How is the Global Financial System Affected by

Russia-Ukraine Crisis?
MFIN7012 Group 4

Yu Qianhui Bai Xinru

Commodity Risk Yield Curve
Yang Wenkang Song Jingwen
Chen Yao Lin Yudong
Credit Risk SWIFT
Zhang Yiyang
Pang Yongzhe Su Wenfeng
Monetary Policy Investment Strategy
Su Wenfeng
Slides Bai Xinru Song Jingwen Chen Yao
Presentation Yu Qianhui Zhang Yiyang Su Wenfeng
Contents

01. Commodity Risk 04. SWIFT

02. Yield Curve 05. Monetary Policy

03. Credit Risk 06. Investment Strategy

01
Commodity Risk
Oil/Gas/Precious Metals
Commodity Risk
Global trade pattern may change according to the geopolitical conflict

The conflict between Russia and Ukraine may push up global inflation in the short term, especially in energy,
agriculture and metal prices. Russia and Ukraine are major exporters of commodities, especially petroleum
products, grain, and metal products.

2019 Russia/Ukraine trade volume of major industries accounted for global

share, %
20

15
7.3
10 0.2
2.6
10.9 4.2 1
5 8.4
6.2 5.9
3.4
0
Grain Petroleum Products Steel Products Animal and Plant Metal Products
Products
Russia Ukraine
Source: OECD Data
Commodity Risk
Impact on Oil/Gas - Direct Impacts

As an important exporter of crude oil and natural gas, Russia has a significant impact on the supply of
oil and gas worldwide. Against a backdrop of relatively low local stocks and improved epidemiological
conditions driving open borders and travel demand, the potential for a "supply premium" from the
Russia-Ukraine situation is a key variable in the short term for oil prices.

Price of Gas Futures (Pound/Therm) Price of Brent Crude Oil Futures (USD/Barrel)
6 140

5 120

100
4
80
3
60
2
40

1 20

0 0

Source: The International Petroleum Exchange (IPE) Source: Intercontinental Exchange (ICE)
Commodity Risk
Impact on Oil/Gas - Further Impacts

Exacerbation of inflation
In terms of historical relationships, oil prices have a

01 high correlation with overall inflation. In the current

context of high inflation, this will undoubtedly
further push up apparent inflation and increase
central bank tightening pressure.

Exacerbation of energy shortages in

European markets
The cessation of the Nord Stream 2 offshore gas
02 pipeline project and the fact that European gas
inventories are currently at low levels will further
amplify the supply shock of Russian gas and
exacerbate the shortage pattern in the European
energy market.
Source: Bloomberg
Commodity Risk
Impact on Precious Metals - Gold

01 Price of COMEX Gold Futures #1 (GC1), USD/ounce Correlation of Gold Spot Price with US 10-Year Treasury Real Yield,
02
USD/ounce, %
2500 2500 3.5
3
2000 2000 2.5
2
1500 1500 1.5
1
1000 1000 0.5
0
500 500 -0.5
-1
0 0 -1.5

XAU/USD DFII10
Source: New York Commodity Exchange (COMEX) Source: London Bullion Market Association, U.S. Department of the Treasury

NEGATIVELY correlated most of the time

→ Gold is a zero-coupon asset, and the rise in real yields is bearish for gold.
A certain DEVIATION from the theory from this period
→ As the Russian-Ukrainian conflict continues to escalate, gold as an important safe-haven asset is clearly pushed up.
Later, if the negotiations between the two countries go smoothly, the price of gold may fall in the short term.
02
Yield Curve
Yield Curve
Term premium and causes

Term premium: the amount of return an investor can get from taking the duration risk over
the risk-free return

Economic forecast
Explanation
01 the expected poor state of the economy suggests that the central bank will keep long-term rates
low, long-term bonds investors may accept a negative term premium.

Bonds demand and supply

Explanation treasury bonds have best liquidity and safety and therefore attract investors during periods of
02 global economic volatility, the increase in demand lower the term premium.
Yield Curve
War and interest rate

01
Short of funds
The country raised interest rates or issued
bonds to absorb funds, resulting in extreme
high short-term interest rates.

02

Short supply and Inflation

The war leads to the destruction of
production, resulting in short supply, further
lead to inflation and rising interest rates.

