Russian stocks are tumbling today after Obama announced a new round of stricter sanctions on Russian officials and banks.
So what happens if more countries keep imposing sanctions on each other?
Citi’s Steven Englander has a big note about “financial market warfare” and what the ramifications are.
Long-term implications If the use of financial market warfare intensifies, the risks are:
1) More home bias in investing,
2) Official investors gravitating to jurisdictions and custody arrangements that insulate their assets from seizure
3) Premium on gold, physical commodities and other unattachable assets
This would unwind many years of international capital market liberalization. Moreover, it would have the greatest impact in discouraging long-term, illiquid investments, as these would be most vulnerable to seizure. It is much easier to cut positions in short term liquid assets if there is trouble brewing. External deficit EM economies would probably suffer the most since creditors would see an extra force majeure risk premium added. Apolitical safe havens would probably benefit the most. Where there is an interaction with the traditional currency war discussion is that the damage to EM borrowers would probably be greater than to G10 borrowers. When EM countries depreciate, they often get hit by higher bond yields as well. G10 countries, even when they depreciate sharply, often do not face big pressures on their bond markets. Moreover, higher food prices from depreciation are not nearly the same social issue in G10 that they are in EM.
As if emerging markets don’t have enough problems, now they will possibly collateral damage from a retrenchment in foreign investment.
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