Western countries introduced a “nuclear weapon” in the money market, and this could lead to many consequences – Expert: “The crisis is unlikely to spread badly”

Queues at ATMs, escape deposits, recession, banking crisis, hyperinflation, high unemployment, emigration.

These are the consequences of economic sanctions on Russia in the West, mainly in the EU, the United States, Britain and Canada. Almost half of Russia’s foreign funds are spent in the financial systems of these countries.

When Russia’s foreign assets are frozen, the local central bank will have no means of stabilizing the economy and currency.

The turmoil in financial markets could also affect the global economy, experts estimate.

Professor at the U.S. Military Academy Rob Person compares, among many other things, the freezing of foreign funds by the Russian central bank to the “nuclear weapon” of the money market on Twitter.

– Russia has about $ 640 billion in foreign reserves, of which about 32 percent is in euros, 22 gold, 16 dollars and 13 (Chinese) yuan, Person writes.

Crippling an individual central bank is a sanction unique (switch to another service), and all its consequences are still difficult to predict. In any case, the sanctions will weaken the Russian authorities’ ability to support the ruble and help companies service their foreign currency debts when foreign funds cannot be used.

China and Switzerland may also join some of the sanctions. Swiss banks have billions (switch to another service) including money from the former Soviet security police, the KGB, which is under Putin’s control.

The escape of deposits could lead to Russian banks starting to collapse due to lack of funds. In the morning the ECB already anticipates (switch to another service) the European subsidiary of Russian Sberbank is likely to collapse.

Subsidiaries of other Russian banks are also under severe pressure. For example, the main strategy of the Swiss credit bank Suisse Zoltan Pozsar compare (go to another service) the collapse of Lehman Brothers, which eventually led to the global financial crisis 13 years ago.

Finnish experts do not believe in the same consequences. Russian banks are not big enough to pose risks to the global financial system.

Nordea’s chief analyst Jan von Gerichin thinks talk of a financial crisis or economic collapse is premature.

– It is quite clear that the counter-ball will come and the confidence shock will come and higher energy prices will vaccinate the growth, but how big the effects will be will only be shown by time, he says.

According to Von Gerich, “however, scenarios need to be made, some of which are uglier than others.”

Also Danske Bank’s main strategy Kaisa Kivipelto emphasizes that, for the time being, the effects on the world economy will come primarily from raw material prices.

– The biggest threat is that rising oil and gas prices will affect inflation, forcing central banks to act even more sharply than expected. Uncertainty can also lead to a slowdown in economic growth.

The worst threat is that central banks would have to raise interest rates because of inflation, but economic growth would slow down at the same time. It could be followed by a very toxic state of the economy, or stagflation.

Stagflation means a combination of at the same time a recession, rapidly rising prices and high unemployment.

– This is a threat picture, but we do not see it materializing in any significant way, Kivipelto says.

The European Central Bank is requested (go to another service) Banks operating in Russia report on the risks to them of excluding Russia from the international financial system.

The vaults of Italy’s second largest bank, Unicredit, France’s largest Société Générale and Austria’s second largest Reiffeisen, account for almost 4% of the assets of the Russian banking system. The Dutch ING also has large receivables in Russia.

The market value of these banks is depleted (switch to another service) last days. For example, Société Générale’s share price has fallen by 28% since the beginning of February.

However, Finnish banks do not believe that the banking crisis could spread from Russia to Europe and the rest of the world.

– I would not overemphasize Russia’s influence in the international financial system. Of course, there will be losses for individual companies and it is conceivable that the economy will suffer to a greater extent to some extent, but the Russian system is by no means central and does not threaten financial stability, Nordea von Gerich assures.

Western countries are also blocking Russian banks from accessing the SWIFT payment messaging system, stopping the country’s foreign trade.

The list of banks to be boycotted has not yet been published. If Gazprombank, for example, is found there, the blockade will reduce oil and gas supplies to Europe. Gazprombank handles a large part of Russia’s energy trade.

So far, however, Western countries have not imposed sanctions on Russia’s energy trade. It would not only be one of the strongest means of punishment, it would also strike your own ankle.

SWIFT is a global information network through which payment orders flow from one bank to another. It enables billions of dollars in international payments.

When Russian lenders are excluded from the SWIFT system, it will result in Western companies not receiving many payments. This also hits many Finnish companies.

There are also signs in Europe that the supply chain is being affected by the conflict. German carmaker Volkswagen, for example, has run two car factories idle (switch to another service) until the end of last week, when it has not received the electrical cables it needs from Ukraine.

The impact of the war on supply chains is so far relatively small. If Russia continues to attack Western Europe’s gas infrastructure, it could push up prices and increase inflationary pressures in the EU as well.

In this respect, the European Central Bank’s monetary policy is based on the imminent removal of transport bottlenecks caused by the corona pandemic.

As investors sought refuge, they rushed to buy dollars as well as bonds of stable European governments. For example, interest rates on Finnish government debt have fallen since the beginning of the crisis.

Chancellor Olaf Scholz told Parliament that Germany would use one hundred billion (switch to another service) more for defense this year. It accounts for 3% of the country’s GDP.

From 2024, Germany plans to spend at least 2% of its GDP on defense. The reform of economic rules in the EU is under way, and a change of direction in Germany could pave the way for looser fiscal policies by eurozone governments.

Sanctions have already provoked retaliation from Russia. It announced on Monday that it would close its airspace to airlines from a total of 36 countries. Finland is also on the list.

However, the biggest risk comes from Russia’s threats to use nuclear weapons.

– The nuclear weapons card has been brought to the table, and if it becomes a risk that the market begins to seriously fear that there will be a nuclear war, then the effects would be greater, von Gerich says.

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