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“Russian-Ukraine war will trigger transformational changes in finance industry”

Ukraine’s ambassador Kateryna Zelenko in a conversation with The Asian Banker’s Emmanuel Daniel and Mathew Welch warned that a protracted Russia-Ukraine war will have serious ramifications for the entire world against Russia’s threat to restrict access to and escalate prices of agricultural and energy exports. She urged the global financial services community to contribute to stopping the war.

About The Asian Banker RadioFinance

The Asian Banker RadioFinance aims to enhance understanding of the finance industry globally by bringing together thought leaders, industry experts, practitioners and futurists to examine current, critical issues through a discussion facilitated by visual and web-based platforms. Through the use of interactive technology, participants do not have to take time out from their crowded schedules or leave the comfort of their own desks.

Below is the edited transcript:

Emmanuel Daniel (ED): Hello everybody and welcome to this briefing and dialogue on the impact of the Russian war on Ukraine, on the financial services industry worldwide. I'm very happy to be joined with my colleague and friend, Mathew Welch, who is a seasoned banker with tremendous experience in in the transaction banking and capital markets parts of the industry. He will be helping provide some deeper insights so that we are technically correct in what we are saying in this analysis. And also insightful in terms of how the financial services industry will be dealing with this crisis and some of the practical issues that will be affecting the industry.

Please let me start with the table of contents. We will be going through payments, supply chain, financial markets, private banking, the dollar, cryptocurrencies, ESG (environmental, social and governance), and a general discussion on geopolitics. It is a lot of ground between the two of us. We should both say is how tragic this crisis is. Wars are always a horrible thing. There are pictures of these types of total devastation in previous wars in Libya, in Syria, in Afghanistan, the 2003 attack on Iraq, in Baghdad, we have seen pictures like this, and we should have felt bad already at that time. But this time, it comes to us graphically. There are journalists on the ground, covering the crisis. We should take a moment to share the sorrow of the people who are suffering. There's nothing that can describe the suffering that is taking place today. Let's have that at the back of our mind as we go through this discussion.  We are very grateful to have the the Ukrainian ambassador to Singapore, Kateryna Zelenko, to say a few words.

Conversation with Ukraine’s ambassador Kateryna Zelenko

ED: Thank you very much ambassador Zelenko for joining us this morning. What is your most important key message to the financial services industry?

Ambassador Kateryna Zelenko (AKZ): The most important message is that we are now dealing with the full-fledged war in the very heart of Europe, and every community, including financial services can contribute to finding a peaceful solution and to stopping this senseless war. We are not only speaking about the huge plight of the people on the ground in Ukraine, of many deaths and destructions, but we're also speaking about the future of the business community which needs a predictable and secure environment to strike deals, to move forward, and to make this planet a safer place to be.

ED: Of all the sanctions that have been done so far and all of the measures being taken in the financial industry. Do you think that it's enough? There are two sides to the response of the finance industry, one is to stop the aggressor and the other is to help the defence of Ukraine. So, what do you think is missing? What do you think needs to be done?

AKZ: To begin with, we are grateful to the international community for the sanctions hitting Russia's financial, energy and transport sectors. And, of course, we can see that more than 400 companies have already left Russian market. However, as we can see, these sanctions imposed are not sufficient enough to stop further bloodshed. That is why active measures have to be taken in order to achieve more progress on that. We see that only seven out of the top 50 Russian banks have been disengaged from SWIFT. We see that a large number of international companies keep working in Russia, paying taxes, it means that they keep funding this terrible military machine. And if we look at the structure of the Russian budget, we can see that every third rouble paid in taxes to Russia turn into funding the country's military budget, it means new deaths, new destructions in Ukraine. And of course, a big issue here is oil and natural gas exports, which make up about 45% of the revenues of the Russian federal budget. We believe that imposing an immediate ban on Russian oil and other energy imports may stop Russia, we see that there are many meetings and summits going on in Europe these days. And we're hopeful that more and more countries will be willing to contribute to the peaceful solution and to stopping Russia's aggression by banning energy imports from the aggressor country.

Mathew Welch (MW): Do you feel that it is a reasonable expectation that the EU might actually join a ban on buying oil and gas from Russia?

AKZ: If you look at the numbers, almost half of revenues come from gas and oil business. It will definitely impact Russia's activities towards strengthening its military capabilities. That is why, we of course see that, it's going to be a very painful decision. But I think every country thinking about the future, thinking about a more secure environment for its businesses and people will be willing, it will be ready to suffer the short-term pain for the long-term gain.

AKZ: But I think this financial pain is nothing compared to the pain and losses we are suffering now, losing children. More than 150 children have already been killed in this war, and 1000s of civilians have been killed, we have severe destruction of the critical and social infrastructure. So, these losses are irreparable, everyone needs to keep in mind.

ED: Do you see from your position, you are in Singapore, any leakages, any attempts by the financial industry, or the supply chain industries to get around sanctions?

AKZ: I think that the situation with many businesses across the globe has become quite unpredictable, because we do not know how long this crisis should endure. And of course, it is now clear to everyone that no one will be able to sit out this terrible war. We already see implications for many countries across the globe, as we need to keep in mind that Ukraine is one of the major exporters of essential food products globally. Think about these factors, we can, of course, come to a conclusion that it is crucial for every country, not only in Europe, but also in Asia, in the African countries, in the Middle East, to think about those hundreds of millions of people across the globe are now at risk of unstable access to food, malnutrition, and even famine. Russia threatened to provoke immense spike in prices, food prices, energy prices, which will be of course painful for the citizens. And that is why we cannot allow, to tolerate this war. And that's why it is so important for our partners to understand that we need to take joint measures in order to prevent this crisis. Besides, our country is also a big supplier of different raw materials, chemical products and machinery, it will mean impact for many industries across the globe. We of course see support by some countries also here in Asia, I think Singapore leads by example.

