Russia’s Ukraine invasion has limited financial linkages in Asia, but indirect risks remain high

Since the annexation of Crimea in 2014, Russia has been exposed to Western sanctions. The latest invasion of Ukraine by Russia will come be accompanied by more sanctions and market turmoil. This leads to the question on where Asia stands in the financial linkages with Russia. To assess the impact, we analyze the different financial linkages (equities, syndicated loans and bonds) between Russia and the world, with a special focus on Asia.

For background information, Russia’s overall financing activities have already weakened from their peak before the Crimea-related sanctions. In hard currencies, Russian syndicated loans and bonds have collapsed with growing reliance on China and local currency.

With regards to the financial linkages between Asia and Russia, the direct exposure from the three channels above is quite limited. In fact, Asia only accounts to 1% of equity and bond financing by Russian entities. On equities, RUSAL is listed in Hong Kong and is the only major listed Russian firm in Asia. This does not mean Russia does not need overseas financing, but its key offshore center remains as London. For bonds, the role of Asia is also rather small with shrinking share.

Syndicated loan is the only financing source with greater presence of Asian banks, dominated by China with a market share growing from 2% in 2009-14 to 12% in 2015-21. China is now keener to lend more to Russian firms in the steel, nickel and fertilizer sectors. The example of nickel is important, and it shows the ongoing effort from China to secure strategic resources in the race to dominate electric vehicle production.

In addition, even though the share of project finance into Russia remains small in China’s portfolio, the share may not fully reflect the investment relationship. The deals with Russia generally come with contracts with purchase guarantees, which are by far larger than the project cost and important for resources security in China. With more sanctions, Russia will also lean towards using more RMB for settlement.

Beyond the direct financial exposure, Asian markets are being affected by the ongoing very negative sentiment. The good news is the impact is so far small when compared to the rest of the world.

Lastly, the conflict is not over, and the intension of Putin is not well understood. China’s trumpeted cooperation agreement with Russia during the Olympics and the contradictory statements on its position also do not bode well for a quick and meaningful de-escalation. In other words, the US-China strategic competition, which is more obvious than ever in the financial sector, will not get any better after China’s ambiguous position on Russia’s Ukraine invasion and the criticism from the US. This means that the final financial impact may be larger than expected especially if potential secondary sanctions are considered.

Full report is available for Natixis clients.