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Are Banks Facing Russia Sanctions Doing Enough?

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There is little doubt that the words ‘Pariah’ and Russia are now being used in the same sentences ever more frequently. The global community have been in shock for five days now. Days during which the words ‘World War’ and ‘Three’ have also come up far too frequently for comfort.

Public support against Putin’s Russia has been one of the driving factors of increasing sanctions over the weekend. Germany capitulated in their mildly neutral stance as thousands of protesters emptied out onto the streets of Berlin. Even Hungary, arguably Putin’s staunchest ally in the EU, has condemned the Russian invasion of Ukraine.

And the first bank within the European Union to be affected was flagged by the ECB first thing this morning:

While Sberbank can’t be considered a ‘global systematically important bank’, it can only be a matter of time until a larger bank is affected. SWIFT isn’t the only reason this is happening either.

SWIFT Action – what does this really mean for Russia?

It is hard to say that Russia is any better than Iran or North Korea now. Yet it took far too long to enact sanctions to a level sufficient to the ‘crime’. A weekend of meetings at the EU and NATO ensued. By the end of them, even Hungary got over its dependance on Russian support.

Whilst the real chance of Russia retaliating by turning off gas exports remains. However, when nuclear weapons are being discussed, does anyone really think that someone is worried about pensioners affording their heating bills? Certainly not Mr. Putin. After all, he has driven Ukrainian pensioners into the depths of Kiev’s underground system. Followed closely by Russian pensioners who today woke to find their rouble to be worth much less than it was a week ago.  

Figures placing Russia’s central bank currency reserves at between $500 and $640 billion have been circulating in several newswires over the weekend. Putin has built up a ‘fortress economy’ for many years now. Will Russia really be able to hold out for years though?

Either way the amount is colossal, one of the largest hordes of its kind in the world. Trying to stop Putin from being able to spend this money is a huge step forward for the EU and the U.S.

But this problem is not unique to Russia. As mentioned earlier, it has happened to North Korea and Iran in the past. Both still seem to survive as countries. North Korea still fire missiles near to Japan too.

“Political leaders made the right decision to cut selected Russian banks off of SWIFT as they did in 2012 when they cut Iranian banks off of SWIFT,” said Leonard Schrank, who was CEO of the organization for 15 years, including when the U.S. Treasury Department created a classified program to tap SWIFT data to track the flow of terrorist financing after the Sept. 11 attacks.

Banks react to the Invasion of Ukraine

Many observers are not clear as to how sanctions will really affect Russia. Or, indeed, firms operating in Russia. Today, Paul Donovan, Chief Economist of UBS Wealth Management, answered some of the questions that many of us are asking.

Donovan first explained how sanctions against a bank and those against a country are very different. “Being outside of Swift does not mean that you can’t engage in international payments,” he explained. “It just means it’s a lot more complicated and expensive to do international payments.”

Drawing comparisons to Iran in 2012, Donovan shared how Iran’s trade fell about 30%. He was quick to highlight how sanctions will also affect any company around the world involved in trade with Russia. Much like UBS themselves.

Reassuringly, Donovan explained how “Russia is not a terribly significant economy on a global scale. Russia’s economy is somewhere between 2% and 3% of world GDP.”

On the disruption coming out of the conflict and how that affects inflation, Donovan believes that we should be a bit cautious about some of the “alarmist forecasts that are out there.”

As to how central banks will react, Donovan explained how this was linked to higher wage costs. He believes that we are not seeing a “wage price spiral” yet. If this should be the case, then central banks will have to step in to push “growth below trend to break the wage price cycle.”

China’s role in the Ukrainian crisis

Ironically, to survive, Putin needs dollar reserves. Dollars that the U.S. don’t want him to be able to use.

Dollars aside for a moment. The Central Bank of Russia (CBR) will be unable to intervene in FX markets to prop up the rouble, one commentator noted. The scenario will soon bring back memories of the dark days of communism in Eastern Europe in the 1980s. Times when people with ten-dollar bills owned their local town. These times could be back, with one big difference.

Much of the future of Russia will depend on how its allies respond. In fact, the situation is clear. You are either an ally of Russia, or you are an ally of NATO. There appears to be no real middle ground. Especially as China has not yet distanced itself from the ‘dispute’ (the word used in the South China Morning Post today).

To make matters worse, on the day that war broke out in Ukraine, China lifted all wheat-import restrictions on Russia. Just hours after fighting broke out. Irrelevant as to the excuse, Western observers have not approved this approach. And this approach could yet backfire on the Chinese Communist Party (CCP).

The matter of Russia’s ‘alliance’ with China is not a given as many may believe. The relationship is more akin to the ‘enemy of my enemy is my friend’ scenario than any true alliance.

One thing is certain. Russia needs China. The question is whether Chinese companies who operate in the Russian market could see themselves targeted by U.S. or other Western measures. If that were the case, the CCP may be forced to limit ties with Russia, just to ensure business continuity amongst some of its largest companies. Russia is asking a lot. Perhaps too much.

What do some of the leaders of the largest banks say?

As many of our readers are aware, even Donald Trump came out with words of support for Ukraine last week. And while the invasion of Ukraine is a political matter, it is also a human rights matter. With banks pushing the ESG agenda for well over a year now. It is worth remembering that the UN Sustainable Development Goals that form the basis of ESG include topics such as:

“Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.” Goal 16

Goal 1 is to “end poverty in all its forms everywhere.” These are just two of the goals that the Russian invasion of Ukraine have clearly affected.

Given the above, one could expect more from the leaders of some of the largest most influential companies in the world. Yet very few banking leaders have commented at all on the crisis in Ukraine. Bank of America, as an example, made large profits of $60 million in Ukraine just 2 years ago. Today, Bank of America is ominously quiet on the topic of Ukraine. UBS and Credit Suisse have allowed their Chief Economists to comment in the press, at least. #DisruptionBanking did not find any banking leader commenting on any channel online since the crisis started.

Fintech Digital Congress Warsaw

In the meantime. Several commentators are calling on Larry Fink’s BlackRock to do more about the firm’s $308 million iShares MSCI Russia ETF. All that BlackRock gave the press in response was a half-hearted: “We are taking all necessary actions to ensure compliance…” bla bla bla speech.

Without meaning to sound too ‘disruptive’. Isn’t there more that the heads of global banks and financial institutions should be saying right now? Is it really ok just to comment through your Chief Economist and hope things settle down?

It’s easy to admire the heroics of Volodymyr Zelenskyy. However, it’s equally important that we look for heroines and heroes everywhere. And do business with the firms that stood up to the challenge. Not with the ones that hid in the nearest Metro station as if Putin was at their door.  

#Sanctions #Russia #Ukraine #SWIFT #Rouble #CentralBankofRussia #UBS #BlackRock #USDollar #China

Author: Andy Samu

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