The world economy continues to suffer from a series of destabilizing shocks. After more than two years of pandemic, the Russian Federation’s invasion of Ukraine and its global effects on inflation and financial conditions have exacerbated the slowdown in global growth.
Sanctions towards the Financial Services Industry
Besides targeting individuals, the sanctions also affected key economic sectors such as the Financial Services industry. Several sanctions have been imposed on the Central Bank of Russia, the sovereign debt, the Credit rating agencies, and the access to International Monetary Fund.
Let’s focus on the most striking one: the disconnection of several banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Overall, Western countries have disconnected ten (10) Russian banks from SWIFT including the dominant Sberbank since March. This assumes that they will have to find another way of communicating with their foreign customers and counterparties. These alternatives bring about concerns as they
- cost more
- are less secure
- tend to be slower
- require more time and effort to verify payment information and complete a transfer for financial institutions processing “tailor-made” transactions
To face these uncertainties, banks have been strengthening Know-Your-Customer (KYC) and Anti-Money Laundering (AML) processes. As a matter of fact, the volume of AML controls has increased with the addition of new financial activity restrictions to “Russian Oligarchs.” Therefore, as the number of individuals blocked from financial transactions multiplies, so does the volume of false positive and false negative results.
Financial stress across Emerging Markets and Developing Economies: consequences on investment
Investment, which was already expected to be subdued, is likely to be further undermined by decreased investor confidence, higher interest rates, and heightened uncertainty about growth outlooks and policy, especially in economies perceived as less creditworthy.
With previous banking crises, the actors of the market are aware that credit booms and relaxed macroprudential oversight are the roots of all evil. The health of bank balance sheets may be overestimated because of the zero-risk weight given to sovereign securities.
Indeed, refinancing debt becomes more challenging in an environment where policy tightening in advanced economies and risk aversion. To address such issues, countries can reduce the risks through the rapid and transparent treatment of nonperforming loans, insolvency reforms to allow for the orderly reduction of unsustainable debts, and innovations in risk management and lending models to ensure continued access to credit for households and businesses.
Russian Recession and the risk for a domino effect
According to some financial institutions reports, a recession in Russia is likely to result in substantial losses. Some European banks have material linkages with Russian entities facing severe losses, such as Sberbank. In countries whose banks have the greatest exposure, the liabilities of Russian entities account for about 1.5 percent of total banks assets and about 8 percent of total foreign exposures.
Even more alarming is that large equity losses for exposed banks seem probable, as implied by drops in the equity prices of European banks perceived to be exposed to Russia following the introduction of sanctions. The profits and liquidity positions of institutional investors will also be impacted by write-downs on Russian assets with encumbered liquidity, and by the need to hold additional margin against implicated exposures.