The War and the Euro

Business circles warn that the war in Ukraine will weaken the euro. Sanctions on Russia threaten the US dollar’s long-term standing. Russia’s national bankruptcy would cause billions in losses to banks within the EU.

BERLIN/WASHINGTON/MOSCOW (Own report) – German business circles are warning of the negative impact Russia’s war in Ukraine will have on the euro. Because the EU has maintained much closer business relations to Russia, they explain, the economic impact caused by the war, will be greater for the EU than for the USA. The EU currency will thus come under pressure. Even “parity with the dollar” can no longer be ruled out. Observers, of course, are seeing that the standing of the US dollar, as the leading global currency, is in danger, in a long-term perspective. That the USA has frozen the Russian central bank reserves, could motivate other countries to avoid this risk and invest their money elsewhere. The sanctions could also have repercussions on western countries, if there is a Russian national bankruptcy caused by a western boycott. This would impact particularly the French, Italian, and Austrian banks, as well as banks in the USA. German credit institutions are considered comparatively less endangered; however, a considerable inflation dynamic throughout the euro zone is feared.

“Euro Under Sales Pressure”

Nearly three weeks since the beginning of Russia’s intervention in Ukraine, the number of voices in the German public shedding light on the economic impact the war will have on Germany’s export-dependent economy is growing – particularly in relationship to the United States. In Germany’s largest business journal, Handelsblatt, the EU currency’s decline in value, in relationship to that of the US dollar was discussed.[1] Since the economic damage caused by the war will be greater in Europe – “significantly greater than for the USA” – due to the closer business relations to Russia and the greater energy imports from there, the euro will come under “pressure to sell” on the foreign exchange markets. Should the war escalate further and Europe – Germany in particular – find themselves compelled to sanction Russian gas imports, then the euro could fall below its parity with the dollar, predicts the head economist of the International Banking Association, who forecasts a significant “transatlantic divergence” in the economy. Markets have so far underestimated the impact of the war, as the EU’s instable financial system is overburdened with high debt rates, and will have to reckon with lower growth and more debt.

Inflation Dynamics

In light of the war, the European Central Bank (ECB), in fact, feels compelled to keep the key interest rates at zero percent, in spite of the higher inflation, and not to phase out purchases of state bonds until the third quarter of this year, thus the inflation dynamic in the euro zone should continue to pick up momentum.[2] Before the outbreak of the Covid-19 pandemic, the weakness of the euro was seen as the driver of the economy, especially for German industry, because it facilitated export to non-European countries. In the meantime, observers note that “the situation has completely changed.”[3] Due to the skyrocketing prices for raw materials and fossil energy resources, which are billed in dollars, a “weak euro is also fueling inflation” within the euro zone. The currency’s decline in value could even make it necessary for the ECB to intervene, currency experts are warning.

The Global Reserve Currency

Still another factor that is pushing the decline of the euro, and therefore, the rising inflation within the euro zone. is the standing of the US dollar as the world’s leading currency, notes the Handelsblatt. Thus, in “phases of insecurity” the dollar serves as a secure port of anchor and increases its value in relationship to other currencies.[4] At Spiegel online, one of the largest news portals in Germany, on the other hand, it is already being speculated that the US dollar is now merely the “global currency on standby.”[5] As the “currency anchor of the world,” it has withstood all of the upheavals and crises of the past few decades. However, there are now “a few signs” that the dominance of the dollar could be “coming to an end.” Inflation in the USA is very high – at eight percent – and is tending to continue to rise, which could inflict lasting damage to “international confidence in the value of the dollar.” The US Federal Reserve Bank has to already increase interests – in spite of the looming war recession. In addition, the war in Ukraine has set the “tectonic of economic power” in motion. It can be expected that “blocks of fragmented financial markets will form,” wherein the US currency could lose its globally dominant position.

A Double-Edged Sword

Above all, however, the article continues, the position of the US dollar as the leading global currency, is threatened by the “sharpest weapon” of the US’ sanctions – the freezing of the Russian Central Bank’s reserves deposited in the USA.[6] This is a radical measure that “has never been applied in this form” – aside, of course, from last year’s freezing of Afghan currency reserves. ( reported.[7]) Should the apprehension spread among other countries that Washington could “have currency deposits confiscated at any time,” this could “cause massive damage to the dollar” and accelerate its decline as the world’s leading currency. The consequences could turn out to be far-reaching: The USA is dependent on the dominance of the dollar, because it allows it to finance its enormous budgetary deficit.

