The world has gone from soft sanctions on Russia to a SWIFT cut-off in a day, and that’s a worry for the world and markets
War has consequences. And when the war gets bigger, the consequences swell. That's exactly what has happened in Ukraine. The soft sanctions against Russia have suddenly shifted to a harsh action of cutting it off from the global financial system. What changed?
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Ukraine's president Volodymr Zelenskyy, who has been a smart user of social media in politics, decided that the war with Russia needed to be fought on the worldwide web, not in the trenches. And that seems to have worked. Photos and videos of Russia's brutal invasion swamped the internet, building a groundswell of support across the world for Ukraine and against the Russian incursion. Zelenskyy, a former actor, too played his part of a hero of a wronged nation to perfection. People took to the streets in many cities across the world in nations like Georgia, and even in Moscow—despite the threat of arrest and more.
People pressure seems to have spurred the western powers to act. More support in terms of arms and ammunition and other resources started flowing in, but that wasn't enough. The US too couldn't be a bystander any longer. Joe Biden had to act to avoid being seen as weak and pussy footing around Russia. The action finally came in the form of cutting-off Russia from the international financial transaction system SWIFT which is used by about 11,000 banks across the world for money transfers. This will mean Russia can's pay or receive funds for trade and services. This can cause forex volatility, the outflow of capital and disrupt trade arrangements. The only choice now is an alternate payment system, which won’t be an easy shift suggest experts.
There can also be bilateral arrangements, more likely with select nations like China, India, and UAE that abstained from voting in the UN Security Council meeting, to transact in Yuan, Rupees, and Dirhams.
Whatever be the final shape of things to come, there will be an impact on trade. And the impact is likely to be more in the commodity markets where Russia has a higher share of global trade like oil & gas, palladium, aluminium, nickel, wheat, barley, and sunflower oil. And these can stoke inflation in the short-term, and maybe even medium-term as some fear a resolution now might take longer.
A NEW TRADE ORDER
I'm no geopolitical expert and my views are based purely on observations, inferences, and logical interpretations. The current Ukraine situation seems to have put India in a spot of diplomatic bother. It would like to retain its good equation with the West without compromising its relationship with Russia. Here it is important to appreciate that we have a belligerent China at our borders, with growing influence in Pakistan and Sri Lanka, and the only counterforce in the region is a long-term military ally, Russia. So India can scarce afford to let its ally go.
On trade as well, India has been settling bilateral trade in Rupees so, exclusion from SWIFT may not have a significant impact. Even China will likely be more than happy to oblige with transactions settled in Yuan. But what does Russia import from and export? Its key exports are oil & gas and petro products, besides wheat. On the import side, it is telecom gear, medicines, aircraft products, automobiles, and parts. And China is its biggest trade partner, with Germany, Netherlands, and Belarus being other significant partners.
Exclusion from SWIFT can hurt where the earlier sanctions didn’t, energy supply to Europe. S&P Global Platts in a report suggests there might be an impact even if not directly targeted.
"Although the details have not yet been released, it appears to be narrowly targeted and thus should not directly affect Russian commodity exports," Rick Joswick, Head of Global Oil Analytics at S&P Global Platts Analytics said.
"However, it will likely make many buyers more hesitant to purchase Russian oil. That will tend to drive down the price of Russian crude oil even more until it ultimately clears outside of its traditional markets in Europe," he said, noting that Urals were already at record discounts to North Sea grades in prior days. "Another affect is that regular buyers of Russian oil, primarily in Europe, will seek non-Russian alternatives. That will tend to support the price of Brent crude and the broader market."
A disruption of energy supplies is what can hurt Europe, and that could have bigger economic implications than Russia alone being cut-off from the world. So, the SWIFT impact may be more pronounced than the earlier sanctions.
Can Russia find new buyers for its oil & gas? Can it import products it requires from China and India, instead of Europe? Those remain the big questions, and a shift in trade can have lasting implications.
THE MARKETS HAVE MORE TO WORRY
The euphoria of Friday can fade swiftly with the sharp turn of events, with the soft sanctions imposed earlier making way for harsher measures. And that can lead to significant volatility across equity, commodity, forex, debt and crypto markets.
And while there is likely to be some disruption for sure, the economic impact on Europe and its repercussions for the global economy will need to be weighed. This could lead to economists and central bankers becoming less optimistic about growth even as they need to curtail the short-term inflationary pressures. The result can well be a significant shift in the rate action by the US Federal Reserve, which will have implications for the markets.
On the other hand, the uncertainty can drive money out of risk assets into safe havens, and that could be a negative for riskier emerging markets. In India's case, the not-so-inspiring performance in the third quarter, which barring a few sectors, had demand slowdown and margin pressure written across it could be another worry.
In light of the above moving parts, it might be prudent for equity investors not to over-extend themselves in this market, but wait for clarity and stability to emerge.
War is not good for anyone, and we hope it ends soon. The loss of lives is uncalled for in this century, when we are talking of settlements on Mars and life in the Metaverse. We can only pray for better sense to prevail, but till it does, keep your money safe.
(Edited by : Jomy Jos Pullokaran)