Russia/Ukraine war and its effect on financial institutions

Issue 2 2022 Editor's Choice, Security Services & Risk Management, Financial (Industry)

The war will have an impact on all financial institutions, but it will be a scaled impact depending on the organisation and its location. Those in Russia and/or Ukraine will be subject to greater challenges, but few, if any, will escape unscathed. In my opinion, the impacts will include:

• Government expenditures in war. In the First World War, Britain’s government expenditures amounted to £9,5 billion, which, judging from national income estimates for 1913 and 1924, was possibly one-third of total national income for the period. How do the governments raise these funds as there is less tax collected from countries that are at war, less loans being paid back, less liquid cash etc.?

• Will monetary expansion and borrowing from the public become the chief forms of war finance? Russia has far more wealthy people that can support their cause than Ukraine and therefore Ukraine will always be on the back foot in regards to the financial side of a war.

• What is the preparedness of the financial institutions for a short war and what are the reserves for a long-term war? Has any financial institution included this as a risk in their risk management plan or will this be the same as when the pandemic started in 2020 and all financial institutions had to play catch up?

• In World War 1, the bank rate was raised from 3% on July 29, 1914, to 10% on August 1. On July 30, the government closed the stock exchange. On August 2 it declared a moratorium on bills of exchange, which was subsequently extended. On August 6 it passed the Currency and Bank Notes Act, which gave the bank permission to extend its fiduciary issue without additional gold reserves. In addition, the act authorised the Treasury to issue notes as legal tender[1], made postal orders legal tender until the Treasury notes could be printed and circulated and permitted the Scottish and Irish banks to meet their obligations with their own notes. The government underwrote shipping insurance up to 80% and the Treasury agreed to guarantee the Bank of England against loss on bills discounted for banks and brokers. What will the impacts be on each individual country and any rate increase, how does this impact each individual financial institution in the country?

• As of the 27th of February, 156 000 refugees crossed Ukraine into Poland since the invasion began. How do Poland’s financial systems cope with the additional expense of having to house and feed all the refugees?

• The fiscal impact on day-to-day money required from the commercial banks. Do the banks hold substantial quantities to provide for all the Ukrainian population wanting to withdraw their money? Will Ukraine currency lose its value and therefore result in Ukraine people not meeting their day-to-day living requirements?

• With the war and curfews placed on Ukraine people and with the fighting, how does the country distribute currency to the commercial banks? This means that the logistics have been hugely impacted, which causes panic and infighting. At the outbreak of war there was a scramble for hard cash which could drive the US Dollar to a temporary premium.

• During WWII, stock markets did initially fall, but recovered before its end, during the Korean War there were no major corrections, while during the Vietnam War and afterwards stock markets remained flat from the end of 1964 until 1982. Have the financial Institutions worked out the impact of their book if the top 10% of their customers lose due to an impact on the markets?

• The United States, United Kingdom and other countries have imposed rigorous sanctions on Russia, targeting its financial sector, banks and politicians, which now creates more regulations that financial institutions must adhere to at a great cost to themselves.

• Payments for imports and exports that have already been approved are now impacted and there could be huge losses.

• Russia has been excluded from SWIFT, which will impact the Russian economy and the normal citizens of Russia. This exclusion will increase the costs of other transactions due to the number of transactions and increased security.

• Russia is the second largest country in terms of the number of SWIFT users, Russia has up to 300 financial institutions using the SWIFT systems. While the Russian banks do have the option to use alternative banking systems i.e. cellphone banking or messaging apps to conduct banking, these banking methods can be significantly less secure and efficient. This will create a huge market and gap for the criminal minds in this world.

• There will be an increase in scams asking for assistance and innocent victims who want to assist Russians or Ukrainians in desperate need. Financial institutions will need to undertake more preventive measures on an ongoing basis to protect money laundering.

• Increased cyberattacks just from everyday criminals on all financial systems in order to gain access, or by planned attacks by Russia in order to weaken the world. Cyberattacks perpetrated by foreign adversaries represent one of the greatest national security concerns and the top priority of any country’s intelligence communities. Increased sanctions on Russia could result in Russia conducting cyberattacks on global financial services infrastructures.

• Money laundering, according to information provided, Russia has stockpiled gold, hard currency and other items of value i.e. precious gems and metals which could now be used to support the war.

• What will the impact on business be? Less profit, less transactions going through the bank, less payments of loans, businesses sinking, insurance claims and so on?

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