How is the Russia-Ukraine war impacting the financial and tech sectors?

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How is the Russia-Ukraine war impacting the financial and tech sectors?

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This content is contributed or sourced from third parties but has been subject to Finextra editorial review.

With sanctions from the European Union, Switzerland, France, Japan, Australia, New Zealand, Taiwan, the United States, and the United Kingdom, ratcheting up on the Russian Federation, economic shockwaves are being felt by industries far and wide. Already, the global economy is gasping for air; energy and oil prices are climbing, shares are tumbling, supply chains are approaching the rocks, growth is hobbled, and inflation is on the cards.  

Of course, the technology and financial services spheres are far from immune to the globe’s latest malady, but – in the eye of the storm – it isn’t yet clear what the long-term implications will be.

Finextra spoke to a clutch of firms in the space to glean their thoughts on the events of the last week; the potential consequences of Russia being excluded from Swift; the prospect of retaliatory cyber-attacks from Russia; as well as how financial services players can further support Ukraine, or indeed, stymie the Kremlin.   

What will be the impact on finance and tech?

“Any crisis – irrespective of its origin – has an impact on the revenue and losses of impacted industries,” said Krzysztof Grzeszczuk, innovation consultant, Netguru. “Firms that operate directly on the Russian market, investors, and companies targeting the Russian market, will obviously be most impacted by the sanctions.”

“In the worst-case scenario,” added Grzeszczuk, “firms will be forced to withdraw from the Russian market completely, or declare bankruptcy if the losses cannot be compensated by revenue streams from other markets or financial aid from their countries of origin.”

Not all areas of financial services, however, are staring down the barrel of a gun. Michael Clouser, co-founder, The Startup Race, stressed that “cryptocurrency and related services will benefit. People are losing trust in central currencies due to political instability, and actors are seeking to circumvent sanctions and SWIFT shutdowns.”

Rising oil prices may spurn even more inflation, and central bank-controlled currencies will become less valuable as people lose confidence in them, added Clouser. “Alternative currencies – those besides Bitcoin – will rise in price, such as Monero and other cryptos with privacy by design.” 

Aside from the potential shifts in customer sentiment, talent could take a hit too. Already, firms in Ukraine are allowing their cohorts move to alternate European offices. In the Netherlands, Bunq founder, Ali Niknam, has launched a scheme to help those impacted by the crisis immigrate to the Netherlands on highly-skilled visas.

This could this be the start of a tech talent migration into Europe, and a tech brain drain from Russia.

How will Russia’s expulsion from SWIFT impact the payments landscape?

With the United States, the United Kingdom, Europe, and Canada removing a handful of Russian banks from SWIFT on 26 February – essentially denying Russia access to the financial markets – many have speculated on the impact this will have on the payments ecosystem. There are concerns around, for instance, how payments for Russian energy imports would be executed, whether foreign creditors can be compensated, and to what extent it will encouraging nesting.

In response to its expulsion, the Russian Central Bank has claimed its SWIFT alternative – the Financial Message Transfer System (FMTS), developed in the wake of the 2014 invasion of Crimea – is primed.

According to Reuters, FMTS sent two million messages in 2020, or about a fifth of Russian internal traffic. However, institutional involvement in the scheme is nowhere near what it needs to be to prop up Russia in the international payment transfers arena. Membership today constitutes mainly Russian and Belarusian banks.

Irrespective of FMTS’ short-term success, the bottom line here is that the West’s use of the SWIFT “financial nuclear weapon” – as French Finance Minister Bruno Le Maire dubbed it – will, at the very least, be splintering for the global payments landscape.   

Are Russia-sponsored cyber-attacks likely?

Le Maire’s depiction of the SWIFT axe as a “weapon” is poignant. Indeed, the Russia-Ukraine conflict has become an economic skirmish as much as it is a geopolitical war. As such, the imminent possibility of direct, retaliatory attacks against western financial institutions should not be taken off the table.

