The Russian invasion of Ukraine has resulted in numerous deaths and a refugee catastrophe, with Ukrainians fleeing to Slovakia, Hungary, Poland, Hungary, and other places. The war is projected to have a variety of ramifications for corporations and the global economy and its humanitarian toll. The war has affected several countries far and wide in international trade, commodity prices, and the overall global financial system. So in this article, we intend to look at how the conflict might affect the global financial system in the medium to long term.
According to reports, Russia provides around $1 trillion to liquid global wealth. In addition, about $300 billion is deployed in money markets, thanks to the private sector and the Bank of Russia. The various subtleties and repercussions of disconnecting Russia's ties to the global financial system are beyond the scope of this article. Still, such an action would be akin to a $1 trillion balance sheet failure.
Enlisting the Federal Reserve to cover the gap would be one urgent tactical policy response.
However, this would have the unsettling effect of requiring the Fed to increase its balance sheet again before slowing the speed of expansion from the "last crisis"—all against the context of an already inflationary environment facing a new energy supply shock.
The ongoing Ukraine crisis is the kind of problem that might push the Fed into an effectively winnable situation. It could cause a liquidity shock as a result of an inflation shock and sanctions as a result of disrupted energy/commodity supply.
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If we think long term, the weaponization of finance systems is expected to speed the balkanization of the global financial system based on the US dollar. The breaking of a lengthy precedent—that the financial system's plumbing should not be used to further geopolitical goals—heralds a new era of possible threats to the world financial system.
Rumors have already established that one of China's lifelong geopolitical goals has been to ensure that they get to buy products in a currency that they can control. Recent developments are likely to act as a stark warning to China to step up its efforts in this area. In the months and years ahead, we anticipate witnessing the actual effects of that doubling, most certainly to the cost of the worldwide dollar system and the capital abundance it facilitated.
Given how Russia started the war, it's an inevitable conclusion that they'll end up with the worst-affected country. Even if Russia wins the fight on military strength, its economy and financial markets will be severely harmed.
The United States and Europe have slapped financial and economic sanctions on the country. They've chosen to keep some Russian banking institutions out of the SWIFT network. This decision will have ramifications for Russia's financial operations, foreign commerce, and the overall economy. The US and Europe have also indicated that sanctions will be imposed on the $600 billion in foreign reserves held by Russian central banks. It ensures that whenever Russia emerges from the war, whether as a victor or a loser, it will be cut off from the international financial market.
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Europe will not suffer significant direct losses because it is not directly involved in the conflict. The war's geopolitical consequences, on the other hand, will put their financial markets in a state of flux for some time. They also have strong economic relations with Russia, so the euro loses some significance. Furthermore, the sanctions imposed on Russian reserves will leave European banks heavily in debt to Russia's financial and corporate sectors.
China may be another country that benefits from this conflict. According to researchers, China's financial and domestic markets will soon welcome additional incremental international money due to international uncertainty. However, it is still debatable whether China would be able to preserve stability in the face of the continued fighting.
Because the United States is still a long distance from the global crisis, it may not be as severely affected as Russia and Europe. After all, all of the money that has been taken out of Europe could end up in the United States, strengthening their capital and financial markets. However, the financial market will be harmed by rising inflation as the price of commodities such as oil continues to climb.
Oil and energy markets are two essential commodities that have reacted to the geopolitical crisis and war between Russia and Ukraine. The war has also significantly impacted oil and energy prices, as Russia is a significant pile exporter. Brent crude oil prices, for example, reached an all-time high of $130 per barrel before settling around $116 per barrel a few days ago. These shifting costs will impact a variety of things, from consumer gasoline prices to the company's cash flowers, resulting in significant inflation and, eventually, a recession.
The stock market, of course, will be impacted by the conflict. However, because different global markets have varied levels of exposure to particular commodities, the response has been much more complicated. These countries also have varying levels of exposure to the Russian stock market, which has been closed since the invasion and accompanying market and rouble decline.
According to numerous study data, European countries are far more interconnected to the Russian stock market than other countries. That is why, following the invasion, their situation and posture have grown much more vulnerable.
The United Kingdom, Germany, and France, for example, have a 0.47, 0.42, and 0.45 correlation with Russia, respectively. As a result, these countries are more intertwined with Russia, resulting in the increased significance of their vulnerability. On the other hand, the USA and China have much less correlation with the Russian market, keeping their conditions more stable for the time being.