Source：Highcharts.com
03
Credit Risk
Credit Risk
Main rating agencies downgraded Russia's credit rating to junk due to higher credit risk

March 4 2022: Russia was downgraded by a solid 8 notches to CCC- from BB+ by S&P.

More obstacles in debt repayment

01 • Ruble depreciation & bank deposit outflows
• Frozen foreign reserves & weakened external liquidity Substantial
foreign holding
of OFZ*:
Higher
around $36 bn
Deteriorating credit fundamentals Financial
credit
02 • Less financing flexibility in both public and private sectors instability
• Weaker economy activities, lower GDP growth and fiscal revenue risk

More uncertain willingness to pay

03 • May default on purpose in order to punish US and Europe

Source: https://www.fitchratings.com; Goldman Sachs Global Investment Research

*OFZ (abbreviation for Russian: Облигации Федерального Займа, romanized: Obligatsyi Federal'novo Zaima, lit. 'Federal Loan Obligations') are coupon-
bearing federal loan bonds issued by the Russian government.
Credit Risk
Credit rating and sovereign CDS value comparison

Russia's CDS Spreads Widen as Tensions Rise

The Russia 5 Years Sovereign CDS reached a 1 year maximum value of 412.48.

Country S&P Rating Sovereign 5Y CDS Implied Probability of default*

High yield
Russia CCC- 412.48 6.87%
Brazil BB- 226.90 3.78%
Greece BB 144.50 2.41%
Investment grade
Germany AAA 12.80 0.21%
United States AA+ 14.70 0.25%
Japan A+ 18.40 0.31%
China A+ 60.77 1.01%
Italy BBB 101.90 1.70%
Source: http://www.worldgovernmentbonds.com/sovereign-cds/; date of data is 3-Mar-22
*Implied probability of default is calculated on the hypothesis of a 40% recovery rate
Credit Risk
Arbitrage opportunities in the Russian market using bonds and CDS

Arbitrage opportunity exists when:

• Total return = risk-free return + credit spread - CDS spread > risk-free return
Credit spread – CDS spread >0
Bond-CDS basis <0

Russia's 10Y CDS Spread (in bp): 10Y government bond yield spread:

773.34 bp

Source: http://www.worldgovernmentbonds.com/

Credit spread > CDS spread

Arbitrage strategy: Bond-CDS basis <0

Borrow at risk-free rate to buy bond and CDS of the

same maturity in equal notional amounts.

Foreign Exchange Riskm

Source: Bloomberg; BondEvalue
04
SWIFT
SWIFT Introduction

Source: europa.eu
SWIFT Introduction
SWIFT Introduction
SWIFT Introduction

(Through SPFS)

Russian Branch Bank in U.S.A

Russian Bank
(Through CHIPS)

Role of SWIFT: Unifying the Format of Transaction

Information among Banks over the World

American Bank
SWIFT Introduction
Impact to Russia

Russian NX/GDP
60.00%

52.09%
50.00%

39.47% 39.64%
40.00% 38.75% 35.83%
39.80%

30.00% 26.58%
33.08%
24.71%

20.00% 22.59%
22.26%

10.00%

0.00%
2019S1 2019S2 2019S3 2019S4 2020S1 2020S2 2020S3 2020S4 2021S1 2021S2 2021S3

Source: data.stats.gov.cn
Impact to Russia

Oil Export Contribution

18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
Arabia Russia Iraq U.S.A Canada UAE Nigeria Kuwait

Source: Wind
Impact to Russia

Russian Import Industries

10.70%

3.20%
4.10%

4.60% • Highly Rely on Machine Imported

from Europe
5.40%

72.00%

Machine Medicine Viachel Clothes Steal Others

Source: Wind
 Impact to Russia

Russian Foreign Exchange Reserves

Exchange Reserves
decreased from 55 trillion
dollar to 35 trillion dollar
by nearly 45%, after
Crimea Event

Source: TRADINGECONOMICS.COM
05
Monetary Policy
 Monetary Policy
Fed expects to raise interest rates

The Fed's Treasury bond purchases fell sharply

The growth of total assets in February slowed down slightly from the previous month.