Already, Britain's Lloyds is on high alert for cyberattacks. The National Cyber Security Centre (NCSC) recently pointed out a “historical pattern of cyber-attacks on Ukraine with international consequences” – urging financial firms to “bolster their online defences” today. Distributed denial of service (DDoS) attacks, such as the one that put Ukrainian banking sites offline nearer the start of the war, seem to be the weapon of choice for Putin’s posse of military hackers. The European Central Bank (ECB) has advised banks to shore up their defences.

By Clouser’s estimation, retaliatory cyberattacks from Russia will become even more likely “if Putin doesn´t get a quick win, and the war drags into 2023. Any interventions by Western states will lead to cyber-attacks by Russia – if not nuclear war eventually – as Putin has threatened. He is a man of his word.”  

How can financial services players help?

While the financial services and technology sector is vulnerable in this crisis, firms within it have the power to support Ukraine and place their own embargoes on the aggressor.

“In the current situation, it is important to support Ukraine and its people,” said Grzeszczuk. “Fintechs, financial institutions and tech companies can make a difference. People migrating from, for example, Ukraine will need new accounts and means of paying abroad.”

Indeed, banks and fintechs are already reacting to this by bearing fees for international funds transfers to Ukraine or simplifying the processes of opening new accounts for Ukrainians. Visa and Mastercard, for instance, have donated $2m each for humanitarian aid, and Revolut – with its Russian-born chief, Storonsky – is making it easy to make direct donations to non-governmental organisations helping those affected by the crisis. “Their customers donated €1m to the Red Cross within 24 hours,” pointed out Grzeszczuk.

The Tech to the Rescue voluntary movement has even launched a campaign to help non-profit organisations get the technological support needed in the face of the crisis.

In terms of on-the-ground impact, some firms – such as Lemon.io – are transferring months’ worth of bonuses ahead of time, and have committed to paying full salaries to any employee joining the Ukrainian armed forces. EPAM, meanwhile – with around 10,000 staff in Ukraine – is facilitating donations and providing transportation, accommodation, and health care to those impacted by the crisis.

“There are many more examples of such activities coming from individuals, non-profits, and commercial organisations,” said Grzeszczuk. “We have the tools to make an impact. Even small initiatives can make a difference.”

Clouser, meanwhile, calls for investment banks and private equity funds to pull out of investments in Russia “and take action at the board level to stop transactions with the state.” 

Global head of industry and regulatory affairs, Encompass Corporation, Dr Henry Balani, however, notes that implementing sanctions against Russian banks and companies will be more difficult in practice than many might expect. “This is because Russian companies could restructure subsidiary companies so that they are no longer classified by the Office of Foreign Assets Control as ‘Russian-owned’,” he explained. “To do this they can, and probably will, restructure so that their subsidiaries are no longer at least 50% owned by a Russian parent company.” 

Therefore, banks will need to review their current clients and understand their ownership structure, while comparing the latest companies and individuals that have been sanctioned. “They must, then, validate their subsidiary ownership structure, with the challenge being that these companies will deliberately dilute their subsidiaries to evade sanctions,” he said.

Another challenge is that sanctioned banks are owned by billionaires and oligarchs with direct links to President Putin. “Banks will have to identify these individuals’ ownership of other companies and, in turn, validate if these companies' assets need to be frozen.”

The implication here is that, if these sanctioned billionaires and oligarchs are majority owners of these companies, “it means these companies are in turn sanctioned – the bottom line is that banks must be able to identify these relationships – and quickly.”

A united front

The Russia-Ukraine war has yielded a never-before-seen geopolitical response from the financial community. The increasing speed at which banks and tech companies are announcing their own embargoes against Russia are seeing the Federation become further isolated from the rest of the globe.

But these measures will not only cause pain to Russia today; they will hamper its growth for many years to come – particularly within its technology sector, if the west moves to ban technology exports to Russia.

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Contributed

This content is contributed or sourced from third parties but has been subject to Finextra editorial review.