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Russia-Ukraine War Effect On The Forex Market

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A worldwide outcry has been caused by Russia’s recognition of the DLPR, which has triggered the first batch of sanctions. Russia’s domestic markets are closed for a national holiday, but offshore trade reveals that Russian USD debt continues to fall. A look at how other markets have reacted to Ukraine’s recent events

Russia has recognized the Donetsk and Lugansk People’s Republics (DLPR) as independent states in eastern Ukraine and inked agreements on social, economic, and military cooperation with them. In the event of an “external military danger,” Russia’s military may invade certain countries and take action. Russia has expressed optimism for a diplomatic settlement to the conflict in Ukraine’s eastern provinces of Donetsk and Luhansk. According to OSCE assessments, there have been several ceasefire breaches along the DLPR and Ukraine-controlled borders, although actual military engagement between the Russian and Ukrainian troops has not yet occurred.

With the exception of a few nations (Cuba, Nicaragua, Syria, and Venezuela), the worldwide reaction to DLPR was overwhelmingly unfavorable. The Nord Stream 2 gas pipeline project was put on hold until further notice, foreign participation in Russian sovereign debt issued after March 1 was prohibited, and Russia’s two largest banks, Vnesheconombank (VEB) and Promsvyazbank, were hit with asset freezes and FX transaction cuts as a result of the sanctions. President Biden, on the other hand, made it clear that the steps revealed thus far are just the first step in a much larger process.

Congress is considering a bill that would allow the US government to suspend sanctions on up to 12 Russian financial entities in the event of additional escalation. Nine out of the 12 institutions on the list, according to our calculations, account for 70% of the FX balance sheet of Russian banks, while the individual size ranges from $1bn to $100bn. The FX balance sheets of the other three companies (including VEB and PSB) are not publicly available, although they are unlikely to be substantial.

Russia, Sanctions, And Forex Market

FX markets seem to be pricing in more favorable results. Volatility in the FX options market decreased as a result of President Putin’s designation of new independent regions and Russian military incursions into the Donbas area. There has been a 6% drop in one-month volatility pricing for both the EUR/USD and the USD/JPY during the previous 36 hours. The FX market can only presume that the Russian intervention will be limited to this level. It is also worth mentioning, some of the experts predict that the forex trading taxes will increase for Russian investors who trade with Russia-based fx brokers, because of the current and the growing inflation rate. For obvious reasons, the relative performance of the foreign exchange market has been influenced by the closeness of countries and the reliance on energy imports (although the Japanese yen has outperformed here.)

Traded interest rates’ response to the present crisis has been mild when compared to the spike they’ve experienced since last summer. For example, 10-year Treasury rates, a safe-haven asset for many, are just 7.5 basis points below their top. Perhaps market players are too optimistic about how recently escalated tensions will affect the performance of risk assets and the economy as a whole.

The Russian rouble was initially unfazed by the new sanctions, but it is still vulnerable. The question of whether Russian FX swap curves begin to take counterparty risk into account will be a key one for the FX market. FX swaps for a currency that can be delivered should only have one FX swap curve. There is just a little difference in the estimated yields of one-month offshore RUB contracts at 13.6% against onshore contracts at 13.2% right now. This might extend much further if there are concerns about additional penalties.

Impact On The Financial Markets

Fears of an oil supply interruption due to the conflict in Ukraine sent crude prices surging over $100 a barrel for the first time since 2014, with Brent reaching $105. On Thursday, oil prices in the United Kingdom and the Netherlands jumped by 40 to 50 percent. Even though oil and gas prices dropped on Friday, investors’ nerves are still jangling.

Some of Russia’s largest oil customers had difficulty securing bank guarantees or finding ships to transport their petroleum from Russia in spite of Western sanctions on the country.

As the second-biggest oil producer in the world, Russia supplies Europe with around 35 percent of its natural gas and 50 percent of German gas needs.

Inflation-linked bonds – securities whose dividends grow in step with inflation – fueled a rush for the bonds.

Treasury Inflation-Protected Securities yields dipped this week, but breakevens jumped to 3%. Germany’s two-year real rates fell by roughly 30 basis points as European gas costs climbed, making the country susceptible. TIPS funds had their first net inflows in five weeks, according to statistics from the Bank of America.

