Asia’s recovery buffeted by Russian war roar


All Asian leaders thought they knew about 2022 is smoldering alongside the wreckage wrought by Vladimir Putin’s artillery in Ukraine.

Take Prime Minister Fumio Kishida in Tokyo, which had already banked a growth rebound in the current quarter. The surge in energy prices related to Russia’s invasion has blown up Japan’s best-laid plans. It’s not where Kishida’s party hoped to be ahead of elections this coming summer.

Yet this head-turning dynamic is happening all across Asia. Hopes that inflation would taper off and supply-chain disruptions would ease are being dashed with each advance of Putin’s tanks.

Louis Gave at Gavekal Research speaks for many when he observes: “Until Vladimir Putin’s long, televised rant last Monday, my go-to line for the Ukraine crisis was that ‘Godot would show up in Kiev before any Russian troops.’ Clearly, that was a huge miss.”

For virtually everyone, actually. Years of “rational actor” being Putin’s brand created the understandable impression the Russian leader was bluffing. Now that reality has walloped markets everywhere, economists are scrambling to gauge the fallout.

On a macroeconomic level, Russia would seem a bit international player. China, notes Steven Cochrane at Moody’s Analytics, is by far the largest exporter of goods to Russia, but only 2% of its shipments are bound there.

Yet Asia is the most reliant region on Russia’s oil and, to a lesser extent, gas exports, Cochrane says. There’s a threat, too, “that the semiconductor shortage could lengthen, as Russia and Ukraine are major players in the supply of neon and helium gases.”

The knock-on effects are upending currency markets. The 30% plunge in the Russian ruble to an all-time low was the most graphic example. Markets are bracing for ever-harsher sanctions against Putin’s regime. The Russian central bank closed the stock and derivatives markets on Monday.


Russians line up to withdraw money from ATMs in Moscow this week. Photo: Facebook

Sanctions lift fears

That was dramatized by scenes of lines for ATMs amid worries US President Joe Biden and other Group of 20 leaders will announce several more rounds of sanctions, including on major banks. Fears are rampant that bank cards might cease to function. The same with concerns cash withdrawals will be limited as Russian banks get blocked from the SWIFT payments system.

The domestic securities arm of Nomura Holdings is suspending taking sale or buy orders on at least four investment trusts containing Russia-related assets. Singapore also is clamping down on certain Russia-connected transactions.

Saed Abukarsh, chief portfolio manager at Ark Capital Management Dubai, isn’t exaggerating when he calls Russia “simply unbankable” right now. And equally unpredictable.

All markets know for sure, Jeff Currie, head of commodities research at Goldman Sachs, told Bloomberg, is that “this is an enormous amount of oil that has the potential to be disrupted.”

Clay Lowery, executive vice-president at the Institute of International Finance, says that based on IIF analyses of the current situation, as well as natural gas supply diversification options, European countries might be able to manage a disruption of Russian exports for the rest of the winter.

“However,” he adds, “in the medium-term, due to a number of issues, including extraction constraints, lacking infrastructure and political factors, demand-side measures would be inevitable.”

While last week’s decision by the German government to suspend the certification of Nord Stream, by itself, should not have an effect on supplies, Lowery says, “it increases the likelihood that Russia will not step-up natural gas exports to Europe anytime soon.”

In the weeks ahead, says strategist Jeffrey Halley at Oanda, “it’s all about the Russia-Ukraine situation and evolutions in that situation will drive market sentiment and direction. Putin will now have to accept that the Western powers are prepared to accept quite a bit of economic pain now to punish Russia.”

A worker checks monitoring equipment at the Slavyanskaya compressor station, the starting point of Russia’s Nord Stream 2 pipeline. Credit: TASS

Fresh headwinds strike Japan

The same with Japan. Kishida was quick to sign on to Biden’s Russia sanctions campaign – and to threaten more actions to come. That pain is sure to complicate the 2022 Kishida thought Japan was set to have, starting with a solid first quarter.

