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The Impact of the Russia-Ukraine Conflict on Global Financial Markets



Since the outbreak of the Russia-Ukraine war, the global capital markets had experienced the initial plunge on February 24, and then stabilized and rebounded in the second trading day on February 25. The three major U.S. stock indexes closed up collectively, with the Dow Jones industrial average, the S&P 500, and the Nasdaq up 2.51%, 2.24%, and 1.64% respectively.

European stocks also rallied, with Russia’s RTS index up 26.12% after tumbling more than 50% during the previous session, while the UK’s FTSE 100, France’s CAC 40, and Germany’s DAX all rose more than 3%. The prices of gold, crude oil, and other safe-haven commodities all fell sharply and gave up their sharp gains from the first trading day. Taken as a whole, this implies that the impact of the Russia-Ukraine conflict on global capital markets is relatively limited for now.

Judging from the reflection of the capital market, the initial impact of the Russia-Ukraine crisis on the financial market was not too drastic. This may have something to do with the intensity of the war, as well as the influence of the countries involved in the capital markets. If the war is limited in scale, it will not cause a systemic crisis like the COVID-19 pandemic.

However, in terms of its long-term development, researchers at ANBOUND believe that the evolution of geopolitical conflict patterns brought about by the Russia-Ukraine crisis will inevitably affect global investment decisions and capital flows. These effects will be gradual and profound, indicating that global financial markets will evolve with geopolitical changes.

Russia, which started the war, will be hit hardest. On the one hand, the war itself, as an escalation of the Russia-Ukraine crisis, will not end soon. On the other hand, even if Russia wins an overwhelming military victory, there will still be a long period of instability in Ukraine, a situation that investors would not want to see. Moreover, as the crisis escalated, both the United States and the European Union have imposed economic and financial sanctions against Russia.

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The latest information shows that Europe and the U.S. have decided to exclude some Russian financial institutions from the SWIFT system. SWIFT sanctions will have a significant negative impact on Russia’s economy, foreign trade, and various financial transactions. The U.S. and Europe also threatening sanctions on Russia’s central bank’s USD 600 billion-worth of foreign reserves. The expulsion of most Russian banks from the SWIFT system has left Russia isolated in international financial markets, meaning it will pay a huge price for this, regardless of whether it wins in the conflict or not.

For the EU, since it is not at the heart of the conflict, its direct losses are small. However, the financial markets in Europe will be in a state of instability due to the geopolitical impact of the war that is geographically near the region, which will not only hit the financial markets in Europe, but will also drag down the euro. Europe, which has close economic ties with Russia, will also suffer from the sanctions against Russia. European banks are heavily exposed to Russian corporate and financial debt, and any rise in risk could destabilize the global financial system.

The U.S. has little to lose from relevant geopolitical conflicts, and the fact that much of the capital withdrawn from Europe is expected to flow back to the U.S. is undoubtedly beneficial to the relatively stable U.S. capital markets. The continued rise in energy prices will likewise further push up the level of inflation in the U.S., posing long-term risks for its financial market. This will further increase the difficulty of the Federal Reserve’s monetary policy implementation, and the policy risk of the Fed’s “hindsight” will further intensify, bringing instability to the U.S. capital market.

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In terms of the impact on China, ANBOUND noted that the USD/RMB exchange rate rose again recently. On February 26, both the onshore and offshore USD/RMB exchange rate traded around the 6.30 mark. Data showed the RMB’s correlation with global market volatility fell to a three-year low early last week, underscoring the currency’s safe-haven ability.

In fact, this means that international capital is seeking new safe-haven, bringing incremental international capital to China’s domestic capital market, making China’s financial market one of the beneficiaries of the crisis. However, China’s ability to maintain the stability of its surrounding environment remains a major consideration for international capital flows in the face of growing geopolitical competition and conflict.

However, the war between Russia and Ukraine will have an impact on energy prices such as oil and natural gas, as well as food and commodity prices. The economic and financial sanctions imposed by the U.S. and Europe will also exacerbate Russia’s recession. Nonetheless, Russia can still utilize its energy resources for its geopolitical interest. Russia is said to have substantially raised natural gas prices.

European natural gas prices have soared 41%. In addition, nearly 35% of palladium, an important element used in the U.S. semiconductor industry, was imported from Russia. Once Russia stops supplying palladium to the United States, the shortage of chips in the U.S. will be exacerbated. At the same time, 90% of neon, another element used in the U.S. semiconductor industry, was imported from Ukraine.

A sharp increase in the price of neon as a result of the war could also have some impact on the U.S. semiconductor industry. Some market institutions have analyzed that crude oil prices may once again exceed the USD 140 mark, which will benefit Russia, a major energy exporter, enough to compensate for the losses caused by rising financial settlement costs. Changes in supply and demand in areas such as energy and commodities will undoubtedly exacerbate global inflationary pressures.

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Financial markets have conventionally been one of the most globalized areas, and as geopolitical conflict intensifies, this change will have implications for the long-term evolution of global financial capital markets. In particular, Europe and the United States, which have advantages in the financial field, have imposed financial sanctions on Russia, exposing the global financial market to geopolitical hazards, as well as increasing financial transaction costs and risks. These policy and market changes arising from the Russia-Ukraine conflict will indicate an increase in risk for global capital.

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Budget deficit to balloon to Rs5.6tr in FY22, says Miftah as he slams PTI’s economic policies



Pakistan Muslim League-Nawaz (PML-N) leader Miftah Ismail, also a former finance minister, on Tuesday informed Pakistan’s budget deficit will hit Rs5,600 billion at the end of the ongoing fiscal year, a record high level, as he slammed economic policies of the ousted government of Pakistan Tehreek-e-Insaf (PTI).

