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2 Mar 2022

Econ Digest

Russia-Ukraine conflict and its impact on the Thai Baht; Limited direct impact but high indirect impact and risk


        Various issues happened amid the Russia-Ukraine crisis after February 28, 2022, most importantly, the first round of talks between the Russian-Ukrainian delegations for resolving the current conflict. However, this round of talks ended with no agreement, while the delegations from Russia and Ukraine agreed to hold the second round of talks on March 2. Concurrently, Ukraine officially signed an application for European Union (EU) membership, which could affect the efforts for seeking a favorable resolution by both parties to be less possible at the moment.

       While the resolution of international political tensions remains uncertain, the issue that has had great impact is the catastrophic fluctuation in the Russian financial system after sanctions were announced by many governments, freezing Russian overseas assets (especially foreign exchange reserves) and cutting off a number of Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. As a result, the shortage of U.S. dollars, Euros, and other foreign currencies intensified, and the Ruble plummeted to a record low. This has prompted the Russian central bank and relevant authorities to launch a number of measures to limit risks to the overall market and financial system, including doubling interest rates at one time (from 9.5% to 20%) and ordering exporters (mostly energy companies) to sell 80% of their foreign currency revenue, as Russia’s central bank cannot use its reserves to support the Ruble. Moreover, Russia also issued other measures to limit capital outflows as well, for example, prohibiting securities companies from accepting orders to sell assets to foreign investors, as well as preparation for measures to control capital outflows by ordering a ban on foreign exchange loans and transfers to Russian residents outside the country. However, these immediate measures will only buy time to help stabilize Ruble for a short period of time, thus it is possible to see a new record low of the Ruble in the coming days.

       Looking at the Thai Baht, close attention should be paid to the Baht’s movements, which will fluctuate and be pressured to depreciate amid the increasing buying position of the U.S. dollar as a safe haven and highly liquid currency during the period of protracted Russia-Ukraine tensions, which may raise risk levels in the near future. Although the trade between Thailand and Russia (including exports and imports) accounts for only 0.52% of the total trade value of Thailand, it must be admitted that issues that need more emphasis and caution are trading partner risks and operational risks as well as potential delays in the payment process. Therefore, Thai business operators and financial institutions must prepare for it. Looking ahead, the types and conditions of Russia’s exclusion from the SWIFT system must be monitored closely, for example:

1) Restricting certain Russian financial institutions’ access to the SWIFT system or restricting transactions in certain currencies. Financial institutions in Thailand will still be able to transact with Russian financial institutions that are still in the SWIFT system or switch to transact in other currencies to continue serving customers.

2) Restricting all Russian financial institutions’ access to the SWIFT system, thus alternative transfer systems will be chosen. In this case, it depends on whether Thai financial institutions are members of other systems or not and security must be taken into account in the transaction process as well.

       Finally, while the situation is unsettled and the solution cannot be assessed in the short-term, investors are expected to reassess the risks and indirect impacts on the EU’s economy and financial market closely as the EU is highly linked with the Russian financial sector, particularly the banking sector. Based on data as of the third quarter of 2021 from the Bank for International Settlements (BIS), it reflected that EU bank’s claims over their counterparties in Russia totaled USD83.84 billion or accounting for approximately 69% of all foreign bank claims, primarily in Italy (20.8%), France (20.7%) and Austria (14.4%), respectively.

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