Russia’s invasion of Ukraine triggers financial changes

In the aftermath of Russia’s invasion of Ukraine, leaders of major investment funds around the world are anticipating seismic shifts in the global economy. Blackrock CEO Larry Fink recently outlined a fundamental transformation of global supply chains in an annual letter to shareholders. It predicts a reversal of globalization, as countries and companies seek to shorten the length of their global supply chain to mitigate geopolitical risks stemming from overreliance on other countries. Similarly, drastic disruptions to Russian oil and natural gas exports are likely to encourage increased investment in renewable energy and other forms of environmental, social and (corporate) governance funds, especially those that divest further. of the Russian economy. Big investment firms have taken accelerated steps to distance themselves from Russia, while corporate stakeholders are reorienting supply chains to avoid Russian resources, markets and financial systems.

In addition, European and G7 sanctions programs have placed greater emphasis on national sovereignty and a nation’s participation in international payment and settlement systems. The SWIFT system routes more than 42 million messages daily from more than 11,000 institutions in 200 countries. However, with the withdrawal of some Russian banks from SWIFT, more countries may seek alternatives. Already in the wake of the 2014 sanctions programs stemming from the invasion of the Crimean peninsula, Russia built an alternative system, the Financial Message Transfer System (SPFS). The Central Bank of Russia operates the SPFS system. The system, like the US FedWire system, has wide national coverage, although Russia has taken steps to integrate SPFS with other countries, such as China, India and Iran. At the end of 2020, 23 foreign banks connected to the SPFS system from Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan and Switzerland. Today, this network handles about 1/5 of the volume of Russian transactions. Russia had been working to integrate SPFS with China’s cross-border interbank payment systems (CIPS). The impact of the removal of SWIFT has been brutal and catastrophic in the short term for cross-border payments. However, it may encourage the development of less interdependent financial networks for countries concerned about economic sanctions programs.

This same concern is also fueling many countries’ consideration of central bank digital currencies (CBDCs). These countries are actively reassessing their dependence on the currency and continuing to seek strategies to improve the settlement of international transactions. Fink added that “even before the war, several governments were looking to take a more active role in digital currencies and define the regulatory frameworks within which they operate.” CBDCs have the potential to reduce the risk of money laundering and corruption, but there remains concern that digital assets could be used to help Russia evade sanctions as Russia’s central bank allegedly develops a digital rouble. The Biden administration recently signed into law an executive order on digital currencies, prompting federal agencies to conduct studies and recommend regulations on the launch of a digital US dollar. Read on to find copies of the Executive Order and our recent Executive Order blog post.

For more information on how FinTechs and financial institutions can combat attempts to use domestic FinTech and banking platforms to evade sanctions programs, please see our articles: Tanks and Banks and Banks and FinTechs Beware: Here Come the Sanctions.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 102

About Virginia Ahn

Check Also

The Great Commodities Shock: COVID-19 and War in Ukraine Mean Big Price Increases

Here comes the big shock of commodities – The World Bank released a new forecast …