By David J. Lynch
Yesterday at 4:13 p.m. EST|Updated today at 7:42 p.m. EST
Major Asian stock markets opened lower Monday as investors sought safer bets ahead of a possible Russian military attack on Ukraine that the White House says could occur any day.
In Tokyo, the Nikkei 225 index dropped roughly 2 percent in the first half hour of trading. South Korea’s KOSPI fell by a similar amount.
A telephone conversation on Saturday between President Biden and Russian President Vladimir Putin did nothing to ease the tension over the massive Russian military buildup surrounding Ukraine, a senior administration official told reporters.
The impasse has investors braced for further volatility this week, with stocks already struggling amid inflation worries and signals from the Federal Reserve of an interest-rate increase next month.
A White House statement on Friday that said the Russian military could lunge toward Kyiv at any time clipped the Dow Jones industrial average and pushed up the prices of Treasury bonds and gold.
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In a more than one-hour-long talk, Biden warned the Russian leader Saturday of “swift and severe costs” if he attacks Ukraine. Administration officials insist any allied response this time will be much harsher than the sanctions imposed following Russia’s 2014 takeover of Crimea.
“That was meant to cost them money. This time, it’s meant to blow them up,” said Brian O’Toole, a former Obama administration Treasury sanctions official who’s now with the Atlantic Council.
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The prospect of tough financial sanctions, probably targeted at Russia’s state-owned banks, is meant to deter a Russian invasion by highlighting the danger of capital outflows, a plunging currency and bank runs. Russian investors already have paid for Putin’s belligerence: The benchmark RTS stock index is down by about 25 percent since its late-October high.
But sanctions also could boomerang on U.S. and European economies, particularly if Putin retaliates.
Though its role in the global economy pales alongside that of China, Russia is a key supplier of critical materials, such as titanium for Boeing airplanes and palladium for automotive catalytic converters. More than 400 U.S. companies have a major supplier based in Ukraine, and 1,100 have a “Tier 1” vendor in Russia, according to Interos, a supply chain risk management company in Arlington, Va. U.S. agribusiness giants such as Cargill and ADM have sizable operations in Ukraine.
Putin also might respond to sanctions by unleashing crippling cyber attacks against power grids, banks or corporate networks in the United States or Europe, further rattling investors.
“A land war in Europe is something that would probably shock the complacency of financial markets more broadly than people are appreciating,” said Douglas Rediker, a partner at International Capital Strategies. “I don’t know how many analysts or investors are remotely prepared to understand the consequences of this.”
All three major U.S. stock indexes already have lost ground so far this year, as the highest inflation in 40 years has the Fed poised to raise borrowing costs for the first time since 2018. Hardest hit has been the technology-rich Nasdaq, which is down almost 12 percent since Jan. 1.
Financial fallout from a Russian move against Ukraine would depend upon the scale of the attack and the extent of the U.S. and allied sanctions imposed in the aftermath. A full-scale air, artillery and ground offensive to seize the country would probably draw a more punishing U.S. response than would a limited move in the separatist Donbas region in eastern Ukraine.
Servicemen of Ukrainian military forces in Kyiv on Feb. 13. (Sergei Supinsky/AFP/Getty Images)
On Sunday, Sen. Lindsey O. Graham (R-S.C.) said on ABC’s “This Week” that Congress should quickly approve legislation authorizing sanctions “that would destroy the ruble and cripple the Russian economy.”
The ruble fell more than 3 percent against the dollar on Thursday and Friday and is now worth less than half its early-2014 value. A further weakening of the Russian currency would make imported goods more expensive for Russian consumers, exacerbating inflation that already is running at an annual rate of nearly 9 percent.
Russian banks will probably be a primary target for U.S. sanctions. The five largest — Sberbank, VTB Bank, Gazprombank, Rosselkhozbank and Otkritie — account for more than 60 percent of the banking system’s assets, according to the Institute of International Finance (IIF).
More than half of Russian wages and pensions are paid via Sberbank alone. Tough sanctions targeting the institution, which is majority-owned by Russia’s central bank, could trigger a depositor run, analysts said.
