The United States and its allies are increasing sanctions against Moscow in response to Vladimir Putin’s decision to wage war on Ukraine, highlighting the countries most commercially and financially exposed to the Russian economy.
Monday certainly marked a day of shock and awe in terms of the financial markets’ response to the sanctions. the Russian ruble USDRUB,
plunged to a record low and authorities decided to shut down the country’s stock market for at least two days after the United States and its allies decided over the weekend to remove more Russian banks from the Swift interbank messaging system , but with exemptions for energy transactions, and aimed at the Russian central bank’s ability to tap into huge foreign exchange reserves that it could otherwise use to defend its currency.
The moves sent ripples through global financial markets, with US stocks posting a mixed finish after a volatile trading day. The Dow Jones Industrial Average DJIA,
ended the day with a loss of 166.15 points, or 0.5%, while the S&P 500 SPX,
fell slightly by 0.2%.
“The entire Russian economy could be crippled if the country’s businesses are unable to make and receive payments from foreigners,” wrote Wells Fargo economists Jay H. Bryson and Nicole Cervi. , in a Monday note.
But countries that have significant economic and financial exposure to the Russian economy could also suffer if Russia falls into a sharp economic contraction, they warned. In the charts below, they detailed the country with the largest trade exposure to Russia in terms of total dollars (left) and as a percentage of gross domestic product (right):
It’s the graph on the right that shows where the pain would likely be felt the most, and they’re mostly made up of former Soviet republics, with bilateral trade between Russia and Belarus topping the list at 50% of Belarusian GDP in 2019. Since much of this trade is likely to be in oil and gas, any move that ultimately targets Russia’s energy exports, which have so far been spared, could have big ramifications for Belarus and d other major trading partners, the economists said.
They noted, however, that bilateral trade between Ukraine and Russia amounted to only $10 billion in 2019, barely 7% of Ukraine’s GDP. In comparison, bilateral trade between Ukraine and the European Union amounted to nearly $45 billion, equivalent to about 29% of Ukraine’s GDP.
“This intensification of trade ties between Ukraine and the West took years to prepare. Immediately after the dissolution of the Soviet Union, the volume of bilateral trade between Ukraine and Russia was about three times greater than the volume of trade between Ukraine and the European Union,” the economists noted.
When it comes to financial exposure, Western Europe has the most worries, economists said.
Data from the Bank for International Settlements shows that the French and Italian banking systems each had about $23 billion in aggregate exposure to Russia at the end of Q3 2021 (left chart), meaning banks in France and Italy could suffer losses if their loans to Russian entities and households become nonperforming, they said.
The Austrian banking system ranks third with $17 billion in overall exposure, although this is significantly less than its French and Italian counterparts, but that $17 billion equates to around 1.5% of Austrian banking system assets. , making it the most financially exposed to Russia on a relative basis, economists said, while U.S. banks’ $15 billion exposure to Russia equates to less than 0.1% of the country’s assets. American banking system.
“Even if all of this exposure were to deteriorate, the entire US banking system would not be materially affected,” they said.