Because there is a clear understanding in Singapore that in the world where “might is right”, no nation can feel safe, and no business can feel safe. It means that we need more support from also other countries not only in terms of humanitarian aid, which is also which has been provided by the government of Singapore and by the people in Singapore who donate to the Red Cross. But it is also a matter of restrictive measures, which can show that if the country moves the goalposts, it will be punished because we all need to take care and protect the rule-based order in the international law. Every tenth loaf of bread is made of Ukrainian wheat.

The world has not yet recovered from the COVID pandemic. And now we have a more massive challenge, which again, threatens to disrupt the supply chains, which will be of course, felt on every corner of the globe.

ED: What's the position of the Ukrainian government on the support being given by other governments in the emerging markets? ASEAN as a whole, China, Japan, India and the Middle East?

AKZ: Yes, we are grateful to our partners in the countries of Asia Pacific who already imposed sanctions against Russia. So, along with Singapore are Japan, South Korea, Australia and New Zealand. We also got support in terms of humanitarian aid and financial support from many of these countries, military support as well, which is crucial to Ukraine to strengthen its military capacities as we are dealing with a powerful enemy. Of course, we need, there is much more which can be done. We have seen that there have been also two statements made by the foreign ministers of the ASEAN countries. And most of the ASEAN countries have also voted in favour of the UN General Assembly resolutions about Russian aggression against Ukraine, with this new wave of full-scale invasion, and the second resolution was passed yesterday on the humanitarian situation in Ukraine. So, there are many ways to support Ukraine. The main thing is that there is of course, the goodwill, people to contribute to finding a peaceful solution, because we see that if we do not reach the sustainable ceasefire, and if you do not achieve the withdrawal of troops, we cannot speak about sustainable peace, which means that the situation will endure for longer.

Russia and Ukraine macroeconomic overview 

ED: Thank you very much ambassador for your comments. Obviously the ambassador was somewhat diplomatic, because she's a diplomat, in terms of the amount of support she's been getting. But there are countries that have been reticent that she didn't mention them very much. Let's start by getting a mental picture of what we're dealing with in terms of the size of the respective economies. As you can see from this list of countries that we've cobbled together, Russia's GDP, which is $1.4 trillion, it's about the size of South Korea, Australia. Canada is slightly bigger than Russia. And if you look at some of the major economies, France is about twice the size of Russia, Germany is about thrice the size, two to three times larger than Russia. And India is also much larger than Russia.

MW: I think one of the interesting things here is that Russia plays this role as a superpower, but actually, its economy is about the same size as Australia. The reason is that the all the money in Russia, is taken by the Russian government, and disproportionately gets into military and all the rest of that. As an economy, it's about the same size as Australia or a bit smaller than South Korea.

ED: In fact, what you said just all the money's taken by the state, so state run economies tend to look larger than they are because there's a consolidation of the assets around the state. In the case of Russia around the oligarchs.

MW: Yes, if you look at the number of very rich billionaires out of Russia, you think it was a very rich country, but actually, it's just the billionaires have disproportionately large.

ED: And you're coming to that in a while, right. And then Ukraine is a sizable economy, much larger than many countries but quite interestingly, smaller than its neighbours. Like Poland, for example, it's much larger than Ukraine. Pakistan is much larger than Ukraine.

MW: Ukraine is a $150 billion economy roughly, where Russia is a $1.5 trillion economy. So, the comparison between the two of them Russia, although we said Russia is only the size of Australia, but it's 10 times bigger than Ukraine. And Ukraine isn't a large economy in the world.

Composition of GDP sectors in Russia and Ukraine

ED: Yes, it's strategically important for food security for itself, as well as for a number of countries that are not even related to Ukraine.

And for the population of its size, it is a pretty decent and sustainable economy in that sense. Both economies are very strongly dependent on commodities. In the case of Russia, it's essentially a 73% fuels and mining economy, basically. And that's what gives Russia the confidence to be able to pursue this war in a way that it does, because it has many, client states which are dependent on it. And if you look at the major trading partners, the next slide, please. What's interesting is, both Russia and Ukraine have something in common. Both of them have China as their major, the most important trading partner on the import and the export side. On the export side China is the largest export market for Russia, and it takes about 15%. of Russian exports. For Ukraine, the export side 14% and 15% for Russia to China and 11% Ukraine to China.

Russia and Ukraine both have China and EU as major trading partners

MW: Although China is very important to Russia with 14.6%, 15% of its exports, but of course it doesn't work the other way around. Russia is really quite small for China's exports. China is big for Russia, but Russia is only 3% or 4% of the exports of China.

ED: That's correct. Strategically, Russia does not even feature in China's important and as an export destination, which will affect how China prioritises, to what extent it's going to be able to help Russia. So, everything that we are hearing about China being very helpful to Russia. It will cost China a lot if it loses that relationship with Europe and the US. It doesn't make sense to support Russia. Let's go on to the next slide. We listed the banks that are significantly exposed to Russia  at this point. There are three types of exposures that banks are exposed just through their lending book, there are banks are exposed on the capital. So, the capital is extensively affected, and then there are banks exposed on the trading book, derivatives and so on. So, the bank that is most affected on the lending book is UniCredit, which actually had to push the core capital ratio down to 13% from about 15%. So, that's where it hits some of the European banks.

Top banks around the world most affected by Russia

MW: I think the most exposed are Raiffeisen,  Société Générale and UniCredit. And I think the reason for that is that each of those three banks has actually had businesses within Russia. So that's where they've got quite a lot of balance sheet exposure, either directly or through subsidiary institutions and subsidiaries, Rosbank, for example.

ED: So, it's either their own wholly owned subsidiaries, or like in the case of Rosbank, subsidiary that they own. So, at the moment on the ground, the American bank with the largest exposure seems to be Citibank. Most of the other banks are sort of marginally exposed to Russia. The French banks are mostly loan books, basically. Yes.