As investors have been nervous about substantial central bank rate rises, Thursday’s market crash reduced the value of the global stock market by roughly $1 trillion and continued a decline in the main indexes that began this year.

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U.S. companies are barreling towards a $1.8 trillion corporate debt

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US firms are barreling towards a giant wall of corporate debt that’s about to mature over the next few years, Goldman Sachs strategists said in a note.

There’s $1.8 trillion of corporate debt maturing over the next two years, Goldman Sachs estimated. Firms could be slammed with higher debt servicing costs as interest rates stay elevated. That could eat into corporate revenue and weigh on the US job market.

The investment bank estimated that $790 billion of corporate debt was set to mature in 2024, followed by $1.07 trillion of debt maturing in 2025. That amounts to $1.8 trillion of debt reaching maturity within the next two years, in addition to another $230 billion that will reach maturity by the end of this year, Goldman strategists said.

The wave of debt that will need to be refinanced could spell trouble for companies, as interest rates have been raised aggressively by the Fed over the last year. The Fed funds rate is now targeted between 5.25%-5.5%, the highest range since 2001.

For every extra dollar spent to service their debt, firms will likely pull back on capital expenditures spending by 10 cents and labor spending by 20 cents, the strategists estimated, a reduction that could weigh down the job market by 5,000 payrolls a month in 2024 and 10,000 payrolls a month in 2025.

Experts have warned of trouble for US corporations as credit conditions tighten. Already, the tally of corporate debt defaults in 2023 has surpassed the total number of defaults recorded last year. As much of $1 trillion in corporate debt could be at risk for default if the US faces a full-blown recession, Bank of America warned, though strategists at the bank no longer see a downturn as likely in 2023.

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Russian response to sanctions: billions in dollar terms are stuck in Russia

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“Tens of billions in dollar terms are stuck in Russia,” the chief executive of one large company domiciled in a country told ‘The Financial Times’. “And there is no way to get them out.”

Western companies that have continued to operate in Russia since Moscow’s invasion of Ukraine have generated billions of dollars in profits, but the Kremlin has blocked them from accessing the cash in an effort to turn the screw on “unfriendly” nations.

Groups from such countries accounted for $18 billion (€16.8 billion) of the $20 billion in Russian profits that overseas companies reported for 2022 alone, and $199 billion of their $217 billion in Russian gross revenue.

Many foreign businesses have been trying to sell their Russian subsidiaries but any deal requires Moscow’s approval and is subject to steep price discounts. In recent days British American Tobacco and Swedish truck maker Volvo have announced agreements to transfer their assets in the country to local owners.

Local earnings of companies from BP to Citigroup have been locked in Russia since the imposition last year of a dividend payout ban on businesses from “unfriendly” countries including the US, UK and all EU members. While such transactions can be approved under exceptional circumstances, few withdrawal permits have been issued.

US groups Philip Morris and PepsiCo earned $775 million and $718 million, respectively. Swedish truck maker Scania’s $621 million Russian profit in 2022 made it the top earner among companies that have since withdrawn from the country. Philip Morris declined to comment. PepsiCo and Scania did not respond to requests for comment.

Among companies of “unfriendly” origin that remain active in Russia, Austrian bank Raiffeisen reported the biggest 2022 earnings in the country at $2 billion, according to the KSE data.

US-based businesses generated the largest total profit of $4.9 billion, the KSE numbers show, followed by German, Austrian and Swiss companies with $2.4 billion, $1.9 billion and $1 billion, respectively.

‘The Financial Times’ reported last month that European companies had reported writedowns and losses worth at least €100 billion from their operations in Russia since last year’s full-scale invasion.

German energy group Wintershall, which this year recorded a €7 billion non-cash impairment after the Kremlin expropriated its Russian business, has “about €2 billion in working interest cash… locked in due to dividend restrictions”, investors were told on a conference.

“The vast majority of the cash that was generated within our Russian joint ventures since 2022 has dissipated,” Wintershall said last month, adding that no dividends had been paid from Russia for 2022.

Russian officials are yet to outline “a clear strategy for dealing with frozen assets”, said Aleksandra Prokopenko, a non-resident scholar at the Carnegie Russia Eurasia Centre. “However, considering the strong desire of foreign entities to regain their dividends, they are likely to explore using them as leverage – for example to urge western authorities to unfreeze Russian assets.”

