Your weekly economic update from the team at FXD Capital
The escalation of events in Ukraine resulted in an eventful week for global financial markets.
From the perspective of Russia, the country is potentially in an economic death spiral. With western sanctions in place, the currency and stock markets are in a state of collapse. The situation is further exacerbated by western companies pulling their offers, ranging from consumer goods to electronic services. The results on one side demonstrate that sanctions can be brutally effective, but on the other, they illustrate the effect of how integrated the global economy is now.
Take the case of the air industry. At first glance, one would assume, “well, Russia produces oil so its planes can fly”, but that’s quickly confounded when you factor in the nuance:
- Planes are generally leased, with the Republic of Ireland being a popular jurisdiction base. With sanctions in place, lessors can seek to recall their assets.
- The manufacturer handles plane servicing; with Boeing and Airbus restricted from doing business in Russia, planes may end up grounded or impaired from invalid servicing.
There is a potential risk of bank runs in financial markets, with SWIFT sanctions effectively locking Russian banks out of capital markets. For now, the effect seems to be limited; with several Sberbank operations declaring insolvency in central Europe, the subsidiaries were quickly snapped up by local banks, quickly averting an Icesave-type situation from occurring. What comes next is whether Russia defaults on its sovereign debt, either through physically being incapable due to economic sanctions or through necessity. There may also be further contagion to countries in Latin America and Africa who are extended credit by Russia for projects or political goodwill.
For everyday Russians, the situation is the kind of nightmare that sits very far back in the mind of everyone in the digital world we live in. While generations ago, our wealth would have a sizable portion in liquid tangible assets, either a diamond stuffed under a mattress, or a cow out the back, now we are accountable to a global system beyond our control. Money in a bank can be devalued by currency prices or even seized by the state. Credit cards can stop working, and app stores closed down on a whim. While this is no attempt at a long preamble ending with a positive affirmation of holding cryptocurrency, it’s more a candid thought that things can change quickly. Unless you’re on the beach of a Pacific Island with a pile of gold, there is always going to be that chance of armageddon.
In countries that aren’t Russia, the financial impacts taking place are commodity prices continuing their surge. The delicate trade-off for Russia is that it desperately needs to keep selling its natural resources, as for the foreseeable future, it’s their only source of hard currency. Opportunistic nations, like Pakistan and India, are demonstrating a willingness to continue trade. In the west, some traders and buyers are actively seeking to avoid purchasing Russian wares, either for moralistic or reputation-based convictions.
Markets are responding in a schizophrenic way. There is a higher chance of nuclear interventions, which are the kind of events that are doomsday-type scenarios. Yet there have been pockets of “enthusiasm”, in that the events will signal a delaying of tapering programmes and the reversion to stimuli to prop up beleaguered household wallets and whipsawed businesses still coming to terms with the end of two years of Covid purgatory.
The area to look at now is whether the EU and the US fall out of lockstep with monetary policy moves. One month ago, everywhere seemed to be on the path of increasing rates and trying not to cool off economic growth in the process. Now, the EU is likely to forgo such moves due to the effect of potentially 1 million refugees and massive generational spending projects put in place within a matter of days (see Germany’s about-turn on Nord Stream 2). Yet, the US is largely shielded both physically and financially from recent events; it has a substantial degree of energy self-sufficiency and is unlikely to participate in any military activities in Europe. So will the US continue on its path of tapering and rate increases? What will happen if the US, eurozone and (potentially, the UK) directions diverge?
All the best for the week ahead
Alex
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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