12 minute read
Negative impact on APAC banks bubbles up as Russia’s invasion carries on
Removing Russian financial institutions from SWIFT or impacting Russian secondary trading are the biggest risks to APAC’s banking industry
Financial impact may be larger than expected, especially for China, if secondary sanctions come into play.
Whilst banks in Asia face only limited impact from the sanctions imposed on Russia, effects on financial markets may snowball in the long run, given the shrinking chances for a quick deescalation of the war.
Following Russia’s invasion of Ukraine in late February, various markets–including the US, the European Union, the UK, Japan, and even Singapore–announced sanctions on Russia’s energy exports, financial institutions (FIs), and foreign assets of Russian billionaires. Notably, foreign markets have cut off a number of Russian banks and curbed financial transactions related to Russia.
Chief amongst these sanctions are seven Russian banks being cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global messaging network for crossborder payments, as of 3 March. The US, EU, and the UK have also frozen the Central Bank of Russia’s (CBR) more than US$600b in foreign currency reserves and barred them from moving funds outside of its territorial borders.
The effect on Russian FIs was swift. Sberbank, Russia’s largest lender, exited the European market after experiencing “abnormal cash outflows” and announced that they cannot provide liquidity due to the EU ban to move funds abroad–all within a week of the invasion.
“With regards to the financial linkages between Asia and Russia, the direct exposure from the three channels–equities, syndicated loans, and bonds–is quite limited,” said Alicia Garcia Herrero, chief economist for the Asia Pacific, and Gary Ng, economist at Natixis, a French corporate and investment bank. “Asia only accounts to 1% of equity and bond financing by Russian entities.”
On equities, only one major Russian firm is listed in Asia–RUSAL, the world’s second largest aluminum company, which is listed in Hong Kong. Most of Russia’s offshore financing remains in London and the EU.
However, if uncertainties extend over time, it could have a negative impact even on banks’ asset quality.
Beyond the direct financial exposure, Asian markets are already being affected by the ongoing very negative sentiment, according to Garcia Herrero and Ng.
“The good news is the impact is so far small when compared to the rest of the world,” they said.
Speaking to Asian Banking & Finance, Natixis’ Garcia Herrero named sanctions removing Russian financial institutions from SWIFT or impacting Russian secondary
One Asian market remains a key focus following the announcement of sanctions in Russia: China
trading as the biggest risks to the region’s banking industry.
“If the uncertainty extends over time, it might have some negative impact on banks’ asset quality, all the more so to those countries with close ties with Russia. The most obvious will be in Singapore since Russian energy companies are present there,” Garcia Herrero said.
White Knight China?
One Asian market remains a key focus following the announcement of sanctions in Russia: China. Early into the invasion, the country’s local banking and insurance regulator said that it will not pass any financial sanctions on Russia.
China has financial ties to Russia, the most notable being the over US$23.7b (RMB150b) swap line between the People’s Bank of China (PBOC) and the CBR. China also presents a few other financial avenues that Russia may consider clinging to as foreign markets shut down other methods of obtaining financing: China’s Cross-Border Interbank Payment System (CIPS), and even the recently launched central bank digital currency, called the e-CNY.
But according to Garcia Herrero, China only offers a respite and not a long-term solution for Russia’s financial woes. “Our take is that the space is limited in the short run,” the chief economistnoted.
Should the world shut its doors on Russia and the country decides to pivot all its financial resources, its foreign reserves on the PBOC could likely be depleted within a year.
In this scenario, the CBR could choose to use its around US$90b RMB deposits at PBOC to finance imports from China.
Depletion of Russia’s RMB reserves can even come earlier since Russia will clearly opt for increasing imports from China settled in RMB as opposed to those from EU, Russia’s largest trading partner by far, Garcia Herrero said in a report.
The possibility of using PBOC’s digital currency, the e-CNY, is also likely a no-go for Russia. Whilst the centralised ledger could allow crossborder transactions that bypass SWIFT, its reach and use remain limited. The use of e-CNY might also damage demand for the Ruble.
There is also the question of whether Russia can use the CIPS to bypass SWIFT sanctions, according to a report by Natixis.
CIPS is a payment system which offers clearing and settlement services for cross-border transactions in renminbi. However, it is currently illiquid, Natixis reports, with only 13 thousand transactions processed per day. This is only 5% of the over 240,000 processed by the Clearing House Interbank Payments System, the most widely used international payment system currently.