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Transforming Africa’s Transport and Energy Sectors in landmark Zanzibar Declaration

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A special meeting of African ministers in charge of transport and energy held from 12-15 September on the theme, “Accelerating Infrastructure to Deliver on the AU Agenda 2063 Aspirations” has concluded with an action-oriented Zanzibar Declaration aimed at spurring the Continent’s transport and energy sectors.

Convened under the auspices of the African Union’s Fourth Ordinary Specialized Technical Committee on Transport, Transcontinental and Interregional Infrastructure and Energy, the meeting was organized by the African Union Commission (AUC) in collaboration with the African Union Development Agency (AUDA-NEPAD), the African Development Bank (AfDB) and the United Nations Economic Commission for Africa (ECA).

Speaking at the Ministerial segment of the meeting, Robert Lisinge, Acting Director of the Private Sector Development and Finance Division at the ECA called on member states to address the barriers limiting private sector investments in infrastructure and energy, urging them to facilitate investments by creating conducive policy and regulatory environments. “The requirements of continental infrastructure development and the aspirations of Agenda 2063 and Agenda 2030 far exceed current levels of public sector investment,” he said.

He stressed that over the next ten years, there is a need for concerted action to address energy transition and security issues, in order to open up opportunities for the transformation of the continent. He cited ECA’s analytical work on the AfCFTA, which demonstrates there are investment opportunities for infrastructure development in the area of transport and energy and added that digitization and artificial intelligence offer great opportunities for the efficient operation of infrastructure.

According to the  Zanzibar Declaration, the Ministers adopted the AUC and ECA continental regulatory framework for crowding-in private sector investment in Africa’s electricity markets. This framework will be used as an instrument for fast-tracking private sector investment participation in Africa’s electricity markets. The Declaration also called on ECA and partners to develop a continental energy security policy framework as called for by the 41st Ordinary Session of the Executive Council and an Energy Security Index and Dashboard to track advancements in achieving Africa’s energy security.

The meeting acknowledged the efforts by ECA to support Member States in coordinating Public-Private Partnerships (PPP) with development partners and the establishment of the African School of Regulation (ASR) as a pan-African centre of excellence to enhance the capacity of Member States on energy regulation.

The Declaration requested the ECA and partner institutions to further act in the following areas:

The AUC, in collaboration with AUDA-NEPAD, ECA, AfDB, RECs, Africa Transport Policy Programme (SSATP), and the African Continental Free Trade Area (AfCFTA) Secretariat to implement the roadmap on the comprehensive and integrated regulatory framework on road transport in Africa.

ECA, in collaboration with AUC, to identify innovative practices and initiatives that emerged in the aviation industry in Africa during the COVID-19 pandemic and propose ways of sustaining such practices, including the development of smart airports with digital solutions for improved aviation security facilitation and environmental protection.

ECA, in collaboration with AUC, to establish mechanisms for systematic implementation, monitoring and evaluation of continental strategies for a sustainable recovery of the aviation industry.

The AUC, AUDA-NEPAD, AfDB and UNECA to engage with development partners and Development Finance Institutions (DFIs) to mobilize resources for projects preparation and implementation of PIDA-PAP 2 projects.

ECA and AUC, in collaboration with partners, to coordinate PPP initiatives to avoid duplication of efforts and strengthen complementarity.

The AUC and ECA to work with continental, regional and specialized institutions to support the design and implementation of programmes, courses, and capacity development initiatives of the African School of Regulation (ASR) to support the implementation of the African Single Electricity Market and Continental Power System Master Plan.

The AUC to work with AUDA-NEPAD, AfDB, ECA and RECs, respective power pools, regional regulatory bodies, and relevant stakeholders to design continental mechanisms for regulating and coordinating electricity trade across power pools.

AUDA-NEPAD, AUC, AFREC, ECA, AfDB, Power pools and development partners to comprehensively assess local manufacturing of renewable energy technologies and beneficiation of critical minerals for battery manufacturing.

ECA and AFREC to accelerate the implementation of the Energy4Sahel Project to improve the deployment of off-grid technologies and clean cooking in the affected Member States.

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