Impact of the Russian sanctions and Russian exposure to the global market (16Mar2022)

Following the Ukraine crisis, Russia has been hit with various sanctions from the international community.  The war spread from the streets of Ukraine to news, cyberspace and also the markets.  The sanctions included removing Russian banks from the SWIFT system for international payments and freezing the assets of Russian companies & oligarchs in & outside Russia.

 

Due to globalization, there are also much collateral damages that have been inflicted to the various companies due to boycott, business suspensions and closures in Russia.

 

Here are some of the market impacts I compiled from various news sources (like Yahoo, Fortune.com, The Guardian, etc): 

 

Russians rushed to withdraw their savings - taken from business insider.

1. Russian central bank was denied access to its US$630 billion (£473 billion) of foreign reserves.  
2. Ratings agencies have either cut Russia’s credit rating to junk status or signalled that they may do so soon. This implies that Russia is highly likely to default in debts that they have. 
3. Over US$100 billion of Russian debt in foreign banks that could be defaulted
   Figures from the Bank for International Settlements (BIS) show that France and Italy’s banks each have outstanding claims of about US$25 billion on Russian debt, while Austrian banks had US$17.5 billion.
4. Citigroup has a US$10 billion Russian exposure out of its US$2.3 trillion in assets.
5. Ukraine’s circa US$60 billion of bond debt has also been downgraded to junk status, raising the risk of a default from a weak probability to a real danger.
6. French banks BNP Paribas and Credit Agricole are the most exposed to Ukraine with local subsidiaries. 
7. Société Générale and UniCredit are the European banks with the largest operations in Russia with most exposure to Russian debts.
8. Increase in the cost of raising US dollar funding in the euro swaps market needed for international trade.
9. European, US and Japanese banks could face serious losses of around US$150 billion as part of their Russian exposure
   
10. Reuters has reported that US companies have about US$15 billion of exposure to Russia where most should be written off.
    
11. Shell and BP have said they are going to offload assets that they own in Russia.
12. Pension funds also affected. Universities Superannuation Scheme (USS) is the UK’s biggest independent pension scheme with about 500,000 pension customers and £90 billion in funds. Its Russian assets are worth over £450 million. 

 Impact to key exports from Russia & Ukraine

 

Extracted from www.aljazeera.com about main export from Russia and Ukraine

These are some of the key exports out of both Russia and Ukraine where we can expect global disruptions due to sanctions and the on-going conflict.

 

Impact of Russia's global exports(taken from Yahoo Finance &JP Morgan)

 

New war front - global markets

The sanctions have started war on a new front - economics.  The eventual impact to the market goes beyond the Russian government.  In the global market, it is not so clear on how "sanctions and boycotts" could be applied evenly, without bias.

 

Latest news articles from 16Mar22 about the dependence of Russian oil

As part of a global economy, we are more inter-connected like before.  Using oil & gas as example, Russia could make it very painful for Europe if they decide to stop supplying the oil and gas to Europe.   

 

Quote from NY Times:

Some 45 percent of the European Union's gas came from Russia in 2021, while Russia was also Europe's largest supplier of oil at 27 percent, more than three times the next largest, Norway.  

 

They could literally leave Europe in darkness, crippling their industries, causing mayhem in healthcare & infrastructure by turning off their oil & gas taps.  With OPEC unwilling to increase their production, there is no viable and immediate suppliers to replace the Russia volume.  Germany has raised concerns of massive poverty should Russian oil be stopped.  There are also concerns about the global agriculture produce (potentially leading to food crisis) as sanctions were dealt to Russian fertilizer producer .  This "war" has spread to commodities, agriculture, food shortage, energy crisis, supply chain and more.  All these will lead to inflationary effects and more.  With this, I will like to leave an interesting quote from Mr Charlie Munger about the cause-effect of inflation.

"Inflation is a very serious subject.  You can argue that it is the way democracies die." - Charlie Munger (during $DJCO annual meeting on 16 Feb 2022)

Conclusion

Let us hope that the world leaders will be able to work this out with minimal loss of lives and livelihood.  Macro factors of a "draggy" war will have much more impact to the global economies.  Let us consider beefing up our portfolios with more "defensive stocks" like utilities and consider other asset classes as recession hedge.