Blocking U.S. banks and companies from all dealings with one or more of these institutions could seriously interfere with the ability of Russian banks and businesses to send money across borders. That would imperil Russia’s more than $700 billion in two-way trade flows, especially with European firms.
As part of what one analyst labels a “Fortress Russia” strategy, Putin in recent years has developed a domestic payment system known as SPFS. Although it can process all financial transactions within Russia, its international links are limited.
“We’re talking here about the financial sector’s plumbing,” said Elina Ribakova, IIF’s deputy chief economist. “If Russia were disconnected, it would have a devastating effect.”
In other respects, however, the Russian economy is less exposed to outside pressure than at the time of Putin’s takeover of Crimea. Since mid-2014, Russia has reduced its total foreign debt to $478 billion from $733 billion.
Russian borrowers owed global banks $121.5 billion at the end of September, according to the Bank for International Settlements in Basel, Switzerland. That’s roughly half the amount they owed in early 2014.
French and Italian banks have the largest positions, at about $25 billion each. But U.S. banks are owed $14.7 billion.
The reduced need for foreign financing was the result of Russian government policy and the earlier sanctions, which effectively forced Russian borrowers to repay debts as they came due rather than refinance them, Ribakova said.
Thanks to high oil prices, Putin also has been able to build up a war chest of foreign exchange reserves, which could be deployed to defend the ruble against attacks or to bail out wounded state banks. The Russian central bank is now sitting on $630 billion, up from $356 billion in spring 2015.
Although Russia has thinned its ties to the U.S.-dominated global financial system, individual industries and corporations retain vital two-way linkages. The country is a major supplier of many industrial metals and fertilizers, as well as oil and gas.
Global companies with Ukrainian or Russian suppliers also could suffer supply interruptions in the event of a major conflict, with or without the added complication of sanctions. Many companies could switch to alternative sources of goods or materials.
“But it would take time to find these alternatives and to get contracts in place,” said Jennifer Bisceglie, chief executive of Interos.
Dan Ujczo, a trade attorney at Thompson Hine in Columbus, Ohio, said clients have been calling for advice on the possible effects of sanctions on multinational corporations with a presence in both the United States and Ukraine or Russia.
“The Black Sea region is pretty important for our clients,” he said. “There’s been a lot of concern.”
Russia’s prominence in commodity markets also is drawing attention amid the geopolitical showdown.
The price of palladium, used in catalytic converters, is up more than 30 percent since mid-December. And the U.S. aircraft industry relies upon Russia for the titanium used in jet engines. Just three months ago, Boeing signed a “memorandum of understanding” with VSMPO-AVISMA, a titanium producer, confirming that it would remain the largest supplier for Boeing aircraft.
Titanium parts from the Russian company are used on 737, 767, 787, 777 and 777X models, as well as in products made by Airbus, Rolls-Royce, General Electric and Pratt & Whitney.
If titanium supplies were interrupted, “we’re protected for quite a while, but not forever,” Boeing CEO David Calhoun told investors last month.
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On Friday, national security adviser Jake Sullivan vowed that the United States — along with the United Kingdom, the European Union and Canada — would impose “severe economic sanctions” on Russia following any attack.
“It will face massive pressure on its economy and export controls that will erode its defense industrial base,” he told reporters.
Any new constraints would be on top of existing measures imposed following the Crimean invasion, which restrict the Russian financial and energy sectors’ access to capital markets. The United States also prohibits Russian oil giants from obtaining the most advanced exploration technologies for use in Arctic offshore or shale formations.
Further restraining Russia’s economic development without inadvertently damaging U.S. or allied economic interests will be a delicate job.
Indeed, the United States was forced to backtrack in 2018 on sanctions it imposed on Rusal, an industrial metals producer controlled by Russian oligarch Oleg Deripaska. After the Treasury Department announced the measures, aluminum prices spiked by 30 percent, sparking complaints from U.S. manufacturers that used aluminum to make products such as cars and beverage cans.
The measures were eased 17 days later and eventually repealed after Rusal and a second company controlled by Deripaska agreed to restructure to reduce his stake.
“There’s no way to avoid collateral damage. That’s what happens with any sanctions program,” said Doug Jacobson, a sanctions specialist at Jacobson Burton Kelley in Washington. “There’s going to be collateral damage to U.S. companies.”