Source: Wind
 Monetary Policy
Inflation analysis

Russia-Ukraine conflict pushes global commodity prices higher in the short term

Source: Wind
Monetary Policy
Global manufacturing PMI data analysis
Global manufacturing PMI data
US PMI has rebounded, Japan PMI continued to rise
Country 22-02 22-01 21-12 21-11 21-10 21-09 21-08 21-07 21-06 21-05 21-04 21-03

United States 57.5 55.5 57.7 58.3 58.4 60.7 61.1 63.4 62.1 62.1 60.5 59.1
Brazil / 47.8 49.8 49.8 51.7 54.4 53.6 56.7 56.4 53.7 52.3 52.8
Germany 58.5 59.8 57.4 57.4 57.8 58.4 62.6 65.9 65.1 64.4 66.2 66.6
China / 50.1 50.3 50.1 49.2 49.6 50.1 50.4 50.9 51.0 51.1 51.9
Japan / 55.4 54.3 54.5 53.2 51.5 52.7 53.0 52.4 53.0 53.6 52.7
Italy / 58.3 62.0 62.8 61.1 59.7 60.9 60.3 62.2 62.3 60.7 59.8

Global services PMI data

US PMI rebounded, Japan fell
Country 22-02 22-01 21-12 21-11 21-10 21-09 21-08 21-07 21-06 21-05 21-04 21-03

United States 56.7 51.2 57.6 58.0 58.7 54.9 55.1 59.9 64.6 70.4 64.7 60.4
Euro area 55.8 51.1 53.1 55.9 54.6 56.4 59.0 59.8 58.3 55.2 50.5 49.6
Germany 56.6 52.2 48.7 52.7 52.4 56.2 60.8 61.8 57.5 52.8 49.9 51.5
Britain 60.8 54.1 53.6 58.5 59.1 55.4 55.0 59.6 62.4 62.9 61.0 56.3
Japan 42.7 47.6 52.1 53.0 50.7 47.8 42.9 47.4 48.0 46.5 49.5 48.3
Source: Wind
06
Investment Strategy
Use VIX to profit from market volatility
Mean reversion of VIX

Volatility Index (VIX) is a real-time index that

represents the market’s expectations for the
relative strength of near-term price changes of
the S&P 500 index (SPX). Because it is derived
from the prices of SPX index options with near-
term expiration dates, it generates a 30-day
forward projection of volatility.

We can see that the Moving Average (mean) has

stayed around 20 for the last 20 years (currently
around 35) even though there have been some
wild swings.

Source: seeking alpha

Use VIX to profit from market volatility
Volatility during crisis

Volatility Index (VIX) is a real-time index that

represents the market’s expectations for the
relative strength of near-term price changes of
the S&P 500 index (SPX). Because it is derived
from the prices of SPX index options with
near-term expiration dates, it generates a 30-
day forward projection of volatility.

Source: seeking alpha

 Use VIX to profit from market volatility
Buy low sell high

VIX Modal Frequency Probability Percentage of Landing

Number of Days at or Below Range Below
3500 120%
3099
97% 98% 99% 99.76%
3000 100% 92%
84%
2500
80%
2000 64%
1703
60%
1462
1500
40%
1000
568
500 355 20%
182
59 54 19
0 0%
9-15 15-20 20-25 25-30 30-40 40-50 50-60 60-70 70-85 <20 <25 <30 <40 <50 <60 <85

Source: seeking alpha

Use VIX to profit from market volatility
Examples using options

Source: yahoo finance

Invest in U.S. LNG in the long term
EU’s dependence on Russian gas
Invest in U.S. LNG in the long term
U.S. LNG export to EU expected to grow
 Invest in U.S. LNG in the long term
Example: LNG(NYSE)

Market Cap 35.522B

Beta (5Y Monthly) 1.26
Cheniere Energy, Inc. (LNG) is the highest overall rated company
in the Oil & Gas Midstream industry with an overall score of 74. PE Ratio (TTM) N/A
LNG is up 82.35% so far this year after the company closed EPS (TTM) -9.25
yesterday at $133.61. The overall score measures the company's Earnings Date May 02, 2022 - May 06, 2022
performance based-off both short and long term indicators and
Forward Dividend & Yield 1.32 (0.99%)
means that LNG scores better than 74% of the overall market.
Ex-Dividend Date Feb 04, 2022
1y Target Est 134.10

Source: yahoo finance

Thank you