Russia's economy is under severe pressure from tough new Western sanctions. This is forcing financial institutions to ponder: How exposed are they if it gets bogged down?
What's happening: According to the Bank for International Settlements, foreign banks had claims of more than $120 billion on Russian counterparts at the end of September 2021.
There is concern that as the ruble falls and Russia is increasingly cut off from the global financial system, missed payments could pile up and trigger large losses.
France's Société Générale (SCGLF) and Italy's Unicredit (UNCFF), two major European banks with the largest operations in Russia, face special scrutiny. Since Russia invaded Ukraine last week, SokGen shares are down 25%, while UniCredit is down 23%.
Fitch Ratings warned on Wednesday that "the fallout from Russia's invasion of Ukraine will put pressure on the asset quality of large Western European banks," adding that their operations are at increased risk as they race to comply with international sanctions. .
Where's the weakness? Fitch said it mostly covers corporate and investment banking operations as well as investment portfolios. There are concerns that institutions affected by the sanctions will not be able to repay loans, forcing banks to write off some of them.
Fitch said compliance with the sanctions will also be a challenge, especially with some of the top Russian banks excluded from the SWIFT global payments system.
In a statement on Thursday, Societe Generale said it is "strictly following all applicable laws and regulations and implementing the necessary measures to strictly enforce international sanctions as soon as they are made public". "
The bank said it had about $21 billion in contacts with Russia at the end of last year. But it emphasized that it could face even the worst consequences.
Societe Generale has "more than enough buffer to absorb the consequences of a potentially extreme scenario in which the group would be stripped of property rights to its banking assets in Russia," it said.
UniCredit, which has been operating in Russia since 1989, said last week that its Russian branch was "very liquid and self-funded", and that franchises accounted for just 3% of the bank's revenue.
Earlier this year, the political situation in Ukraine abandoned a possible bid for the Russian state-owned bank Otryati.
US banks can feel the pain, too. Citigroup revealed this week that it had $5.4 billion in "Russia credits and other exposures" at the end of 2021. Citi's chief financial officer, Mark Mason, told investors on Wednesday that the bank is conducting tests to evaluate the results "under various stressors." types of scenarios."
Citi's shares have fallen 4% since the invasion of Russia. The KBW Bank Index, which tracks US lenders, is down about 2%.
Why this matters: In a note to clients on Sunday, Credit Suisse investment strategist Zoltan Posser called for the collapse of Lehman Brothers in 2008 when considering the consequences of cutting Russian banks off SWIFT. He said the effect could ripple through markets, forcing central banks to intervene.
A "Lehmann moment" of systemic significance has yet to materialize. But watching communications from banks will be important as Russia's economy crumbles.
"You really don't know for sure all the implications, so I think it's one of fear," Robert Sears, chief investment officer at Capital Generation Partners, told me.
Fed ready to hike interest rates in two weeks
The Federal Reserve is getting ready to raise interest rates for the first time since the pandemic began as the war in Ukraine blew the outlook for the economy.
LATEST: Chair Jerome Powell told Congress on Wednesday he expects the central bank to go ahead with a rate hike later this month, a significant step toward curbing the highest inflation in decades.
"Inflation is very high," Powell said. "we are working on it."
Powell said he favored a 0.25 percent increase in the normal-sized interest rate. Previously, there was talk that the Fed may opt for a bigger hike to show that the Fed is serious about bringing prices under control.
But conflict in Ukraine, which could slow economic growth while accelerating inflation, has complicated the Fed's effort to move away from the crisis-era policies it adopted to offset the effects of COVID-19.
"The economic impact of these events is highly uncertain," Powell said.
Investor Insight: His remarks fueled the stock market's rally. The S&P 500 rose 1.9%, while the Nasdaq Composite gained 1.6%.
Investors were relieved by more clarity on the Fed's path ahead.
"Powell's comments helped reduce uncertainty about the Fed's near-term intentions," said Jim Reid, a Deutsche Bank strategist.
New food price shock: Palm oil prices on the rise
Russia's invasion of Ukraine has devastated markets for wheat and corn, the two countries' major exports. But they are not just increasing the prices.
WATCH HERE: Palm oil prices have risen as investors try to find alternatives to shipments of sunflower oil stranded in Black Sea ports, reports my CNN business associate Anna Kuban.
Palm oil futures in Indonesia - the world's biggest exporter of the product - have risen more than 18% since last Wednesday, the day Russia launched its attack, according to data from Refinitiv.
The war in Ukraine has raised uncertainty as to whether port closures and shipping delays will limit sunflower oil deliveries. The country typically accounts for a third of global production and half of all exports.
Ukrainian sunflower oil futures rose 32% in the first few days of the attack, according to data from S&P Global Platts. It has started looking for alternatives.
Palm oil, a common ingredient found in many of the world's food and cosmetics, is an alternative. It is also used for cooking in India, the world's top importer.
James Fry, chairman of consultancy LMC International, said consumers in China, Pakistan, Bangladesh and countries in North Africa will also face problems.
"They will be forced to cut their oil consumption. They won't be able to afford it," Fry said. "Especially if things like wheat are also a lot more expensive."
Next
Best Buy (BBY), Kroger (KR), Utz Brands and Weibo report results ahead of the opening of US markets. The Costco (COST), Gap (GPS) and Smith & Wesson brands follow after the close.
even today →
- Preliminary US jobless claims for last week's post at 8:30 a.m. ET.
- Jerome Powell's testimony before the Senate Banking Committee begins at 10 a.m. ET.
Coming tomorrow: The US jobs report is expected to show that the US added 400,000 jobs in February.