Financial War under the Russia-Ukraine Conflict
As the conflict between Russia and Ukraine has intensified, Europe and the United States have continued to strengthen trade and financial sanctions against Russia. The sanctions have also involved social, cultural, and other sectors. Researchers at ANBOUND pointed out that Europe and the United States are using their advantages in technology, finance, and other sectors to invoke Russia’s “denationization” through sanctions. At the moment, these sanctions have caused more harm to Russia than the Russia-Ukraine conflict itself, resulting in huge losses in Russia’s economy, trade, and finance. Russia, based on its strengths, has taken corresponding countermeasures to safeguard its interests and cover some losses. The financial war between Russia and U.S. and its allies tends to worsen, especially for the financial industry, which has an important impact on the socio-economy. From ANBOUND’s point of view, the financial war not only affects the relevant parties but also has a profound impact on the international financial system and monetary system. It will also intensify geopolitical contradictions and promote the transformation of a highly globalized financial system into a localized system.
Leveraging on their dominant position in the international financial and monetary system, the U.S. and Europe have initiated the financial sanctions. Russia was excluded from SWIFT, the global financial payment system, while the overseas assets of the Russian central bank and some other financial institutions were blocked, making half of Russia’s USD 630 billion foreign exchange reserves gone worthless. The European Union has banned its settlement system from completing transactions in stocks, bonds, or derivatives in Rubles; the Russian currency can only be used to settle energy trades. The international financial and trading system, therefore, becomes highly politicized.
The financial sanctions imposed by Europe and the U.S. have harmed Russia, causing the latter unable to carry out its normal trade settlements and financial transactions. On February 24, the day the Russia-Ukraine conflict started, the MOEX index slumped 45%, and Russian stocks have been excluded from the global benchmarks. Russia shut the stock market to avoid the Ruble and stock market to plunge. For the European and American financial institutions, sanctions not only force the multinational financial institutions to withdraw from the Russian financial market but also causing Russia a large wave of defaults on its debt. Until then, Russia has been seen as a leader in the emerging markets, attracting multinational banks and financial institutions to enter the market.
Since the outbreak of the conflict, the market value of European companies in Russia has shrunk by more than $100 billion. The global depository receipts of Russian companies have slumped by more than 95% before the trading was suspended. The European and American financial markets, especially the major financial markets in Europe are also in great uncertainty due to the Russia-Ukraine conflict that has spooked investors. Some market institutions are also concern that the freezing of Russian assets and the fluctuations in the value of financial assets might cause liquidity risks in some financial institutions, requiring the Federal Reserve and other central banks to bail out. These sanctions not only affect Russia and those related parties, but also the resiliency of the financial systems of various countries.
Russia begins to fight back. On one hand, Russia increases trade and financial ties with countries that are not involve in the sanctions. Russia even considers using the RMB as the main payment currency for foreign trade to meet the needs of foreign trade settlement. On the other hand, the Central Bank of Russia has banned the sales of local securities by foreigners. On March 23, Russian President Vladimir Putin decided to demand payment in Rubles for natural gas transactions with European countries. Putin has ordered the Central Bank of Russia and the government to formulate rules for Ruble settlements with European countries within a week. On the same day, Russian State Duma Chairman Vorokin mentioned that the refusal to exercise the U.S. Dollar and Euro to settle natural gas transactions is a historical decision, without which Russia’s financial and economic sovereignty would be impossible.
The new measures by Russia might cause the European Union, which is reliant on Russian energy, in peril. If the European Union refuses to utilize Rubles for settlement, the Union is likely to face Russia’s energy supply cutoff which widens the current energy crisis. If the European Union’s energy companies accept Russia’s demands, the financial sanctions against Russia are likely to become ineffective. Even if the Russian-Ukraine crisis worsens, neither Russia nor Ukraine has touched the energy channel to the European Union, this enables an uninterrupted transmission of oil and natural gas to the European Union. The European Union does not use energy as a tool for sanctions against Russia. According to the “industrial upstream” theory by ANBOUND’s founder Chen Gong, Russia’s move to take advantage of its dominant position in the energy sector and transform it into a tool for financial counterattacks has indeed exacerbated the energy shortcomings in the European Union.
