As Russia continues to wage war on neighbouring Ukraine, there’s a second war front that’s been wreaking havoc on the markets and will probably continue to do so even after the much-anticipated end of the war in Ukraine. The financial war unravels on a global scale and involves hefty tariffs, import and travel bans, and asset seizures between the West and Russia.
As soon as Russia first invaded Ukraine on February 24th, the Western Allies responded with a slew of unprecedented diplomatic and economic sanctions. The new US-Russia trade war is expected to play out over the next five to ten years and will have a long-lasting impact on both the global economy and individual investment portfolios. According to Bank of America’s global economist Ethan Harris: “This is clearly not a temporary risk-off event that the economy and markets can shrug off and return to business as usual”
A sweeping set of sanctions
Two sanctions, in particular, have rattled the markets. The first one expelled Russia’s largest banks from the global payments network known as SWIFT, making it nearly impossible for Russia to process overseas transactions. The second measure froze a total of $630 billion in dollars and euros held in reserve by Russia’s central bank. This left Russia’s Central Bank very little room to manoeuvre and prevent the value of its ruble from collapsing.
While the Western allies have presented a united front when it comes to bans on imports, trade tariffs, and travel restrictions, the trade war is arguably led by the US, mainly due to the dollar’s role as the world reserve currency. It is practically impossible for banks in Russia – or anywhere for that matter – to exist without being able to do any business in the world’s reserve currency.
Ruble collapses, USD surges
Following Russia’s cut out from SWIFT, the ruble collapsed by nearly 40% and was reduced to Monopoly money virtually overnight, as Russia’s Central Bank was rendered unable to pay off its foreign debt obligations in rubles – which also means that Russia is now defaulting on its debts. The collapse of the ruble seems to be unavoidable as it came even though Russia’s central bank sharply increased interest rates in an attempt to keep money within the nation. And while the sanctions from the West are seriously disrupting Russia’s ruble, the dollar is currently trading near a five-year high. The USD remains supported by the US Federal Reserve’s more stable monetary policy and by the overall risk-off sentiment in the financial markets amid simmering global tensions.
Rising Oil Prices
While economic warfare is not new, it could be argued that it’s never been as effective. In the era of globalization, Western sanctions dealt a huge blow to Russia. Practically overnight, the country’s 40-year effort to build a prosperous market-based economy collapsed. However, globalization also means that the casualties in such warfare can go both ways. Cutting Russia out of the economic system has reverberated internationally.
One of the recoils, for example, has been higher oil and gas prices everywhere. As the United States and Britain halted imports of Russian oil and gas, this resulted in an imbalance between available supply and demand, causing Crude and Brent to skyrocket well above $100 a barrel in early March.
Stock markets turn lower
Sanctions against Russia also affected global stock markets, as investors famously detest uncertainty. Since the start of the war, global markets have been posting bearish sessions. Meanwhile, as economic sanctions tighten around Russia, more than 300 of the world’s most iconic brands have voluntarily halted their operations, suspended product sales, or moved operations out of Russia.
A significantly high-impact exit has been that of the three Western oil giants: Shell, BP and Exxon, whose departures dealt yet another massive blow to the petroleum-dependent economy of Russia. Visa, Mastercard, PayPal, American Express and even Apple Pay and Google Pay also suspended their services, leaving Russians outside the country unable to use their debit cards and Russian banks scrambling to shift to Chinese card issuers. Other iconic companies including McDonald’s have also suspended operations.
At the time of writing, global stock markets have yet to recover from the shock of the war in Ukraine and the resulting financial war that continues to unfold on a global scale. It seems that when it comes to the financial markets, the US-Russia trade war will take years to resolve. Given the direct impact that sanctions are having on the business climate in Russia, securing a full or partial lifting of them is key to making American companies want to come back.
While markets tend to recover from the shock of regional wars relatively easy, the impact of “the war of sanctions” can be world-changing as it may divide the globe into rigid economic blocs. Russia will be forced to rely more on China. China will intensify its efforts to be self-sufficient and Western companies will reconsider the risks involved in maintaining global offices or even doing business in the East. All in all, the invasion of Ukraine might not cause a global economic crisis today, but it can change how the world economy operates for decades to come.