MW: And I think the other thing to note is that where banks have large exposures in Russia, because their businesses in Russia, I guess it's Basel III. But under the new guidelines, they typically their funding and their lending were all within Russian borders, so that the cross-border exposure is a very different question, which is obviously why pushed in that direction of subsidiary banks having their own funding and capital within countries. So that actually doesn't impact the parent as much as it does.

ED: The sense I get is, from the time of the Crimean War, which is in 2014, the Russian regulators have been trying to force the foreign banks to be locally Incorporated. So actually, that reduces the risk to everybody.

MW: And Citi’s exposure is said to be about $9.8 billion, mostly because it's the one American bank that is locally incorporated. And it's been trying to sell its retail franchise for the last year. And I guess this is not a time to sell anything. And so that's the exposure that Citi has. JP Morgan and Goldman Sachs have been sort of circumspect in the way they've been describing their Russian exposure. Goldman Sachs flagged credit exposure of $650 million, and JP Morgan says it's got 160 staff so not very clear. In terms of quite minor exposures, you would almost think surprisingly, small exposures.

Only seven Russian banks face ban from SWIFT

ED: And I guess the American banks tend to do much better in dollar clearing, so they don't really need to get on the ground, unless you're Citibank. Okay, now, let's go to the next slide, payments, the impact on SWIFT member institutions, because of the coverage that you get in the general newspapers, you might imagine that, that the US or the EU has a direct bearing on how SWIFT works and they influence SWIFT directly, they do influence with. But there's a technical process in which it works that we need to be very clear about when we deal with payments. So, the first thing I want to say the banks that have been sanctioned, or rather have had their accounts frozen. there are seven banks that have been flagged and six of them are actually very minor banks, Promsvyazbank, Novikombank, Rossiya Bank, Sovcombank,  Bank Otkritie, VEB, these are very small players, the only bank in that list, which is of some significance is VTB Bank, which has about 30% of the assets of the total assets of the banking sector in Russia. And Russia has got about 333 banks, the two banks that we need to flag and watch very clearly which are not being not being sanctioned or not being, frozen on the SWIFT account, are Sberbank and Gazprombank.

Two most important Russian banks are not disconnected from SWIFT 

MW: Sberbank is something like 30% of the deposit and asset base and VTB Bank, I think is another 20. Together, they're 50%. So they got one bank, but not the other. There are 330 banks in Russia. There's a large number of small banks. So, the different things that two banks that were not impacted by SWIFT, but a very influential Sberbank, which is sort of the equivalent of the savings bank, everybody had an account, like DBS and Singapore, and Gazprombank. And of course, the reason for that is Gazprombank, Sberbank are the banks through which Europe pays its oil and gas, which has not been sanctioned.

ED: And although there is no SWIFT freezing of Sberbank, the US has not allowed US institutions for having any correspondent banking relationship with them, which means that Sberbank will not be able to do dollar clearing on any network that involves US bank on the other side of the deal.

MW: Correct. But the Europeans will still be able to pay for their own gas in euros for any currency, the dollars, and as long as it doesn't get cleared to the US, or a US counterparty?

Well, I think we've got to be careful, right? Because there's the SWIFT. Technically, I think it's not a sanction. It's just about being frozen out of SWIFT. But then there's a whole set of different sanctions, that's going to affect all the banks that we deal with. So, you've got G7 sanctions, you've got the US sanctions, which are expressed through OFAC and what you're talking about. You've got EU sanctions. And then you've also got other individual countries sanctions. So specifically, you've got UK sanctions, and we're sitting in Singapore. And unusually there're also Singapore sanctions. So, whether or not a bank is or is not frozen out of SWIFT, there's still a bewildering array of different sanctions that we as bankers have to think about to make sure that we don't do something wrong. It's a very complicated situation.

SWIFT ban on Russian banks not all-encompassing

ED: And from the last report from SWIFT, the Russian banks are still members of SWIFT. What they don't get to do is they don't get to use the messaging system, except that there are two other messaging systems which are available to the Russians their own system called SPFS, which is a system for transfer of financial messages run by the Russian central bank, and CIPS which is run by China. SPFS already accounts for 25% of money flows, for domestic banks in Russia. So, there are foreign participants in SPFS. So that's another way around the payments loophole that still functions basically, but that's only as good as the amount of liquidity that's available in that network. So if you're dealing with roubles.

MW: And I think the point that you were making earlier ED, which is a very important point, is that what the US Treasury did do was to ban it. Imposed so called CAPTA sanction on Sberbank. Sberbank is still active in SWIFT and fully blocked VTB. So, the US Treasury CAPTA so I have to read this rule learning about sanctions as we go. CAPTA is correspondent and payable-through account sanctions, CAPTA, so they did that for Sberbank. The US and they did a full blocking on VTB. So, what that means is that no US banks deal with Sberbank or VTB. So, to the extent that another bank around the world is sending payments in dollars that normally would go through the US can't be done.

What's also interesting about the payments sanctions that have been taking place so far, is that the announcements were made in the early part of March. But the sanctions and the blockage is Russia related directive from OFAC, which is to say the US sanctions, I think what to take effect beginning March 26, So they gave people a bit of time to figure out what they had to do in order to give effect to the sanctions.

ED: And so it was up to as many banks there are, as there are around the world to decide how they wanted to use this period to do to clear out any of the existing payments, instructions and so on, and not take on new ones. And there have been banks, which have sort of tried to profit from this whole relationship by looking out for loopholes in the system.

Russia and Ukraine have far-reaching impact on supply chains and trade on the rest of the world 

MW: What we're talking about here, principally at this point is payments, which remember, there are a bunch of other sanctions that we'll talk about later that aren't specifically payments related, but which might affect payments that somebody couldn't make a payment to sanction.