In the waning months of 2021, data suggested Japan was in a growth upswing. Yet the rapid spread of the omicron variant and supply-chain disruptions sent fresh headwinds Japan’s way and tempered the recovery.

In January, Japan’s factory output fell for a second straight month. Now Ukraine-related fallout is adding to concern that the economy could shrink in the January-March period. Industrial production fell 1.3% from the previous month in January. Retail sales, meantime, dropped 1.9% in January from the previous month.

At the same time, Japan is finally getting inflation. Since 2013, Bank of Japan Governor Haruhiko Kuroda has worked to defeat deflation once and for all. In his drive to generate 2% inflation, Kuroda’s team swelled the BOJ’s balance sheet to US$5 trillion, topping Japan’s entire gross domestic product.

Unfortunately, it’s the “bad” kind. Kuroda’s charge was to thrust the economy into a higher orbit – high enough to encourage CEOs to increase wages. That, it was hoped, would kick off a virtuous consumption cycle that raises consumer prices organically.

Instead, the inflation Japan is recording reflects the effects of higher energy prices. Imported inflation, more often than not, tends to undermine household and business confidence and reduce purchasing power.

In the BOJ’s case, it also limits options. On the one hand, the BOJ might be tempted to taper and reduce its ginormous balance sheet. On the other, it might now feel under pressure to pump even more stimulus into the economy to backstop growth.

Ukraine-Russia uncertainty is sure to weigh on confidence in Japan, further curtailing growth. That’s especially so if prospects dim for 5%-plus growth in China, by far Asia’s top trading partner.

Here, the China-Russia angle is particularly uncertain.

Analyst Neil Thomas at Eurasia Group notes that two of China’s most important state-owned banks – Bank of China and the Industrial and Commercial Bank of China – are restricting dollar-denominated financing and partially restricting yuan-denominated financing for imports of Russian commodities.

Chinese President Xi Jinping and Russian President Vladimir Putin share a toast. Photo: AFP / Zuma

Uncertain global outlook

“These moves,” Thomas says, “are efforts to reduce financial risk and stay onside of US sanctions, indicating that Beijing has thus far not instructed Chinese actors to violate sanctions on Russia. This suggests that China is unlikely to incur significant costs to back a Russian invasion of Ukraine that it has never endorsed.”

Vincent Mortier, chief investment officer at asset manager Amundi, says the Russia-Ukraine crisis “adds uncertainty to the global outlook at a time when central banks are acting to fight inflationary pressures.”

The impact, Mortier adds, “is primarily on confidence and through commodity prices in an already-hot inflationary environment. The risk of stagflation globally is now higher – inflation factor gets reinforced while the growth factor weakens – while China is relatively insulated from this, further reinforcing the role of Chinese assets as a diversifier.”

Mortier concludes that “as we don’t expect a fast resolution of the situation, we see a rising probability of further repricing across global risk premia. Central bank actions will be even more key. Their agendas could change in case of increasing effects on the growth outlook.”

A case in point is the Federal Reserve outlook. As Goldman Sachs wrote in a note on Wednesday: “We don’t expect geopolitical risk to stop the FOMC from hiking steadily by 25 basis points at its upcoming meetings, though we do think that geopolitical uncertainty further lowers the odds of a 50 basis-point hike in March.”

As San Francisco Fed President Mary Daly told reporters recently, geopolitical blowups “create a lot of uncertainty and uncertainty, as we know, is a demand shock. And how big the demand shock is depends on how high the uncertainty is and how long it lasts.”

Of course, companies from Boeing to BP to Citigroup to McDonald’s are scrambling to assess exposure to the Russia-Ukraine mess. Citi, for example, reports about $9.8 billion in exposure to Russian loans, government debt and cash on deposit.

Japanese giant Toyota this week blamed a suspected cyber attack for its decision to halt production in 14 domestic factories. Very curious timing, coming a day after Tokyo joined the US and European allies in barring some Russian banks from accessing the SWIFT international payment system. Kishida says Japan is furiously investigating.

Just the latest signs that the year Asia expected to experience is rapidly going sideways.

(Courtesy Asia Times)