This page contains information on Financial and economic impacts of Russia’s invasion of Ukraine on New Zealand from the May 2022 Financial Stability Report.
This Box examines the current and potential financial and economic impacts on New Zealand from the conflict. On top of the loss in human lives, Russia’s invasion of Ukraine on 24 February caused a large negative supply shock to energy and other commodities, which has increased the cost of imports for New Zealand. Higher commodity prices have raised inflation, eroding real incomes. In addition, lower household and business confidence is expected to reduce aggregate demand. The spike in uncertainty has seen risk premia rise on risky assets and a tightening in international monetary conditions.
Western countries placed sanctions on Russia, including freezing the assets of Russian individuals and corporations, banning the export of strategic goods, and freezing a significant proportion of foreign-exchange reserves of the Central Bank of Russia. For countries that have banking linkages with Russia, some sanctions are particularly relevant, namely restricting correspondent banking relationships and excluding major Russian banks from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT.
SWIFT is a messaging network to confirm payments between more than 10,000 financial institutions, although payments do not flow via SWIFT.
New Zealand’s direct trade and payment exposures to Russia and Ukraine are small…
The exclusion of Russian banks from SWIFT means New Zealand banks cannot use its messaging network to engage with them. However, a survey by Te Pūtea Matua indicates that New Zealand banks only transact with sanctioned banks via third parties, and customer payments to Russia have been negligible. New Zealand’s direct trade exposures to Russia and Ukraine are minimal. Exports to Russia comprised just 0.4 percent of total goods exports in 2021, with butter accounting for half of this, while imports from Russia were small and mostly crude oil (which has dropped to zero after the closure of the Marsden Point refinery). The Government has announced a 35 percent tariff on all imports from Russia and some export restrictions. Trade flows with Ukraine are immaterial. Recent exports to Russia have been disrupted. New Zealand’s largest dairy exporter Fonterra announced it has voluntarily withdrawn from the Russian market. However, dairy prices have been resilient, and commodity exports can be redirected with limited difficulties.
Global growth forecasts have been downgraded, particularly for European countries that have relatively large trade exposures to Russia. Indirect impacts from the conflict, including higher energy prices, will weigh on real incomes and demand in New Zealand’s major trading partners. This points to greater headwinds in the demand for our exports.
…but high commodity prices are affecting households and businesses
The conflict led to higher prices for a broad range of commodities owing to supply disruptions, in an environment of rising demand. Russia is a major producer of energy (crude oil and natural gas) and metals (aluminium, nickel, titanium and palladium). Both Russia and Ukraine are large producers of wheat and maize (figure A.1). Russia is also an important supplier of fertilisers. The conflict has disrupted the supply of these commodities, resulting in sharp price increases adding to general inflationary pressure. Russian energy exports have been banned by some countries. Metal-smelting activity has been dampened by high energy prices, particularly in Europe. Shipping routes through the Black Sea, a route for agricultural products, have been impeded.
Futures markets suggest that commodity prices are expected to decline over the next year, but remain elevated relative to pre-invasion levels for a number of years. Ongoing conflict-related disruptions are likely to continue to weigh on food production. More countries may look for alternatives to Russian energy. The path of commodity prices will depend on developments in the conflict sanctions, trading restrictions, and the potential for higher prices to stimulate extra supply to compensate for disruptions.
Higher commodity prices are adding to the global inflation caused by COVID-related supply shocks, increasing the risk that long-term inflation expectations rise. High headline inflation in New Zealand is already weighing on household confidence, real incomes, and consumer spending. The conflict is driving the cost of key business inputs even higher, including energy, freight and transportation, which will boost other input costs indirectly. The rising price of necessities, such as fuel, could send longer-term inflation expectations higher, which would affect wage-setting. These developments could dampen business profitability, although the magnitude of this is uncertain. There is a risk that non-performing loan ratios rise for banks’ business lending, producing losses for the financial system and reducing the supply of credit to the economy.
High grain prices will affect New Zealand as a net importer of grain and cereals, and will indirectly raise the price of farm feed that is sourced mainly from Australia and Southeast Asia. However, higher food prices should also benefit agricultural exporters. New Zealand’s dairy and meat stocks are predominantly pasture-fed, and should fare better than overseas grain-fed competitors.
Risk to bank funding cost persists despite stabilisation in risk premium
At the start of the invasion, risk spreads widened in offshore funding markets. However, risk premia have since receded to their level prior to the invasion. Discussions with banks indicate that offshore market liquidity was temporarily tightened, but investor sentiment has since recovered, and banks are not experiencing difficulty in accessing funding. That said, overall funding costs have increased, owing to tighter current and expected future monetary policy. Reflecting large liquidity injections by central banks in recent years, funding markets have operated better than during previous stress periods, for example the Global Financial Crisis and onset of the COVID-19 pandemic. New Zealand banks have enjoyed some flexibility in responding to short-term volatility in the funding market. The share of offshore funding for locally incorporated banks is low, at 15 percent, and only one-third of this funding has a maturity of less than six months. Banks currently have strong liquidity positions.
However, market sentiment is highly sensitive to conflict-related news. An escalation in tensions could constrain banks’ access to international credit markets and sharply increase offshore risk premiums. A persistent tightening in funding markets would eventually pass through to funding costs for banks domestically. These developments, if sustained, could push up debt servicing costs for New Zealanders.
Longer-term impacts of the conflict remain highly uncertain
The path of the conflict and its impact are highly uncertain. At the benign end of the spectrum, a de-escalation and easing in sanctions could reduce commodity prices. This should see the adverse impact on New Zealand ease. At the extreme end, a prolonged conflict without easing sanctions would amplify its adverse impact. There is a small but plausible risk of other countries being drawn into the conflict, whether owing to unintended incidents or deliberate intervention. US-led sanctions could also widen to other countries that are supporters or allies of Russia, and this could disrupt New Zealand’s external trade more significantly. There is a risk that the invasion contributes to trade protectionism and some reversal of globalisation, which would lead to the onshoring of production, reduce labour and capital efficiency, and slow the diffusion of innovation between countries. All of this would slow potential growth rates internationally, including in New Zealand.