It bears saying none of us could really understand the implications of what's going on, both with the war itself, and the disruptions to supply chains. And the secondary effects of these various sanctions and countermeasures. I suspect will be extremely significant in all kinds of areas, and we can't even begin to know what they are. But I mean, sitting here in Singapore, our electricity bills are going up. And it's partly because of all of this. So, it reaches everywhere in the world. Some of the things that were talked about earlier by the Ukrainian ambassador in Singapore, Ambassador Zelenko is that Ukraine is a very significant producer of agricultural commodities, wheat, corn, sunflower oil, and soybeans. Russia is also so if you look at traded grains, Ukraine might be broadly 20% of world wheat traded wheat, Russia, it might be another 15%, since you put it together. And by the way, you might also include Belarus. ED, we didn't talk about Belarus, but that's also falling into this. So, the disruptions to supply are going to be absolutely huge. It's something like could be a third of traded wheat, for example. I think in terms of sunflower oil, Ukraine, I seem to recall is 47% of world production. And it's also extremely significant in funny things like honey. So agricultural commodity wise, extremely problematic. We can we can expect spikes in the prices of these food crops. Corn, of course, is mostly exported, and used as a pig feed in China. Wheat is used for bread as the ambassador said, so you'll get prices going up in in China and all the rest of that. Then there's a secondary impact on food production just while we're on the on the matter of food production, which is that food needs fertiliser. So, a lot of fertiliser comes from potash ammonia. Belarus is one of the significant producers of potash. Otherwise feedstock for fertilisers, natural gas and so on. So, fertiliser prices are likely to go up.

ED: And there in the US, everywhere. And the US being a major exporter of food will be affected.

MW: Farmers all over the world, they're either going to have to pay more for their fertiliser, or what's more likely in the developing markets, they'll use less fertiliser. And so there will be a huge secondary impact on a reduction in global production of grains and agricultural commodities, they lead to price rises. Now, last time this happened, we had the Arab Spring, because a lot of these grains that come out of the Black Sea, they go into the Mediterranean, they get also to Egypt as a huge importer of Ukrainian grain, and they've already got problems with their budget, because they have to subsidise the bread, Lebanon, Syria, all these countries. So you're going to see political disruption there. Additionally, there's neon gas, which is very largely produced by Ukraine for the world. And you need neon gas for the photo lithography when you're making computer chips. So there's going to be shortages of that. If you look at Russia, platinum, aluminium or aluminium, as we say, in Britain, nickel shortages, so prices are going to go up transport routes, we've got more and more people were sending trains from China to Europe. Well, they mostly went through Ukraine. So obviously war going on, it's going to stop. So, cost of transport is going to go up and there'll be further supply chain disruptions. And the airspace of Russia is very largely closed to other countries airlines, and Russian airlines aren't allowed to fly into I think the EU airspace at this point. If you look at the sort of flight tracker, there's this great big hole where Ukraine, Belarus, others, there's no planes. It's got slightly beyond supply chain. But there's 650 planes in Russia, which were listed in the sanctions. So we say sanctions go beyond payments mean that the leasing companies, which is largely based in Ireland have had to ask for their planes back. And naturally, Mr. Putin. So, what happens who pays for the 650 planes, you can't get them out, I think one flew out and was impounded. So, by the way, just on aviation, because obviously, it's a big part of it. Nowadays with the plane, you don't just buy a plane and operate it General Electric, or, or whoever Rolls Royce, continuously monitor and support the engines, so they won't be able to do that with the Russian planes. So, the knock-on impact on supply chains, in terms of transport infrastructure, but also in terms of commodities, agricultural commodities, metals, it could be huge. I mean, if the war ends tomorrow, maybe it all settles down. But if the war drags on, this could be very significant. Automobile production in Europe, they were making certain parts in Ukraine. Now they can't get those. So I'll stop there. But I say it's almost impossible at this point to work out how big it is. But it's probably bigger than people understand in terms of global disruption. So we're earlier you said Ukraine is just $150 billion economy sort of, I mean, we care about the people, but why do we care about the economics of it? And the answer to that is because it's very significant in certain commodities.

ED: The tail that wags the dog. In two years, if you get a crisis or a revolution in Egypt or Sudan, because of grain prices going up. If you see there's a backlash in the Midwest in the US is because the farmers cannot afford and…

MW: Sorry, I missed the biggest one of all, of course, which is oil and gas, because the huge impact is Russian oil and gas exports being stopped by sanctions and, and those exports from and through Ukraine. And as we know, Ukraine and Russia provide I think it's 30 to 40% of the gas in Europe, and a very significant portion of the petroleum products.

Markets: Commodity prices soar

ED: So we'll come to that when we talk about ESG. And meeting COP26, that also will have a huge impact, because they'll either be shortages and I saw in Austria, yesterday, they were already rationing diesel, or price increases, which feeds through into the price of everything. So, there's going to be inflation in Europe as a consequence of the supply chain disruptions from this Ukrainian war.

The knock-on effect of the supply chains are far more profound than we realise. And when you think of something as simple as the microchip, where Russia doesn't show up in any of the data on the production of microchip, Russia and Ukraine produce bits of the components that can slow down the entire process. So that's, that's how profound the impact is on our supply chain. Let's move on markets and commodity prices. The knock-on effect of supply chain has seen itself in the rise of commodity prices.

Markets: The LME saga exposed governance issues

And the way I see it, this entire war will have a profound effect on the future of the industry itself, the financial services industry, why, for example, when nickel prices shot up through the roof, there was one day where the London Metal Exchange (LME) had a blip. Profound rise that affected one of its participating members who's trying to short the market on that same day. It was a Chinese player. And what the LME did was to freeze all of the transactions for that day, and cancel them. And as a result, we never do on a commodity, and you never do that on anything on an exchange. And it raised a lot of issues related to the integrity of the London Metal Exchange, and is owned by the Hong Kong Exchange, and so on. And, and governance and so on. So you can see that the knock-on effect on financial institutions is profound already. And then the repercussions to reconstruct the trust integrity, and the new technologies that are coming through, to move us out of exchanges, will be justifiable going into the future. So I think that in terms of the effect on the future of the financial services industry, and some of the new platforms that will come through as a result of this war will be quite important to watch.

