How the Russia-Ukraine war upended global finance in 2022

The Russian invasion triggered a coordinated international response from companies across various sectors. McDonald's, PepsiCo and Shell all dissolved their long-established businesses in Russia. And dozens of financial institutions and payment providers also halted business activities in the country.

Though certain sanctions may contribute to inflation and impose higher compliance standards on firms at home, the U.S. and its allies have effectively utilized restrictions on Russia's access to transactions to weaken the country.

Elina Ribakova, deputy chief economist for the Institute of International Finance, highlighted the weight of such measures at American Banker's Payments Forum in Phoenix earlier this year.

"The weaponization of finance is something that has come out of this. When you have the U.S. financial system and the influence of the dollar, there is leverage," Ribakova said.

Brian O'Toole, a nonresident senior fellow at the Atlantic Council. noted that the sanctions reinforce the hegemony the U.S. has — and continues to wield — in global markets. 

"It's not a new aspect of war, but a realization of just how asymmetric U.S. financial power is, perhaps even more so than military power," he said. 

Broad sanctions have had a variety of impacts. Whether the U.S.-led coalition can hold on until the war ends is yet to be seen.  Some foreign policy experts warn that isolation may drive Russia to strengthen its trading relationships with the U.S.'s adversaries, like China.

The conflict has raised prices for food and energy across the globe. Inflationary pressures, broadly felt before the war, were worsened by the disruption of trade with Russia and Ukraine, two major global exporters.

Russia and Ukraine account for more than 20% of world wheat and oilseed production, and unharvested fields on the frontlines are driving up scarcity, according to estimates by Goldman Sachs.  With supply chains already strained, global markets, particularly in the developing world, continue to see price swings for essential food products.

Volatile global energy prices have driven the Western coalition to take action to stabilize prices while adhering to existing sanctions. A U.S. ban on the import of Russian oil and gas earlier this year put strain on already elevated prices, though it may reduce Western reliance on Russian energy in the long term.

In one major development, financial officials from G-7 nations in September agreed to cap the price of Russian oil.

"This price cap is one of the most powerful tools we have to fight inflation and protect workers and businesses in the United States and globally from future price spikes caused by global disruptions," said U.S. Treasury Secretary Janet Yellen.

"Today's action will help deliver a major blow for Russian finances and will both hinder Russia's ability to fight its unprovoked war in Ukraine and hasten the deterioration of the Russian economy" she added.

Though some industry participants are hopeful that inflation will peak early in 2023, persistent inflationary pressures are likely to shape global financial markets well into next year, which will present ongoing challenges for the world economy.

Russia's aggression against Ukraine has led many observers to hedge their previously optimistic global GDP projections, and has signaled to regulators the need for sustained vigilance.

According to the Organisation for Economic Co-operation and Development, annual global growth is projected to slow down next year to 2.2%.

One major factor dimming the outlook is the broad tightening of monetary policy, driven by soaring inflation in a variety of economies. As early as May 2022, Fed Vice Chair Lael Brainard was forecasting that the Russia-Ukraine war would pose significant risks to the banking system.

The aggressive monetary tightening has raised the specter of a recession, adding to the market's woes.

In fact, Boston Consulting Group recently found that a majority of survey respondents, all of whom were leaders at big commercial banks, believe the United States and Canada will experience a recession in 2023.

Similar sentiments are prevalent abroad. Elizabeth McCaul, a member of the Frankfurt-based European Central Bank's supervisory board and one of Europe's top bank supervisors, recently urged caution by institutions on both sides of the Atlantic, given what she described as a "fraught" economic atmosphere.

"Bank profits are high, and capital levels are too, but the fault lines are clear," McCaul said. "Supply chain issues, rising costs and elevated leverage are weakening the quality of assets on bank balance sheets. Meanwhile, external risks to the banking sector, ranging from cryptocurrencies to climate change, are in need of tighter controls."