Addressing a press conference at his residence, Miftah – a key member of the PML-N whose president, Shehbaz Sharif, was elected the country’s prime minister on Monday after the ouster of Imran Khan – said the previous government informed us that the country would face a deficit of around Rs4,000 billion.

“However, this deficit will balloon to Rs5,600 billion, which is by far the highest deficit in Pakistan’s history,” said Miftah, who served as finance minister during 2018.

“If we add the Rs800 billion in supplementary grants, the deficit ends up at Rs6,400 billion,” he said, adding that out of Rs800 billion, Rs220 billion alone needs to be given to Sui Northern Gas Pipelines Limited (SNGPL) while another Rs80 billion needs to be disbursed to Gencos to keep them afloat.

Tackling economic issues is one of the main, and most urgent, responsibility of the incoming government, as the South Asian country’s economy faces a number of issues on multiple fronts including a rising inflation rate and depleting foreign exchange reserves.

Terming the Rs373-billion relief package announced by then Prime Minister Imran Khan as a “landmine left for the newly formed government of Shehbaz Sharif”, Miftah said that PTI officials wrongly said that the package could be financed by the government.

“The International Monetary Fund (IMF) has not agreed on the said package, and we would have to renew negotiations with the international lender,” said Miftah.

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Rejecting claims, Miftah said that the previous government never achieved a primary surplus.

The PML-N leader added that Pakistan’s trade deficit is expected to hit $45 billion this fiscal year, which is a record.

“Pakistan imports are going to hit a record $75 billion, whereas the country’s exports will reach $30 billion,” he said.

Miftah said that due to the rising current account deficit, foreign exchange reserves are declining. “Last month alone, forex reserves declined by $5 billion, which is the largest single decrease in foreign exchange reserves in the history of Pakistan,” said Miftah.

“Our government’s top priority is to stabilise and increase the foreign exchange reserves,” he said.

Miftah said that in the coming fiscal year Pakistan needs to make payments of $30 billion, for which it is important to take the IMF on board.

Praising announcements made by Prime Minister Shehbaz, Miftah had earlier said that his government increased the pension of pensioners by 10% immediately, and also raised the minimum wage to Rs25,000.

Miftah added that markets reacted positively to Shehbaz Sharif’s ascent to the PM House, as the Pakistan Stock Exchange (PSX) posted massive gains, whereas the dollar, which was trading at 190 just days ago, has gone down to 182 against the rupee.

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Pakistan to exit FATF grey list this year: Tarin



The Federal Minister for Finance and Revenue, Shaukat Tarin said that Pakistan would exit from the grey list of Financial Action Task Force (FATF) this year as it has already achieved almost all targets set by the task force.

“We have completed 26 conditions out of 27 of the action plan,” the minister, who is in Dubai, told Khaleej Times and termed the FATF decision as politically motivated.

It is pertinent to mention that on Friday, the FATF announced that it was retaining Pakistan on the grey list while noting that significant progress had been made in completing the required action items for removal from the list.

In a statement, the FATF said that Pakistan completed 26 of the 27 action items in its 2018 action plan.

It encouraged Pakistan to continue to make progress to address the one remaining item as soon as possible.

It further added since June 2021, Pakistan has taken swift steps towards improving its AML/CFT regime and completed six of the seven action items ahead of any relevant deadlines expiring.

“Pakistan should continue to work to address the one remaining item in its 2021 action plan by demonstrating a positive and sustained trend of pursuing complex money laundering investigations and prosecutions,” the statement said.

Meanwhile, head of research at Pakistan Kuwait Investment Company, Samiullah Tariq said Pakistan was already in the grey list since 2018, so there was no major impact expected on business and markets in near term.

“In my view Pakistan’s performance has been impressive while complying with FATF parameters and it is also acknowledged by the FATF. Pakistan should have been excluded from the grey list amid considering its significant progress on improving its financial system and check terror financing,” Tariq told Khaleej Times.

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In a statement, the finance ministry said Pakistan presented its case in an effective manner and also reaffirmed its political commitment to continue with the efforts to complete the action plans.

“The FATF reviewed Pakistan’s progress on both action plans in its plenary meeting. The FATF members, while participating in the discussion on Pakistan’s progress, recognised Pakistan’s continuing commitment towards sustainable, robust AML/CFT frameworks,” the statement said.

“The country is making endeavours to complete the last two remaining items of both the action plans, as early as possible,” the statement said.

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IMF Finally Approves 6th Tranche of Loan Program for Pakistan



According to the Federal Minister for Finance and Revenue, Shaukat Tarin, the Executive Board of the International Monetary Fund (IMF) has approved the resumption of its $6 billion Extended Fund Facility (EFF) program for Pakistan.

I am pleased to announce that IMF Board has approved 6th traunche of their programme for Pakistan.

— Shaukat Tarin (@shaukat_tarin) February 2, 2022

The executive board, which convened in Washington, also agreed to relax a few requirements to allow the fourth loan tranche to be released under the $6 billion Extended Fund Facility’s sixth review.

Now completed, the global lender will sign off to make available SDR 750 million (about $1,059 million) for Pakistan, bringing total disbursements under the EFF to about $3,027 million. Prior to this engagement, Pakistan and IMF had reached a staff-level agreement on policies and reforms needed to complete the sixth review under the $6 billion EFF and issued a press statement on November 21, 2021.

Notably, Pakistan committed to undertake measures including spending cuts and the implementation of around Rs. 500 billion in taxes, including a Rs. 20 per liter gasoline tax.

It is noteworthy that the global lender’s review meeting was earlier rescheduled from January 28 to February 2, 2022. Consequently, the next (seventh) evaluation of the $6 billion EFF program is scheduled for April 2022. Thereafter, the eighth and final review will be completed in September 2022.

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