MW: We all know, but it's worth repeating, is supply chain crisis on top of a supply chain crisis, because we've really had the COVID supply chain crisis. And now we've got a new supply chain crisis on top of that.

Markets: Russia struggling to meet debt commitments 

ED: The sovereign debt crisis. Russia owes foreign creditors $62.5 billion, including $21.5 billion that requires repayment in dollars and euros. And there are a number of important payment dates coming through. The first of which was $117 million payment of US denominated debt that was due on the 23 March.

MW: I thought that one problem was a different one, which is interesting, and it shows how you can't quite predict how these things are going to work. I think Russia was trying to pay its fund. And the problem was when they send the dollars, the payment on the bond, the intermediary banks refuse to take them and then gradually trying to pay their entry. But now my understanding was that that one was actually paid. And so we'd past it, but it shows how it's sort of an unintended consequence of the other sanctions that Russia could be forced into default. And it's not a willingness to pay issue. It's in that case, they nearly couldn't pay because they couldn't transfer the dollars to the paying agent, that your point about roubles, I think is slightly different one where they were saying, I think Mr. Putin was saying that he wanted for payments of the gas that he's still supplied to Europe. And of course, this is a big elephant in the room. The EU, Europe is still buying a huge amount of Ukrainian gas. And they typically pay for it in euros. And the problem was that Mr. Putin said he wanted to be paid in roubles, which would have forced the European countries to go out and buy roubles, which would have supported the rouble. But they will basically, as I understand, it said “no” on the grounds that there are contracts, and the contract doesn't allow for paying in roubles, so they're going to continue to pay in euros. So that idea that he could make people pay for his gas in roubles, I think is true, but that also could almost have been default on the contract.

ED: The world's largest fund manager Blackrock had to write off $18.2 billion in Russian assets that it had at the beginning of this year.

MW: The Russian stock market is gone to nothing. On the UK exchange, they're not trading that global depository receipts (GDRs) any longer. And I presume the things are not being traded on the US exchange.

ED: The institutions and countries holding Russian reserves, UK, international institutions, and then the US, Germany, Japan, France, and China. You know all of them. But, of course, China being the largest holder of Russian reserves outside of Russia. So, that sort of gives you a profile of the spread of the Russian reserves around the world.

MW: China I think has about $3 trillion in reserves. Last time I looked, it might have gone up. And as you say Russia has $643 billion, I think as of 18th February. But this is also an extraordinary new development that nobody would have predicted, which is that the G7 basically frozen Russia's reserves. So, I think when Russia went into this business of invading Ukraine, surely they would have said, what's the worst that can happen, what will they to us? And probably some “yes men” told Mr. Putin, don't worry. But what actually has happened is that these reserves have been effectively frozen. Which is new. I mean, that could happen.

Reserves: Russia had $643.2b and 2,300t of gold in February

ED: What tools does the Bank of Russia have to stabilise the financial system? Now that we are actually on the topic of reserves?

MW: That's a very interesting question. And I think that when Russia invaded Ukraine, they obviously would have done a scenario analysis and said, what could happen? What sort of sanctions could we expect? Mr. Putin would have asked his generals or his analysts, can we sustain what they would do to us? But nobody ever thought because it hasn't really been done before, that the reserves of Russia would be frozen. So, we've got a breakdown, I think that we end up where the reserves of whether $640 billion and broadly I think it's 32% in euros 21% in dollars. I think it's about 16% in gold, and a bit less in Chinese renminbi (RMB).

If I understand it correctly, broadly, the dollars and the euros have been frozen. So when they launched this war, Mr. Putin expected that he had $650 billion of reserves. He could support the rouble. And then he finds it's effectively confiscated and that's new. The only part of it I think that he can easily use is the RMB which is sitting in China, which is a relatively small portion. And isn't internationally usable? And the gold and what has happened very recently as in yesterday, or it might even have been this morning. The gold has been well, you can't freeze gold, I suppose. But what the US has said, and I think the UK has said is you may not trade with the EU that they're cutting the Russian counterparties out of the London Metal Exchange and out of the US exchanges. So basically, you can't sell your gold, which is precisely because he had the dollars, his euros frozen. But he's got his RMB, his gold, and now they're freezing the RMB and the gold. So the question of how can they stabilise the situation? It's extraordinarily difficult, and which is why the rouble has gone down 30% I mean, it moves around a lot. And obviously, to the extent that people in Russia are using imports, the price of those imports, so people are talking about 20% inflation in Russia, so quite feasible.

ED: So logically, the tools that they have, one is to try and get around payments as much as possible. Second is the currency where the reserves can't, so the currency goes down.

MW: So, what they have done is they've increased interest rates, it's gone up to 20%, if I'm not mistaken. So, one of the tools available to the central bank is interest rates, stabilise your currency, major interest rates, but obviously, a medium term if you're a company, and 20%, on your debt.

ED: So for this, we look for guidance in countries like Iran, and Turkey, which had similar situations that they faced. Iran with the sanctions, the US, 10 years ago now. And what happened in the Iranian case, when the sanction of what happened to their oil, the oil and black market, there were lots of ghost ships going around the world carrying Iranian oil and trading on the shadow, grey market. And then, of course, China was a big absorber of Iranian oil. So that sort of stabilised the Iranian economy, the GDP fell, like 50%.

MW: So it's not oil production also falls as a result of the other things was they didn't have the technical capacity to maintain the oil wells. So over time, when however, and then all these trucks that go in and out them, the capacity goes down. So who will buy the Russian oil? ED?

ED: Well, that's the deal that Russia signed with China before the before the war started, which is a nonlinear, unlimited relationship, economic relationship. So, China will absorb as much as it can, I think, and I think India also, and India, well, what the Indians are saying is that the buying Russian oil is being done by the private sector corporations, which are getting a discount, if they pay in Indian rupees to the Russians, so you get a 20% discount.

