The Reason Behind Global Financial Crisis

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  • Apart from banks, the war is going to lead to substantial losses for many businesses with interests in Russia.
  • Many of these debts will potentially end up being written off, causing serious losses.
  • Its Russian assets are worth over £450 million.

The Russian assault on Kyiv and other Ukrainian cities has heightened global economic concern as reported by The Conversation

New sanctions 

To condemn Putin’s war, western leaders announced some restrictive economic measures to target Russian financial institutions and individuals.

The sanctions include: removing some Russian banks from the Swift messaging system for international payments; freezing the assets of Russian companies and oligarchs in western countries; and restricting the Russian central bank from using its US$630 billion (£473 billion) of foreign reserves to undermine the sanctions.

In response to these moves, several rating agencies have either cut Russia’s credit rating to junk status or signalled that they may do so soon.

In other words, they think the prospect of Russia defaulting on its debts is higher than before.

According to a group of global banks, a default is “extremely likely”.

The threat to banks

With over US$100 billion of Russian debt in foreign banks, this raises questions about the risks to banks outside Russia – and the potential for a default to kick off a 2008-style liquidity crisis, where banks panic about the state of other banks’ solvency and stop lending to one another.

Figures from the Bank for International Settlements (BIS) show that France and Italy’s banks each have outstanding claims of about US$25 billion on Russian debt, while Austrian banks had US$17.5 billion.

According to rating agency Fitch, the French banks BNP Paribas and Credit Agricole are the most exposed to Ukraine because of their local subsidiaries in the country.

In additional bad news for European banks, there has been a sharp rise in the cost of raising US dollar funding in the euro swaps market.

Banks will also probably be affected in other ways.

Cyprus also attracts Russian wealth with golden passports.

Beyond banks

Apart from banks, the war is going to lead to substantial losses for many businesses with interests in Russia.

For example, Reuters has reported that US companies have about US$15 billion of exposure to Russia.

Many of these debts will potentially end up being written off, causing serious losses.

Some oil companies like Shell and BP have said they are going to offload assets that they own in Russia.

But if the value of these assets evaporates because there are no buyers at sensible prices, companies like these could be looking at substantial write-downs.

Pension funds

Pension funds are also in the firing line.

For example, the Universities Superannuation Scheme (USS) team wants to sell its Russian assets.

Its Russian assets are worth over £450 million.

The decline in the value of these toxic assets is potentially going to be a nasty hit.

Russia’s invasion of Ukraine has intensified this situation, and finance will be on high alert to see how things unfold.

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Source: The Conversation

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