Ukraine Invasion's Potential Impacts

The invasion poses a complex threat to the operations of financial services companies and has enormous consequences for the financial markets in the short term. 


On Feb, 24, Russian armed forces attacked Ukraine. The invasion is first and foremost a human tragedy, and Allianz has been clear in its opposition to this unprovoked attack. As a secondary topic after the humanitarian concerns, the invasion poses a complex threat to the operations of financial services companies and has some enormous consequences for the financial markets in the short term. 

Immediately after the invasion, there was a panicked reaction in the capital markets, particularly European banking stocks. Banks from Italy and France are most exposed to Russia, together accounting for more than 40% of the total exposure of foreign banks in Russia at $25.3 billion and $25.2 billion, respectively. However, these numbers only account for very low single-digit percentages of their total foreign claims. Banks with large Eastern European activities also saw stock prices declining materially. 

Stocks of Russian banks saw massive declines, and interest rates on (expected to default) Russian and Ukrainian sovereign debt, as well as the cost for credit default swaps, went through the roof. Europe’s Single Resolution Board took action on Russia’s Sberbank subsidiaries in Croatia and Slovenia to avoid failure.

The macroeconomic impact and increasingly higher inflation expectations are being fueled by elevated commodity prices. In Europe, the risk of stagflation has increased, and markets are closely watching the next steps central banks around the world are taking. Increasing inflation, together with low economic growth, may lead to lower profit generation for banks and hurt the results derived from retail operations.

When it comes to U.S.-based financial institutions, some asset managers and banks do have physical assets exposure to Russia and Ukraine. However, the evidence seems to suggest that such direct assets exposure (whether these are leased airplanes, real estate, equity investments, Russian and Ukrainian debt/bond investments denominated in USD/Russian rubles/Ukrainian hryvnia, etc.) and other related exposure is in low-single-digit percentages. 

Underwriters expect U.S.-based financial institutions to conduct full write-downs of their investments in Russia and Ukraine during fiscal 2022 and possibly later, as the ultimate outcome of the conflict remains uncertain. It is also likely that the U.S. assets in Russia will be nationalized in response to the U.S.-imposed sanctions, ruling out any possibilities of future recoveries.

A number of U.S. asset managers have highlighted that sanctioned Russian nationals are limited partners in their funds and that they are working to buy back their interests in these private funds to cease the affiliation with these limited partners. 

At the same time, certain U.S. hedge funds are buying up Russian and Ukrainian bonds at cents on the dollar, perhaps betting on an early resolution of the conflict. The Ukrainian bonds are currently trading at higher prices given the pledged financial support of Ukraine by the U.S. and the European Union. While doing so is somewhat of a common practice by hedge funds, aiming to profit from the current unprecedented situation in Eastern Europe may be viewed as an environmental, social and governance (ESG) issue by the investment community and the regulators.

See also: Ukraine: How Exposed Are Insurers?

Cyber and ESG issues

Alongside the human toll, the invasion of Ukraine provides a salient reminder of the omnipresent danger of state-sponsored cyber-attacks that aim to disrupt and disable IT systems. Banks and financial institutions are on alert for an escalation in hacking attempts and Russian reprisal cyber-attacks after the imposing of sanctions by Western nations, resulting in a number of the country’s lenders being kicked off the global payments messaging system SWIFT.  

This comes at a time when risk managers have never been more aware of the hazards posed by cyber criminals. Recent high-profile cyber-attacks have shown a worrying trend, where hackers target technology or software supply chains. AGCS analysis of more than 7,500 insurance claims involving financial services companies over the past five years (worth $1 billion-plus) show that cyber incidents are already the top cause of loss. IT outages, service disruptions or cyber-attacks can result in significant business interruption costs and greater operating expenses from a variety of causes, such as customer redress, consultancy costs, loss of income and regulatory fines. Brand reputation and, ultimately, a company’s stock price can also be harmed, while management can also be held responsible for lack of preparedness.

It is unsurprising then that cyber incidents was ranked as the top risk for the financial services sector by 51% of the 872 respondents who participated in the Allianz Risk Barometer 2022. For companies, and their senior management, this ultimately requires them to maintain an active role in steering the information and communications technology (ICT) risk management framework, including assigning clear roles and responsibilities for all functions and appropriate allocation of investments and training. Companies need to operationalize their response to regulation and privacy rights and not just look at cyber security.

At the same time, the broader ESG impact is being felt by asset managers assessing the impact these developments have on the sustainability of their investments post widespread sanctions, on a country that already scored relatively low in terms of governance and social matters. No doubt some asset managers will consider divesting Russian assets based on ESG considerations. Companies’ boards are re-evaluating presence and activities in the country due to concern over reputational damage.

Anton Lavrenko

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Anton Lavrenko

Anton Lavrenko is regional head of financial institutions for North America at Allianz Global Corporate & Specialty.

Originally from Eastern Europe and a fluent Russian speaker, Lavrenko has more than 25 years of international insurance experience in commercial, financial institutions, reinsurance and brokerage segments.

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