Notably, CIPS itself is still included in the SWIFT ecosystem, as it runs on the SWIFT messaging system. Whilst work is reportedly in progress to develop an alternative messaging system to SWIFT, it is not yet fully operational, Natixis’ Garcia Herrero said.
“Over time, the ban on selected Singapore’s financial industry has turned vigilant to any risks arising from sanctions imposed on Russia due to its invasion of Ukraine.
The Monetary Authority of Singapore, the local financial regulator, said that local FIs are aware of the heightened risks, and “are taking appropriate measures to manage any legal, reputational and operational risks arising from the sanctions that have been imposed by various jurisdictions.”
“MAS has sent a circular to all financial institutions (FIs) in Singapore, reminding them to manage any risks associated with the situation in Ukraine and the sanctions imposed by major jurisdictions,” a MAS spokesperson told Asian Banking & Finance in response to queries. told
“FIs should also continue to stay vigilant to any suspicious transactions or flow of funds, and apply enhanced customer due diligence in higher-risk situations,” the spokesperson added.
Asian financial institutions and issuers are generally not very exposed to Russia or Ukraine, according to separate comments from Moody’s and Natixis. Despite this, local banks in Singapore are taking measures to curb any risk that could possibly arise from transactions and connections to the affected markets.
United Overseas Bank (UOB), one of Singapore’s biggest banks, told Asian Banking & Finance that they do not have direct exposure to Russian banks, but have advised clients on possible exposure to risks.
“We have earlier advised a handful of our clients with trade flows affected by potential sanctions to manage down their exposure accordingly,” UOB explained in an emailed correspondence.
In a statement published on its website, UOB stated that it will comply with any sanctions that will be passed by Singapore, relevant entities, and in jurisdictions in which the bank operates.
Russia-Ukraine foreign lender
Singapore on the lookout for Russia-related risks
Russian banks in using SWIFT may also have implications on the approach Western regulators take on CIPS, including a potential regulatory backlash given that CIPS will potentially include those entities sanctioned under SWIFT, especially if transaction data is not shared,” the chief economist added.
China’s biggest risk in offering support to Russia is that it may damage its own financial sector.
“[It] is increasingly unlikely that Western economies will continue to engage wholeheartedly in China’s financial sector if Russia jumps on it as a solution to its sanctions,” Garcia Herrero said.
Negligible risks to China, HK
China continuing to open its doors to Russia presents a new set of dangers for local banks, who may risk getting hit by secondary sanctions—sanctions imposed on entities who deal with assets that fall under the primary sanctions.
In this case, Chinese banks may face being sanctioned by other markets should they continue to engage with Russian assets.
“We believe there is no immediate risk for secondary sanctions on banks operating in Russia or dealing with Russian entities at this stage,” an OCBC Investment Research (IR) report read. However, it warned that the situation remains highly fluid.
Outside of this risk, currently, Hong Kong and Chinese banks’ direct exposure to Russia is noted to be relatively small and are also not expected to be hit by ill-effects arising from the sanctions.
Even two Chinese banks who have disclosed subsidiaries operating in Russia–Industrial and Commercial Bank of China and China Construction Bank—has their exposure to Russia accounting for less than 0.05% of their total assets of the first half of 2021. These subsidiaries’ business scope focuses mainly on facilitating Sino-Russia bilateral trade, according to data compiled by OCBC IR.
Large state-owned enterprise banks also have been reducing financing exposure to Russian commodities owing to credit-risk concerns even before the RussiaUkraine war, and should further limit Chinese banks’ exposure to Russia, OCBC IR said.
Hong Kong banks credit exposure to Russia is also negligible and is estimated to be about 0.01% of the industry-wide assets.
The future
Whilst manageable impact is expected in the near term, analysts called for banks to remain vigilant, especially with the unlikely quick de-escalation of the conflict.
China’s decision to not impose sanctions on Russia and seemingly extend economic support to their neighbour could further deteriorate US-China relations, for one.
“[The] US-China strategic competition, which is more obvious than ever in the financial sector, will not get any better after China’s ambiguous position on Russia’s Ukraine invasion and the criticism from the US,” Natixis reported.
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Alicia Garcia Herrero
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Chinese banks may face sanctions by other markets if they continue to engage with Russian assets
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