The consequences of the existing geopolitical conflict between Ukraine and Russia will impact the financial system and the geopolitical stability of countries beyond European borders. The complexity of this conflict will make it imperative that organisations, and especially those in the financial sector, closely monitor the evolution of their risk exposure in order to contain the ripple effect of the economic and political sanctions imposed on Russia and their potential allies.
From our perspective, there are four key areas of focus:
- Financial Crime
A new wave of economic sanctions and the exclusion from the international payment scheme SWIFT will not only impact the Russian financial system, but also the countries which keep a tight commercial relationship with Moscow, making it more difficult to continue operating under the previous terms. Despite the sanctions being targeted at senior members of the Russian Government, it's only natural that there will be serious implications for Russian companies conducting business internationally; with said companies undergoing full scrutiny of their beneficial owners, governance bodies and operations. Organisations that choose to collaborate with them, will be subjected to potential sanctions and commercial restrictions. Channels and mechanics used to finance terrorism will be at the core of this sanction strategy to reduce the economic capacity to continue with the conflict.
- Impact on the supply chain
It remains unclear whether energy payments will be blocked from the international payment system. Nevertheless, this is not the only element that can impact the global supply chain, especially with Russia being the biggest producer of Palladium; a mineral used for industrial purposes in various industries, ranging from healthcare, to vehicles, and technology. By way of an example, the industry of microchips has been affected by a shortage in recent years due to increasing demand, and now with this recent conflict, there is a very likely impact in terms of raw material and pricing. In light of these recent events, one potential strategy that can be deployed to avoid traditional commercial routes and evade sanctions is to relocate business activity to markets such as China. However, increasing China’s control over the critical minerals used for producing electronic components could contribute to further geopolitical trade tensions in the future. At present, China’s embrace of Russia on energy and financial issues carries risks in itself. However, if China is viewed as Russia’s enabler during times of war, pressure to extend sanctions will rise in US Congress as well as major technology exporters such as Japan and South Korea.
Expect to be attacked. As part of the new ways of war, there are cyber-criminals operating and targeting western institutions (including government websites, Financial Institutions, and western flagship companies) as a response to the sanctions package. The increase in the level of sophistication of these attacks will force organisations to implement, maintain and adapt to a robust resilience and recovery framework to operate under these uncertain circumstances.
- Emerging risk and market volatility
This geological conflict will reshape economic trade and political alliances between regions, forcing organisations to readjust their risk exposure and identify new emerging risk. One of the potential consequences from a financial perspective, is the increase in demand for certain assets in order to maintain operations. In the case of financial assets, it's expected that we see an increase in the use of Cryptocurrencies in order to circumvent international sanctions and continue conducting business. Moreover, it's also expected that we will endure a high level of volatility for the upcoming months due to the consequences and future geopolitical decisions between global leaders.
What to do next?
- Revisit your business model and understand your risk exposure: regardless of the level of contraction or risk exposure, Senior Management should understand the consequences of doing business with those subject to international sanctions
- Allocate resources to those critical business functions: provide extra resources to those function in charge of monitoring and managing said risks. There is increasing pressure to minimise reputational risk and preserve value.
- Test your resilience and be prepared to be attacked. It is important to maintain an up-to-date cybersecurity policy as part of the overall Security framework. Ensure that Cybersecurity procedures and defensive tools are tested and deemed to be fit for purpose. Furthermore, monitor your dependencies with critical providers and their protection actions. Maintain constant communication between your Senior Management and technical teams to address any disruption, minimising any potential impact to customers.
This geopolitical conflict is generating shock waves not only to Europe but beyond the European borders, impacting international trade, increasing volatility in financial markets, and generating a demographic impact.
Organisations and Senior Management should constantly monitor the evolution of this conflict to assess their exposure to said events and drive decisions to de-risk operations and reduce any potential impact to the business and clients.