MW: My understanding is oil on this sort of market is charging 20% less than market price. And then in addition to Russians will have the problem of getting paid, they'll get paid in rupees.

ED: And some of it is barter. So, in fact, Russia already has very good barter relationships with a number of countries, India being one of them, Malaysia and so on. So, there are mechanisms that can be triggered.

MW: At the moment, Russian oil and gas has been sold to Germany's buying it, paying in euros, and the funds flows go through their bank, as they always have done. And that was the point that the ambassador was making, which is, please Europe, stop buying Russian oil or gas. I know it'll be painful. But, she was saying that it's painful anyway. Typical problem.

Frozen assets of oligarchs will present private banking nightmares for years to come

ED: Private Banking. Russian billionaires control 30% of the nation's wealth, 23 billionaires account for $343 billion. That number, by the way is nothing. One public listed company in China, it's about $300 billion. But offshore, I think the overall number is about $800 billion isn't that? Because a lot of the wealth is in property and so forth. So again, talking about unquantifiable impact. The city of London has a list of Russian oligarchs putting their money through it, buying houses, using London lawyers to set up British Virgin Islands (BVI) companies which own their yachts. So, this is where famously, Roman Abramovich has been told he has to give up his ownership in Chelsea, which is a matter of angst in the UK at the moment. The Swiss Bankers Association says that its private banks hold about $230 billion of Russian money, which accounts if you take $800 billion to $1 trillion, as being the total net worth of Russian oligarchs. $230 billion, this is a pretty significant amount. So, a lot of it is actually anchored in Switzerland. And then of course, all of the other financial markets around the world. Credit Suisse said that it has a gross credit exposure of $1.5 to $1.7 billion to Russia. I think that is at a private banking level. So that gives you an idea, UBS, it says that it has $640.34 million, which is very small. And maybe not very indicative.

MW: But I think also in the private banking world, I was talking to the CEO of one Asian CEO, one Swiss private bank this morning. And he says, the problem is, isn't completely clear what you can and can't do, for example, the European Union is I think that if you're not an EU resident Russian, you can't have a bank account in the EU. So obviously, if you're a Russian in Russia, that means you can no longer have a bank account in the EU. It's unclear if you're not Russian resident Russian, are you allowed to have a bank account in the EU? So, even as we're trying to explain some of the impacts of this, people in the Swiss banking industry themselves are unclear how to interpret the rules, a lot of them have come out and they're very, very broad. So, the banks don't really know what they can and can't do, they have to close all Russian bank accounts in Europe, of non-EU resident Russians.

ED: We saw the legality of freezing accounts of high-net worth individuals operates at three levels. One is the country sanctions that says, freeze your accounts. The second is that you actually have to have a legal basis for that, meaning that the legal basis in most cases, because of criminality, not because of war or something that is not related to them. So, the banking system has to go out and prove the criminality of the assets. And then third is enforceability, which in some cases, in the past have taken up to 15 years, and some oligarchs are able to, find your way through because they have the best lawyers in the world. So, there'll be a three-stage process.

MW: Assets are not held, and all of the name right, they're all held through different companies. So, proving who owns a given asset is highly complex. I think at this point, we simply don't know. But the point at next level of difficult sanctions for banks is that there are these named oligarchs at the intersection, but that Japan has frozen the assets of an additional 17 Russian individuals, named individuals. And then, as I understand it, the US sanctioned all 300 members of the Duma, the Russian parliament, and that was I think, yesterday. So, it's really a moving target, you don't know.

ED: So, they need to go through the processes, sanctioning, is, it's the easy part. You know, enforcing is the difficult part.

MW: Problem is our banks are the ones that have to do it. And by the way, where Singapore came out with its own sanctions. My understanding is that again, talking to Singapore bankers yesterday, they were grateful because they said that MAS us very clearly what we can and what we can't do. So now we know can we get on with business. So, for instance, if you're in Singapore, and if I've got a young friend, friend of mine, as a friend who's a young man is a student in Moscow, and he needs to pay his rent, he is a student, you need $500 a month? Can I send the $500 to that fella in Moscow? Apparently, yes, I can, then your problem will be practically the Singapore banker told me, You're going to have to show an awful lot of documentation that the fellow is the student that this is rent. So, if you're not already a customer, or you haven't already been sending the money. So, the good thing about the Singapore sanction, so it makes it clear what you can do.

I think it's going to have a profound impact on private banking, on the cost of private banking, on the KYC. And governance of private banking for a long time to come. And this war makes private banking almost untenable, basically, I think what we'll see is different banks will decide, is it worth it? Is it worth taking Russians? And I mean, know that all these things are saying, by the way, of course, the vast majority of Russian people are good people and tried to make a living and have families and do normal things. We've all got Russian friends. So, I don't wish harm on those ordinary Russians. But you can see why banks are going to just say, it's just too difficult. And we're in Singapore, Russia isn't a big part of our business, we're just not going to do it.

ED: And in fact, any interim measures between the parties between Russia, Ukraine, the US and Europe, will actually confuse them, will muddy the water even more, unless it is the regulators who have to be clear in what can you do, and you can pay your employees in Moscow, you can send money to your young students, to pay your rent. You can apparently send money, I think to withdraw assets, so that we'll need to read very carefully the MAS guidance, which is on their website, but of course, every country has got its own, all these issues. But then you also need to understand the US sanctions too, the G7 sanctions, the US sanctions taxes on so.

