Insight

The West has exercised much harsher economic sanctions on Russia

The West has exercised much harsher economic sanctions on Russia

The “fog of war” has quickly dissipated only to devolve into an all-out military confrontation and a fast-brewing economic war. There have been a couple of developments over the weekend that point to this conflict lasting longer than many anticipate, though still no clear signal on whether Russia plans to cut energy exports to the EU.

Firstly, the Russian army’s encroachment into Ukraine’s two largest cities has been delayed due to surprisingly strong local defenses.

Secondly, the West has exercised much harsher economic sanctions by cutting a few Russian banks from the Swift payment system and impeding the Russian Central Bank from exchanging its foreign currency.

This upgraded sanctions package now has some teeth and could cause monetary conditions to further tighten in Russia. Western allies have been careful to not ban all Russian financial entities from the Swift system since Europe still relies disproportionately on Russian energy supplies.

Potential Impacts

As the Russian Ruble continues to face downward pressure due to sanctions on the Russian Central Bank’s foreign exchange, this could lead to a further erosion of domestic consumer confidence and investment sentiment for Russian assets.

Unless Russian authorities completely cut-off energy supplies to Europe, I think that there will continue to be Russian banks that can still access the global banking system. Russia is China’s second largest energy supplier and could become increasingly more important.

Over time, confidence could be eroded in the USD as a form of global payments and stable store of wealth and could strengthen the internationalization of the RMB.

Many EU countries have already pledged to support Ukraine both financially or with defense equipment and further financial penalties are on the horizon.

It’s becoming clear that Ukrainians and many Western countries are not going to allow the country to fall into Russian hands without a serious military and economic fight.

Sustained local resistance fueled by Western encouragement coupled with tit-for-tat economic sanctions and counter-measures such as a possible interruption in energy supply, could lead to a drawn-out proxy war with serious stagflation-like consequences. 

The APAC perspective

From an APAC perspective, I think there are two main concerns: the economic impact from a high oil prices and the possible sap in global demand for Asian exports due to stagflation risks in major economies. Still, I’m optimistic that most Asian countries can withstand these shocks – even as many countries in the region are net importers of oil.

Consumer inflation around the region remains within normal boundaries though producer price inflation is of moderate concern in places like China.

From a historical basis, the price of crude has had negligible impact on the economic growth trajectory, local currencies, and risk assets for the region.

I’m more worried about the potential energy supply shocks that could lead to stagflation risks in Developed Markets that saps consumer sentiment for Asian goods.  

In the near-term, markets will continue to gyrate and I think there could be a continued risk-off sentiment, as investors look to safe-haven assets such as the USD, JPY, large-cap equities, gold and alternatives such as energy and real estate.

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