The Russian Invasion and the Risks to Global Financial Stability.

Kim Schoenholtz

By Kim Schoenholtz and Stephen Cecchetti

There are numerous compelling reasons to oppose the unprovoked armed invasion of a democracy by a dictatorship. Russia’s violation of Ukraine’s sovereignty is akin to the German and Japanese invasions of their neighbours in the 1930s that ultimately led to WWII. Like those 1930s aggressors, Russia is engaging in widespread indiscriminate bombings and massacres. As a result, any Russian success puts democracies everywhere at risk. The invasion of Ukraine has also seriously disrupted the global economy, contributing to the largest inflation surge in 40 years and threatening widespread recession.

In this column, we focus on the risks posed by the Russian invasion to the complex web of arrangements that comprise our global financial system. Financial stability is a public good that rests on confidence in the global security framework. At the most basic level, households and businesses have an incentive to run out of any jurisdiction that is perceived as vulnerable to an attack of any kind.

As we all know, finance supports real economic activity. It gives us the ability to shift resources over time, to channel savings where the benefits are greatest, and to allocate risk to those best able to bear it. Doing this efficiently requires an elaborate infrastructure built on institutions and markets, as well as widely accepted rules that establish trust. A well-functioning financial system is necessary to support global trade and investment. Yet, the financial system is vulnerable precisely because it has so many positive spillovers: no jurisdiction can secure all the benefits, so no one has an incentive to make all the costly investments that are necessary to protect it.

Read the full VoxEU article.
Kim Schoenholtz is Clinical Professor Emeritus at NYU Stern.