They see widespread capital flight if Russia-Ukraine conflict deepens: IIF


A “serious” escalation of the war between Russia and Ukraine will trigger widespread capital outflows from emerging markets, analysts at the Institute of International Finance (IIF) have warned.

The trajectory of the conflict is of the utmost importance for the market, because if it becomes more serious, “there will be no safe haven among emerging markets, there will be a generalized increase in risk aversion,” they projected.

Investors will unwind their positions in these markets without discrimination and global risk will remain much more volatile.

In a new research analysis, the institute that associates the largest number of financial institutions operating worldwide, explained that this possibility of escalation of war is not its base scenario.

For the economic team led by the director and chief economist of the IIF, Robin Brooks, an escalation of the warlike conflict is unlikely and they foresee that the war will continue in the territory of Ukraine.

But also in that scenario, they anticipate collateral damage for emerging markets.

The institute’s experts detailed that the global repercussion of the war conflict is not related to the collapse that they expect the Russian economy will present, since its contribution to world GDP is small and it has remained fairly isolated from world financial markets.

The global effect comes from uncertainty and financial volatility, as well as from the increase in commodity prices that will continue to fuel inflation.

Just on Monday, economists from the institute predicted a deep recession, of 15% for the Russian GDP, as a consequence of the economic and financial sanctions imposed after the advance of the invasion of Ukraine.

Europe and commodities, communicating vessels

In the document, which they titled “Russia’s invasion of Ukraine and emerging markets”, they found that the global impact will be felt through the effects on Eastern and Western Europe and the commercial channel that flows between the European Union and the United States.

For the economies of Europe they estimate that they will be involved in a much weaker trade.

Another contagion channel towards the emerging countries will be via commodity prices, particularly oil and wheat.

IIF experts estimate that in their base scenario the impact that the persistence of the conflict will have on the US economy and Latin America will be nuanced. They also highlighted that the increase in raw material prices may have a positive side for the region’s exporters.

From his perspective, the region’s commodity exporters will find some kind of advantage with windfall revenues from commodity trade.

Last Friday, March 4, the director of Economic Research for Latin America at the IIF, Martín Castellano, explained to El Economista that these unexpected gains that the region would record from the export of commodities could somehow help offset the secondary effects of the invasion of Ukraine.

The IIF has kept its economic research area very active since Russia invaded Ukraine. Its members include entities such as Lloyds Banking Group; BlackRock Inc., Nomura Holdings; KBC Bank; China Life Insurance Company; JSC VTB Bank; CaixaBank; Nordea Bank AB; Abhu Dhabi Global Market, BNP Paribás and UBS among others.

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