The impasse has prepared investors for further volatility this week as stocks already grapple with inflation worries and signals from the Federal Reserve for a rate hike next month.
A Friday White House statement that the Russian military could advance on Kiev at any time has cut the Dow Jones industrial average and pushed up government bond and gold prices.
In a conversation lasting more than an hour on Saturday, Biden warned the Russian leader of “quick and high costs” if he attacks Ukraine. Government officials insist any Allied response this time around will be much tougher than the sanctions imposed after Russia took over Crimea in 2014.
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“It should cost you money. Let it blow them up this time,” said Brian O’Toole, a former Treasury Department sanctions officer in the Obama administration who is now with the Atlantic Council.
The prospect of tough financial sanctions, likely aimed at Russia’s state-owned banks, aims to deter a Russian invasion by raising the risk of capital outflows, a falling currency and bank runs. Russian investors have already paid for Putin’s aggressiveness: the RTS stock index has fallen about 25 percent since its late October high.
But sanctions could also be a boomerang for the US and European economies, especially if Putin hits back.
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Though its role in the global economy pales next to China’s, Russia is a major supplier of critical materials like titanium for Boeing planes and palladium for autocatalysts. More than 400 US companies have a major supplier based in Ukraine, and 1,100 have a “Tier 1” supplier in Russia, according to Interos, a supply chain risk management firm in Arlington, Virginia. US agribusiness giants such as Cargill and ADM have sizeable operations in Ukraine.
Putin could also respond to sanctions by unleashing devastating cyberattacks on power grids, banks, or corporate networks in the United States or Europe, further unsettling investors.
“A land war in Europe is something that would probably shake financial markets’ complacency more than people realise,” said Douglas Rediker, partner at International Capital Strategies. “I don’t know how many analysts or investors are even remotely willing to understand the implications of this.”
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All three major US stock indices have already lost ground this year as the Fed is poised to hike borrowing costs for the first time since 2018 on the back of the highest inflation in 40 years. The hardest hit was the tech-rich Nasdaq, down nearly 12 percent since Jan. 1.
The financial consequences of a Russian action against Ukraine would depend on the scale of the attack and the extent of subsequent US and allied sanctions. A full-scale air, artillery and ground offensive to seize the country would likely elicit a tougher US response than a limited push into the separatist Donbass region of eastern Ukraine.
On Sunday, Sen. Lindsey O. Graham (RS.C.) said on ABC’s This Week that Congress should quickly pass legislation approving sanctions “that would destroy the ruble and cripple the Russian economy.”
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The ruble fell more than 3 percent against the dollar on Thursday and Friday and is now worth less than half of its early 2014 value. A further weakening of the Russian currency would make imported goods more expensive for Russian consumers and exacerbate inflation, which is already reaching an annual rate of almost 9 percent.
Russian banks are likely to be a major target of US 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 Russia’s wages and pensions are paid through Sberbank alone. Tough sanctions on the institution majority-owned by Russia’s central bank could trigger a run on depositors, analysts said.
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Blocking US banks and corporations from doing business with one or more of these institutions could seriously affect the ability of Russian banks and corporations to send money across borders. That would jeopardize Russia’s more than $700 billion in mutual trade flows, particularly with European firms.
As part of what one analyst calls a “Fortress Russia” strategy, Putin has developed a domestic payments system known as SPFS in recent years. Although it can handle all financial transactions within Russia, its international connections are limited.
“We’re talking about the plumbing of the financial sector here,” said Elina Ribakova, IIF’s deputy chief economist. “If Russia were to be decoupled, the effects would be devastating.”
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Otherwise, however, the Russian economy is exposed to less external pressure than it was at the time of Putin’s takeover of Crimea. Since mid-2014, Russia has reduced its total external debt from $733 billion to $478 billion.
According to the Bank for International Settlements in Basel, Switzerland, Russian borrowers owed $121.5 billion to global banks at the end of September. That’s about half the amount they owed in early 2014.
French and Italian banks have the largest positions at around $25 billion each. But US banks are owed $14.7 billion.
The reduced need for foreign financing is the result of Russian government policies and previous sanctions that effectively forced Russian borrowers to repay debts as they came due rather than refinance them, Ribakova said.
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High oil prices have also allowed Putin to build up a war chest of foreign exchange reserves that could be used to defend the ruble against attack or to bail out ailing state banks. Russia’s central bank is now sitting at $630 billion, up from $356 billion in early 2015.
Although Russia has thinned its ties to the US-dominated global financial system, individual industries and companies retain important interconnectedness. 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 could also suffer supply disruptions 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.
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“But it would take time to find these alternatives and finalize deals,” said Interos chief executive Jennifer Bisceglie.
Dan Ujczo, a commercial attorney at Thompson Hine in Columbus, Ohio, said clients have asked for advice on the potential impact of sanctions on multinational companies that have a presence in both the United States and Ukraine or Russia.
“The Black Sea region is quite important for our customers,” he said. “There were many concerns.”
Russia’s importance in commodity markets is also drawing attention amid the geopolitical showdown.
The price of palladium, used in catalytic converters, has risen more than 30 percent since mid-December. And the US aircraft industry relies on Russia for titanium, which is used in jet engines. Just three months ago, Boeing signed a memorandum of understanding with VSMPO-AVISMA, a titanium maker, confirming it would remain the largest supplier to Boeing aircraft.
Titanium parts from the Russian company are used in the 737, 767, 787, 777 and 777X models, as well as in products from Airbus, Rolls-Royce, General Electric and Pratt & Whitney.
If titanium supplies were disrupted, “we’re protected for quite a while, but not forever,” Boeing CEO David Calhoun told investors last month.
On Friday, national security adviser Jake Sullivan vowed that the United States — along with the United Kingdom, the European Union and Canada — would impose “serious economic sanctions” on Russia after any attack.
“It will face massive pressures on its economy and export controls that will erode its industrial defense base,” he told reporters.
Any new restrictions would come on top of existing measures imposed after the Crimean invasion, restricting Russia’s financial and energy sectors’ access to capital markets. The United States also bans Russian oil giants from acquiring the most advanced exploration technologies for use in Arctic offshore or shale formations.
Further constraining Russia’s economic development without inadvertently harming the economic interests of the US or its allies will be a delicate task.
Indeed, in 2018 the United States was forced to reverse sanctions against Rusal, an industrial metals producer controlled by Russian oligarch Oleg Deripaska. After the Treasury Department announced the measures, aluminum prices rose 30 percent, sparking complaints from US manufacturers who use aluminum to make products like cars and soda cans.
The measures were eased 17 days later and eventually lifted after Rusal and a second company controlled by Deripaska agreed to a restructuring to reduce its stake.
“Collateral damage cannot be avoided. That happens with any sanctions program,” said Doug Jacobson, sanctions specialist at Jacobson Burton Kelley in Washington. “There will be collateral damage for US companies.”
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