Sorry Mr Putin your card has been rejected. Do you have an alternative means of payment, Sir?
It’s not World War III and no it’s not the Cold War: Part Two, but it is a serious situation with Crimea. In the simplest form, we live in world where you cannot just invade a country and call it “yours”. You can’t sail like the Vikings did and go to Wessex and invade, steal and generally try to take what’s not yours and sail back. The world has changed and we have laws to govern this.
So the world governing bodies have imposed sanctions on members of the Russian political elite. They have had their European and US assets frozen, and travel bans have been put in place to restrict their movements, as part of heightened tensions over Ukraine.
The effects of this in risk management are severe. Asset freezing means you can’t trade freely and you don’t have capital to fall back on if you default. It also makes banks not feel “safe” trading with each other, full well knowing that if they trade with a Russian bank in London, there is no guarantee of making a return because of strict sanctions. In a political sense, an American bank does not want to be seen doing business with a Russian envoy. Obama will not like that.
Risk managers now have the hard task of assessing the risk of trading with clients in the Russian or CIS region, knowing that the exposures they now have with clients means they have no “back up” plan assets to fall back on. The simplest way to understand this is if you take a credit card and the default usual protocol is to send debt collectors after your material belongings. But if those material belongings are frozen they can’t be collected. In the case of Russia, the US has frozen the material belongings. You can’t collect any money if the trade goes wrong.
Risk managers are not too worried about this situation escalating. Russia is one of the biggest producers of gas in the world, if not the biggest, and they are still trading that comfortably. But if they lose an asset like that, the Russian economy could get hit severely.