European banks are the most exposed financial institutions to Russia's new sanctions, specifically those in Austria, France and Italy.
The Russian attack on Kyiv and other Ukrainian cities has heightened global economic concern. Western governments announced punitive sanctions against Russian financial institutions and people in response to Putin's war.
The sanctions include removing some Russian banks from the Swift messaging system for international payments, freezing Russian companies' and oligarchs' assets in Western countries, and prohibiting the Russian central bank from using its $630 billion (£473 billion) in foreign reserves to circumvent the sanctions.
As a result of these actions, numerous credit rating organisations have either downgraded Russia's credit rating to junk status or have indicated that they may do so shortly. In other words, they believe the risk of Russia defaulting on its loans is greater than it was previously. A default is "highly likely," according to a consortium of international banks.
With over $100 billion of Russian debt held by foreign banks, concerns have been raised about the risks to banks outside of Russia – and the potential for a default to trigger a liquidity crisis akin to the one that occurred in 2008, when banks became concerned about the solvency of other banks and stopped lending to one another.
European banks, particularly those in Austria, France, and Italy, are the most vulnerable to Russia's new sanctions. Figures from the Bank 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.
European banks, particularly those in Austria, France, and Italy, are the most vulnerable to Russia's latest sanctions. According to data from the Bank for International Settlements (BIS), French and Italian banks each have roughly $25 billion in outstanding claims on Russian debt, while Austrian banks have $17.5 billion.
Since the Crimea sanctions in 2014, US banks have been reducing their exposure to the Russian economy. Nonetheless, Citigroup has a US$10 billion exposure, despite the fact that this is a minor percentage of the bank's US$2.3 trillion in assets.
There is also the question of exposure to a potential default by Ukraine on its debts. Ukraine's circa US$60 billion of bond debt has also been downgraded to junk status, raising the risk of a default from a weak probability to a real danger.
Aside from debt exposure, several banks would be impacted because they provide financial services in Ukraine or Russia. Because of their local operations in Ukraine, French banks BNP Paribas and Credit Agricole, according to ratings agency Fitch, are the most vulnerable to Ukraine. The European banks with the greatest operations in Russia are Société Générale and UniCredit, which are also among the most vulnerable to Russian loans.
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 use this market to raise the dollars that are essential for most international trade, so higher rates will put additional pressure on their margins.
So, how substantial are default risks to banks as a whole? Morning Star, a US financial research firm, feels that European banks' exposure to Russia, much alone US banks', is "insignificant" un terms of their solvency. Regardless, it has Banks will very certainly be impacted in other ways as well. Switzerland, Cyprus, and the United Kingdom, for example, are the most popular locations for Russian billionaires looking to deposit their money abroad. With golden passports, Cyprus also draws Russian money. Because of the sanctions, all of these nations' financial institutions are expected to lose business. For example, since the invasion began, the stock values of UK banks Lloyds and NatWest have both fallen by more than 10%.
Aside from banks, the conflict will result in significant losses for numerous firms with ties to Russia. Given that the Rouble is down 30% and the Swift limitations will make transfers extremely difficult, any company owed money by Russian enterprises will have a tough time being reimbursed. According to Reuters, US corporations are exposed to Russia to the tune of $15 billion. Many of these debts will most likely be cancelled off.
Some oil companies like Shell and BP have said they are going to offload assets that they own in Russia. Others such as trading and mining group Glencore, which has significant stakes in two Russia-linked companies, Rosneft and En+ Group, has said it has put them under review. 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.
One risk is that this triggers a panic sell-off in these firms' shares, causing a market-wide domino effect akin to what happened with banks in 2007-08.
Pension funds are also under attack. The Universities Superannuation Scheme (USS) team, for example, is looking to sell its Russian holdings. With around 500,000 pension clients and £90 billion in assets, the USS is the UK's largest independent pension system. It has around £450 million in Russian assets. The deterioration in the value of these hazardous assets might be devastating. Many investment funds, in general, have money invested in Russian sovereign debt as well as Russian firm stock. They, too, may be facing significant losses.
In summary, the war's repercussions might be vast, and many more will almost certainly emerge in the coming days and weeks. The markets have been extremely volatile as the global economy continues to recover from the epidemic while also dealing with significant inflation. The invasion of Ukraine by Russia has exacerbated the situation, and financial markets will be on high watch to observe how things play out.