US dollar still represents most liquid, preferred counterparty currency bar none

Future of the dollar, I think that's been a lot of discussion on this crisis, or is this war weakening the hold of the US dollar over time? I think that all the data suggests not in any way. I think it reinforces the need for very deep liquidity in global markets in order to be able to pay bills. And the Chinese renminbi is nowhere near there. I mean, it is the fourth largest traded currency on SWIFT, and on forex, but it's a massively smaller player, and then the big ones. And massively, it's still dollar centric. So, firstly, a country has to provide liquidity into the global market. Secondly, they need to have a open capital account. And thirdly, they need to have a system that is used broadly and widely payment network. So, on that on those three counts, the dollar will still be a strong, and on top of that, the US economy is creating even more liquidity to bond purchases, and so on. So, which is globalised because, it's perceived to be the best held foreign reserves. So, for all those reasons, I think the dollar is unassailable at the moment.

ED: $6.5 billion in foreign reserves, which were also frozen. And then that one which is by the US, and obviously because they don't recognise the Taliban government, and in that one, which was kind of troubling precedent, whatever you think about Afghanistan, the US then said, we're going to take the $6 billion. And we're going to use $3 billion of it to give it to NGOs and help people of Afghanistan. And we're going to give $3 billion of it to 911 survivors, and their family, I mean, 911 victim families, which is a very troubling precedent, because I think it passed when countries reserves are being frozen, they sit there, and then one day, they get given back to them. But in that Afghanistan case, they seem to be saying they can be frozen and deployed. So, in the long term, I think countries are going to be much more cautious about using and putting their reserves in dollars, and that might be good for gold.

Cryptocurrencies on the sideline to Russian invasion

Although, as we're seeing, even gold is having its issues now, that Russian gold has been effectively sanctioned, which brings us to the next topic, cryptocurrencies, we did not detect any direct linkages between the war and cryptocurrencies. In fact, the crypto weakened in the period during the war, and its crypto is, is actually dictated by other issues related to the technology. So ethereum, for example, is waiting for new technology in order to be able to transact faster and so on. And it's been delayed. And then you have bitcoin, which is creating a market all of its own. That is sort of a proxy for equities, and equities. And, and the dollar actually, so traders raise money, apparently, I think they've raised $100 million has been given to Ukraine in cryptocurrency, which they've been using for their own.

But one good thing you can say about crypto is that it's being used, as opposed to it's being kept as an asset. I think that for the most part, I think it's about 70% of all crypto is stored as a store of value of assets, not necessarily used for transactions. So, It's situations like this, that forces the use of crypto for payments, and you will see a lot more liquidity created. But it's not showing up in the numbers yet.

I think again, the implications at the same for crypto could be quite profound. because to the extent that the or have large section of the international community is trying to stop certain financial flows to and from Russia. The whole thing about crypto is no government tells us what to do. We're completely independent of governments, and so we're not going to shut down we're going to keep allowing payments he made in crypto. So, if they do that, to any material extent, they're going find that with get shut down.

ED: I will be going into Honduras, to go and see how crypto is used at the street level. And I think there's a lot of activity in crypto setting up merchant acceptance in countries like Honduras, when Venezuela, Zimbabwe. And I guess that when the war ends, when Ukraine is rebuilding. There's no reason crypto will not be an important sector again.

MW: We have a different perspective of this. And indeed, we have a question from the floor of can crypto provide a means to evade sanctions? And you see what I'm saying is in the short term, probably yes. But if that happens a lot, then all these crypto guys to get themselves regulated.

ED: Yes. Having said that, I think it was to Kraken. And Binance by the way, who is now world famous for getting around regulators promise to rid Binance of all Russian investors. So, there's a kind of a commitment to be regulated and to keep to the straight and narrow.

MW: I think Coinbase said they would refuse and then Coinbase then created a plan to shut out Russian based accounts, resisting pressure to join the efforts.

ED: So, the crypto industry is formulating its responses at the moment and will be kind of a regulatory backlash if they take that view, why they're taking that view is not very clear yet, at least not to me. So, why are the platform saying that they're not going to go out and look for Russians in the investor base.

MW: I think philosophically, they all were saying, our whole raison d'etre is that we're not regulated by governments, where the regulator, when governments want to regulate them philosophically, they should really know where they are regulated and where they are legal.

ED: They have started combining with KYC, and so on. So, and then to say that they don't, they will specifically not exclude Russians is interesting. So that's a space to be to watch at the moment is very speculative. Why is the crypto industry taking this kind of opposition, and as I said, the one guy who should have been a lot more, accepting Russians turned out to be the one that says that he will abide by regulation. So, let's see how it goes.

Will the West be able to meet COP 26 goals without nuclear?

ESG. The next slide. So quite clearly, the banking industry is going to find it really difficult to keep to its COP26 commitments. Firstly, it's got to do with lending, to war, rehabilitation needs, reconstruction, and so on. And a lot of that is going to be oil based, it's going to be fossil fuel based, unless a country decides to go nuclear or something like that. And the banks that have decreased their fossil fuel commitments. The Russian Sberbank, it's one of the banks that has reduced its fossil fuel financing, dramatically, one of the biggest reduction in fossil fuel lending. I guess that was a conscious commitment before the war. And then now we will see that maybe they will have to now go back on that.

Sixty largest banks financed $4.6t in fossil fuel since Paris accord

And the banks that have increased fossil fuel financing, many of them are in Asia, the Postal Savings Bank of China, China Minsheng Bank, which by the way, I know quite well, and then the banks that are very strong in emerging markets, Standard Chartered Bank, and so on. So, this whole dimension of lending to fossil fuel projects, and so on, that's going to be pulled back, somewhat in the next three to five years, not just in the two countries, Russia and Ukraine, but the rest of the countries that depend on these countries for oil, and also, the oil players themselves are going to be massively capitalised. So Saudi Arabia, for example, is looking at inflow of funds, which is double what they had last year from oil receipts. So, these countries will be able to continue building infrastructure and so on and depend a lot more on the oil economy.

MW: Well, yes and no, I think the thing is that what has been happening over the last 20 years, is that it's a bit like greenwashing, the Europeans have sort of said, we will not invest in, we will not allow fracking, we will not invest in new gas production, etc. But then actually, there was a good piece out by Oaktree Capital Management. Howard Marks, and he was showing that Europe basically produces three and a half million barrels of oil, and it consumes 15 million. So it's got this 11 million deficit. Same sort of story in gas, same in coal. Russia is exactly the other way around. So what's happened over the last 20 years is Europe has said that we're not going to produce gas and coal and all the rest of it. And they've just started importing more and more of it from Russia.