This move by Russia is undoubtedly beneficial to the devaluing Rubles, that eventually is conducive to its monetary consolidation of its foreign currency sovereign. Some market analysts commented that Russia seems to have formed a new way to support its currency, not only through the intervention of the Central Bank of Russia but also generates demand for the Ruble through foreign buyers of Russian gas. After Putin’s speech, the Ruble’s indicative price against the U.S. Dollar briefly rose more than eight percent. The Ruble increased 5.6% intraday on the Moscow Interbank Currency Exchange (MICEX), the greatest gain since 2014. According to the data from Bloomberg Terminal, the Ruble grew by 4.9%, although much of that was indicative and not tradable. The 1-month tradable Ruble forward contract rose 4 Rubles to around 103. If European companies using Rubles for energy trade settlement, it is bound to increase the foreign demand for Rubles. European countries would have to increase trade and financial ties with Russia to obtain Rubles, and the pressure on related trade and financial sanctions will get ease.
The settlement of energy transactions in Rubles has undoubtedly affected Europe the most. In the past, the transactions by European buyers were mainly in Euro. As of the third quarter of last year, about 58% of Gazprom’s overseas gas sales were denominated in Euros and another 39% in U.S. Dollars. Putin’s above remarks reveal that certain terms in Russia’s contracts with European buyers would need re-negotiation. Russia will continue to export gas to Europe via Ukraine, said Russian energy company Gazprom. Supply disruptions due to any rule change would exacerbate Europe’s energy crisis. On March 23, European natural gas prices surged 34%. Under the energy crisis, the differences between European Union countries will further increase given their different interest rates and economic structures. However, if European Union countries are willing to bear the huge losses of the energy crisis and prepare for new energy channels, Russia would then become the greatest loser and the Rubles will not be able to maintain its stable currency value. Russia’s plan on the Rubles might then become a “double-edged sword” that carries great risks. The viability of Russia’s decision on the Rubles is, therefore, built on the market tolerance of market risks and inflation.
In the long run, if Russia implements the Rubles’ strategy, the dollar-based global monetary system will eventually fall apart. Regarding the application of SWIFTS by Europe and the United States as a mean to sanction Russia, there have been some criticisms in the international financial market which argue about the politicization of the financial system, that will affect the long-term credibility of the U.S. Dollar and subsequently fragment the international monetary system. This financial war reveals that foreign exchange reserves, which are originally served as a safe-haven tool among countries, would become even more uncertain. Governments and international investors are exploring new approach for trade and investment to circumvent this growing threat of political risk to safeguard their interests as well as economic and financial sovereignty. India’s central bank is currently discussing with the Central Bank of Russia to initiate a “Rupee-Ruble” trade payment mechanism to bypass the U.S. Dollar. Saudi Arabia, the world’s largest oil producer, has arranged discussions with China to make use of RMB as the settlement currency for oil trade between the two. Despite these changes are yet to threaten the current dominance of the U.S. Dollar, as the United States continues to seek a “denationized” sanctions model, countries are seeking more diversification of foreign exchange reserves and bi-lateralization of trade settlement currencies. The current dominant position of the single currency, the U.S. dollar, as an international settlement currency will then erode, remarking a new geopolitical pattern in the international monetary system.
The unconventional sanctions including trade and financial wars imposed by Europe and the U.S. against Russia are not comparable to those sanctions imposed on Iran, North Korea, and other countries. With the continuation of the Russia-Ukraine conflict, the trade and financial wars would generate both direct and indirect effects on the global economy and some countries, bringing uncertainties and reform on the energy and trade patterns as well as the financial market system.
Final analysis conclusion:
Russia’s intention to systematize the Rubles as the settlement currency for energy trade with European countries is a counterattack against the financial sanctions by Western countries such as Europe and the United States. This further intensifies the financial war of “denationization” and financial and monetary sovereignty between the two. The impacts would not only bring losses to all parties involved in the war but also have a profound clash on global trade and the international financial landscape.
Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK
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