Financial Crime World

Financial Stability Risk Map Charts Alarm Bells Amid Global Economic Uncertainty

Introduction

The latest Financial Stability Review from the Bank of Russia paints a bleak picture of the global economy, with geopolitical tensions and unprecedented sanctions on Russia taking a heavy toll.

The Financial Stability Risk Map

According to the review’s financial stability risk map (Chart 1), the estimated interest rate risk over a one-year horizon has taken a significant hit, reflecting the impact of Russia’s economic crisis on the global market. The chart shows a degradation of indicators from the center to the edge, indicating a heightened risk of financial instability.

Geopolitical Issues and Economic Consequences

The review highlights the negative effects of geopolitical issues on the Russian economy and global markets. International organizations have downgraded their growth forecasts for 2022 and 2023, with the slowdown in GDP growth potentially being even more significant due to spillover effects.

  • Accelerated inflation, which had already increased after the pandemic, remains a primary risk factor.
  • Commodity and food prices have reached record highs, and the restrained response of leading central banks may contribute to the transition from high inflation to chronic levels.

Sanctions and Their Impact

In 2022, Russia’s economy and population faced unprecedented sanctions at an unprecedented scale. Blocking sanctions were introduced against financial institutions, real sector companies, and individuals, with assets frozen in the US, EU, UK, and other countries.

  • The sanctions have had a significant impact on Russian exports and imports, as well as air, rail passenger and cargo transportation, logistics operators, and access to European and American ports.
  • Sectoral sanctions banned certain types of transactions with Russian organizations, including those related to fund raising, and restricted transactions with Russian government stock.

Consequences of Sanctions

As a result:

  • The assets of the Bank of Russia worth approximately $300 billion were frozen, and certain Russian commercial banks were disconnected from the global SWIFT system.
  • Many large global companies have left the Russian market or suspended operations, and new investments in the Russian economy have stalled.
  • The payment systems Visa and Mastercard announced termination of service for Russian cards, and international settlement and clearing organizations (Euroclear and Clearstream) suspended operations with securities and payments for Russian customers.

Global Growth Outlook

The search for new suppliers and partners is time-consuming due to the fact that certain foreign counterparties refuse to cooperate, fearing secondary sanctions.

  • The International Monetary Fund (IMF) lowered its forecasted global GDP growth in 2022 compared to the January estimate by 0.8 percentage points (to 3.6%) after 6.1% growth in 2021.
  • The estimated GDP growth was downgraded for both advanced and emerging market economies, with the slowdown in GDP growth potentially being even more significant than currently expected.

Conclusion

The review concludes that spillover effects of the sanctions primarily materialized through a shock in commodity markets, which led to acceleration of already high post-pandemic inflation. The growth of commodity prices has accelerated (Chart 3) primarily due to the conflict between Russia and Ukraine.

In light of these developments, financial stability risks remain elevated, and policymakers must carefully monitor the situation to prevent further destabilization of global financial systems.