Facing National Bankruptcy

The consequences of the western sanctions are, of course, catastrophic for the Russian financial market, even though they also affect the financial markets and currencies of the EU and the USA. Russia is heading toward national bankruptcy, observers believe – possibly even soon, since the Kremlin can hardly meet its billion-euro payment obligations for foreign government bonds in US dollars.[8] This is due to the fact that within the framework of the western sanctions, 300 billion of the approx. 640 billion Russian dollar reserves were frozen, which is why Moscow now has difficulties in making payments.[9] In the meantime, the Kremlin has announced that its foreign dollar-debts to “hostile states” will only be paid in rubles. In light of the sanctions-related currency devaluation in Russia, this would be tantamount to a debt cut. The ruble, in the meantime, has lost nearly half of its value in reference to the US dollar. The Russian central bank has announced that it intends to set the exchange rate at which it will pay the interests on its dollar bonds.

Billions in the Fire

British financial experts suppose that the financial markets will see this procedure as little more than a simple “bankruptcy.” Already in mid-April, a payment of $117 million in interests will be due.[10] Should Russia actually go into national bankruptcy; western institutional investors must reckon with “high losses” on their total investments of around US $170 billion on the Russian financial market. Twenty-six large investors such as JPMorgan, BlackRock, UBS or BNP Paribas must already freeze their relevant funds. Alongside institutional US investors, French financial institutions are said to be particularly affected.[11] French banks have about US $4.5 billion in Russian government bonds; while US lenders held US $3.8 billion, Austria’s had US $3.2 billion and Italians US $2.6 billion in the fire. For Germany’s banks, on the other hand, a Russian national bankruptcy would be “manageable,” according to a recent Bundesbank assessment. Russia’s liabilities to German banks amount to only 0.4 percent of the total foreign claims. Altogether, Russia’s total credits add up to the equivalent of €7.48 billion.[12] A complete energy boycott would be much more dangerous for Germany’s economy than a Russian bankruptcy.

Loopholes for Oligarchs

Despite all this, the scope of the West’s sanctions policy remains limited. Aside from the countries in Europe and North America, only Australia, New Zealand, and the West’s three closest Asian allies, (Japan, South Korea, and Singapore) are participating in the sanctions.[13] Even, NATO-member Turkey is not participating, which most recently became clear, when German Chancellor Olaf Scholz sought to celebrate a close alliance with the authoritarian Turkish head of state Recep Tayyip Erdoğan last Monday.[14] Ankara had condemned Russia’s intervention in Ukraine, however, it would not even close Turkey’s airspace to Russian flights and only prohibits Russian warships from passing through the Bosporus. It also appears that Turkey – similar to the United Arab Emirates (UAE) – may become a loophole for Russian oligarchs, seeking to evade western sanctions. According to recent reports, Russian oligarch Roman Abramovich, who fears that his wide-ranging business empire is threatened by western sanctions, was spotted in Istanbul.[15] Two of Abramovich’s luxury yachts – with a total value of more than a billion dollars – are said to be making their way through the Mediterranean in the direction of Turkey.[16] The entry to the Black Sea is also the gateway to the Russian harbors at Sochi and Novorossiysk.


[1] Euro-Kurs: Ein Absinken unter die Parität zum Dollar ist möglich. 04.03.2022.

[2] EZB hält Leitzins auf null Prozent,. 10.03.2022.

[3], [4] Euro-Kurs: Ein Absinken unter die Parität zum Dollar ist möglich. 04.03.2022.

[5], [6] Henrik Müller: Dollar – eine Weltwährung auf Abruf? 13.03.2022.

[7] See also The Forgotten Humanitarian Catastrophe.

[8] Rubel rutscht ins Bodenlose, Geldautomaten schon leer: „Russlands Staatspleite steht unmittelbar bevor“. 14.03.2022.

[9] Russland will Schulden bezahlen – aber nur in Rubel. rnd.de14.03.2022.

[10] What to expect as Russia warns of historic debt default. 15.03.2022.

[11] What a Russian debt default would mean for the world. 10.03.2022.

[12] Russland vor der Pleite? Das wären die Folgen für Deutschland. 09.03.2022.

[13] See also “Isolate Russia”.

[14] So nutzt Erdoğan den Ukraine-Krieg für seine Zwecke. 14.03.2022.

[15] Roman Abramovich jet lands in Turkey after oligarch seen in Israel. 15.03.2022.

[16] Fleeing sanctions, oligarchs seek safe ports for superyachts. 08.03.2022.