.uk-The Week Staff
Sberbank: feeling the effects of sanctions
Peter Santini/Bloomberg via Getty Images
“Tanks are harbingers of financial chaos as well as physical destruction,” said Lex in the FT. Russia knows this well – the first Chechen war drained state coffers so badly that it “precipitated the Russian financial crisis of 1998”. This time, its actions in Ukraine have resulted in a sanctions package that is nothing short of “a declaration of economic war”.
This question now is how far the ripples will spread beyond Russia, to a fragile global financial system whose government balance sheets are still debt-laden from the pandemic. No one knows how events will unwind, but war and sanctions will certainly dent economic growth and fuel already high inflation.
There’s also scope for the Russian financial crisis – and the sanctions-induced trade squeeze on essential commodities – “to amplify other shocks”, particularly in vulnerable emerging markets. “The subtlest threat is of dislocations we cannot foresee: Lehman moments when panic spreads and markets freeze.”
The most ominous sign so far is the collapse of the rouble, said John Stepek on MoneyWeek.com – which has made it “a great deal harder to put a price on Russian assets”. That reminds some of the run-up to the Lehman Brother’s collapse in 2008, when “suddenly no one knew what a large swathe of assets dotted about the financial system was worth”.
The difference here is that exposure to Russia has been declining, so a systemic collapse looks unlikely. But “plumbing” issues are certainly a worry. “You can’t yank a country” Russia’s size “out of the global payments network without some payments getting missed and things getting messy as a result”.
There has been some “self-congratulation that the exposure of Western banks to Russia is limited”, said Alex Brummer in the Daily Mail. But in a financial world where non-bank operators, such as hedge funds and private equity, are “scale players”, it’s “quite difficult to know where the risk lies”. As we learnt in 2008, it only takes the fall of one institution to set off a chain reaction. Michael Strobaek of Credit Suisse believes this is “the dawn of a new world order”, said The Observer – in which higher inflation and financial volatility are a given.
The global currency system could change too, said Ben Wright in The Daily Telegraph. “Going after Russia’s central bank and shutting its lenders out of dollar clearing” may “hasten the adoption of cryptocurrencies by rogue states” – with potentially terrifying results.
Outlawing Russia will also accelerate the ongoing retreat of globalisation, said Oliver Shah in The Sunday Times. “Protectionism is the order of the day.” For families, that means more inflation; for corporates, rising risks. “Frontier capitalism” has rarely looked so dangerous.