Investors brace for volatility as West moves to cut Russia from SWIFT

NEW YORK/LONDON, Feb 26 (Reuters) – Investors braced for bigger swings in asset prices on Saturday after Western countries announced a series of tough sanctions to punish Russia for its invasion of Ukraine, including by blocking certain banks from the SWIFT international payment system.

The new measures announced by the United States, Britain, Europe and Canada also include restrictions on the international reserves of the Russian central bank. The measures will be implemented in the coming days. Read more

Investors fear Russia could be kicked out of SWIFT, the world’s main international payments network, as it would disrupt global trade and harm Western interests as well as Russia. Read more

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“It means there is going to be a catastrophe in the Russian currency market on Monday,” said former Russian Central Bank Vice President Sergei Aleksachenko. “I think they will stop trading and then the exchange rate will be fixed at an artificial level, like in Soviet times.”

Michael Farr, managing director of financial advisory firm Farr, Miller & Washington LLC, said of the impact on global markets: “It could come as a surprise that isn’t taken very well if it means a slowdown international trade”.

The news comes after a week where worries about escalating conflict in Ukraine rocked markets around the world. Stocks fell and oil prices soared as investors rushed into gold, the dollar and other safe havens.

Many of those safety moves were at least partially undone on Thursday and Friday, and US stock markets rallied to close out the week. Read more

The latest measures could send markets into another wild ride as traders weigh the implications for the global economy, including potential higher commodity prices and inflation. The war between Russia, one of the world’s biggest exporters of raw materials, and Ukraine has already helped push oil prices to their highest level since 2014.

The S&P 500 is down 8% year-to-date, dragged down by worries about geopolitical strife and a more hawkish Federal Reserve.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., February 18, 2022. REUTERS/Brendan McDermid

“A lot of traders were sort of convinced that the US and Europe weren’t taking a tough stance,” said Edward Moya, senior market analyst at OANDA. “This action will be really hard to digest and it will really sting a nerve for a lot of investors. … Much of the rebound that we saw in the second half of last week will be tested.

Mohamed El-Erian, part-time chief economic adviser at Allianz and president of Gramercy Fund Management, said Russia’s exclusion from SWIFT “has the potential to cripple the economy there” if done global way.

“Inevitably, there would be spillovers and fallout, including more stagflationary momentum in the global economy and a greater likelihood of Russian arrears to Western businesses and creditors,” he said in comments. by e-mail.

Tom Martin, senior portfolio manager at Globalt Investments, said the move will continue to fuel demand for gold, Treasuries and other popular destinations for nervous investors.

“SWIFT is going to be painful and the markets are going to recognize that,” he said. “What you’re going to get is continued volatility as all participants adjust their risk tolerance.”

A likely victim will be the Russian ruble, investors said. The Russian currency fell to an all-time low against the US dollar last week, although it pared some of those losses on Friday.

“With the central bank likely to face severe constraints on monetary intervention, the ruble will struggle to find a bottom,” said Karl Schamotta, chief market strategist at Corpay. “Nobody wants to catch a falling knife.”

Some investors, however, said markets could put a positive spin on the new measures because Western troops had not joined the war.

“This is the closest thing to a declaration of war from a financial perspective,” said Ross Delston, a US attorney and former banking regulator. “This will result in Russia being considered radioactive by US and European banks, which in turn would be a major impediment to trade with Russia.

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Reporting by Davide Barbuscia, Ira Iosebashvili, Catherine Belton, Megan Davies, Saqib Iqbal Ahmed and Michelle Price; edited by Paritosh Bansal, Leslie Adler and Cynthia Osterman

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