Why western Europe has become so highly heavily dependent on cheap Russian gas and oil. And if now, they're saying strategically, we can't rely on this one supplier? Well, that to your point, either Europe has to say, Norway can produce oil and gas again. I mean, they will have to say that because they're going to have to find a way of replacing Russian suppliers. And they're going to have to accelerate the energy transition.  Germany's shutting down nuclear power plants, Russia's building more nuclear power plants, so it could export more gas to Europe and increase that western Europe’s reliance on Russian oil and gas exports that we now realise is a dangerous dependency. Because you if you build your entire economy on cheap Russian oil and gas. And then you realise that maybe they're not a reliable supplier. So there's going to have to be a huge shift in the entire industrial structure of Europe, and the entire oil and gas market. Russia produces roughly 10.7 million barrels a day, I think the world consumes about 100 million and Russia exports about seven million. So at the moment, a lot of that goes to Europe.

Non-western countries arms-length responses

And the question is, obviously, China and India can take some but the pipeline infrastructure size and there for them to take all of it. So there's going to be major dislocations in European industry, oil and gas policy, green transition, and maybe they'll need to turn on the nuclear power plants.

ED: And for a lot of countries, China, especially oil and gas, were a replacement of coal. So it's not even transition.

MW: So, they're saying we're going to stop using coal, am I going to buy Russian gas? And then they find that they're totally dependent on imports of cheap Russian gas. If Kenya reduces its reliance on Russian energy, what are the options? And of course, the answer is, it's very difficult but they're going to have to cause shortages, price increases, and having to rethink the whole energy policy of Europe, which is pretty major.

ED: We've come to the end of all the areas that we could cover related to finance, just as a conclusion, the geopolitical implications of what we're seeing, who will be the winners and losers? How should different countries play their role in these matters that are arising? What thoughts do you have, Mathew?

MW: I think we're really still at the early stage of this, and we don't really know how it plays out. And a huge impact will be does this war end quickly? Or is it protracted?

Russian-Ukraine war will trigger transformational changes in the finance industry

ED: In fact, that is the big question right now, which is, is this going to be a protracted war? Because if it's going to be a protracted war, the world is going to be entering into a very different economic dimension. As a quick and dirty war, it has its issues. And in fact, this particular briefing and discussion is based on all of the elements of a quick and dirty war, but the moment it becomes a protracted war, and it's going to be two years or three years, we then need to start taking into consideration other issues. China, for example, has already announced that its annual GDP targets for this year 5.5%, it will have tremendous repercussions in the country, as an economy, as a sociopolitical entity. But if it is going to play the cards wrongly, and it falls even more, that has even more repercussions on China, on supply chain globally, and so on.

MW: A lot of these things are there anyway. They're already baked into the cake. Because if say Mr. Putin said, sorry. I'm going withdraw. Do you think Boris Johnson is going to say, Roman, please take back your football club. I think the train has left the station, Europe isn't going to go back to being totally dependent on Russian oil and gas. So, a lot of the things, we've established that you can have $650 billion reserves and they can be frozen.

ED: That's what I'm getting, the world still is connected, from my European friends, Matthew being the most European of them all, which is that we're not going to forget this war, you're not going to forget. Germany has increased its commitment to defence.

MW: We didn't talk about military. In two weeks, Mr. Putin has done more to strengthen the spine of NATO than eight American presidents in 50 years, the EU is reminded of why you want to be in it.

ED: I think Europe has suddenly woken up to the idea that we're not going to put up with restrictive regimes. We're not going to take it lightly We will not be it's not going to be business as usual.

MW: And as the foreign minister of Singapore said the other day, you can't have big countries just invade and conquer and annex little countries, it would be a change in the entire 1945 rule-based global system.

ED: So, the countries that for the last 10 years have been taking sort of a reticent view of geopolitics, we will see them becoming more assertive in the next foreseeable future.

MW: So that's maybe in Asia, this has shown, for example, obviously, China, Taiwan, it's the elephant in the room. And what this has shown is that war is really awful. And it's a terrible thing. So many people's livelihoods have been destroyed by this thing. We've all been reminded what we should have known all along that peace and prosperity and stability and rule-based multilateral order are important and worth preserving.

ED: Somehow, we didn't see that when we watched the CNN videos of the US invasion of Baghdad in 2003. And the bombs going in, we just didn't see that the weapons of mass destruction that didn't exist. So comprehensively I think, it creates a new morality, which is that this behaviour is unacceptable by any country. And finally, I want to say this,  what I've been looking out for, is that this war has thrown up a number of issues in the finance industry, I mentioned to you the we talked about the LME episode, where they shut down the market for a whole day, which questions the integrity of institutions, financial institutions, as we know them to be today. I think that sets the stage and the excuse for new players to want to say, we have a better way, much more networked world where everyone is dependent on everyone else, we already are in that networked world. In fact, that's what we see the Russian invasion of Ukraine looking like, because it's not a winner takes all situation. Is like multiple winners, multiple losers in the whole story. I would say, and remember I said is, the Russian-Ukraine war is the first war in the network era that we are seeing, and it's introducing a number of elements that are going to be normal, and going to be repeated and built on in the future. And the financial sector cannot be held ransom as it is right now, not just by Russia, also by the West, in a way it's responding, you know, in a very casual way, saying, we're going to hold out the reserves of a country and so on, and that countries will start looking for much more networked responses, to create a more robust financial system that can withstand crisis situations like this. So with these comments, I hope we had a good discussion. And thank you all for the many questions.

MW: I think the impact is bigger than we think. I think that's broadly what you've been saying.

ED: Thank you very much everybody.