“Tanks are harbingers of financial chaos as well as physical destruction,” Lex said in the FT. Russia knows this well – the first Chechen war drained the state coffers so much that it “accelerated the 1998 Russian financial crisis”. This time, their actions in Ukraine have resulted in a sanctions package that is nothing short of a “declaration of economic war.”
That question now is how far the ripples will spread beyond Russia to a fragile global financial system whose government balance sheets are still indebted from the pandemic. No one knows how events will unfold, but war and sanctions will certainly hamper economic growth and fuel already high inflation.
There is also scope for Russia’s financial crisis — and the sanctions-induced disruption in trade in key commodities — “to amplify other shocks,” particularly in vulnerable emerging markets. “The most subtle threat is dislocations we cannot anticipate: Lehman moments where panic spreads and markets freeze.”
The most threatening sign so far is the collapse of the ruble, said John Stepek MoneyWeek.com – which has “made it a lot more difficult to value Russian assets”. This reminds some of the days leading up to the collapse of Lehman Brothers in 2008, when “suddenly no one knew what a large pool of assets scattered across the financial system was worth.”
The difference here is that exposure to Russia has been reduced, making a systemic collapse seem unlikely. But “plumbing” issues are certainly a concern. “You can’t rip a country” the size of Russia “out of the global payments network without missing some payments and making things messy.”
There has been some “self-adulation that Western banks’ exposure to Russia is limited,” Alex Brummer said in the Daily Mail. But in a financial world where non-bank operators like hedge funds and private equity are “big players,” it’s “quite difficult to know where the risk is.” As we learned in 2008, it only takes the fall of one institution to set off a chain reaction. Credit Suisse’s Michael Strobaek believes this is “the beginning of a new world order,” he said The Observer – where there is higher inflation and financial volatility.
The global monetary system could also change, Ben Wright said in The Daily Telegraph. “Going after Russia’s central bank and banning its lenders from dollar clearing” could “speed up cryptocurrency adoption by rogue states” — with potentially terrifying consequences.
Banning Russia will also accelerate the ongoing globalization retreat, Oliver Shah said in The Sunday Times. “Protectionism is the order of the day.” For families, that means more inflation; increasing risks for companies. “Frontier capitalism” has rarely looked so dangerous.
https://www.theweek.co.uk/news/world-news/russia/955976/what-is-the-impact-of-economic-war What are the effects of the economic war?