Michelle Price and Pete Schroeder

WASHINGTON, (Reuters) – Russia’s invasion in Ukraine poses financial instability risks on “multiple fronts”. This will put a test on the financial system’s resilience at a time where interest rates have risen sharply, warned the International Monetary Fund (IMF), Tuesday.

Although there has not been a global financial crisis, IMF advised that there could be multiple channels by which the Ukrainian chaos can spread throughout the system.

These include non-bank banks’ indirect and direct exposures to Russia as well as commodity market disruptions that increase counterparty risk and poor market liquidity. It also noted cyberattacks on crypto assets and an acceleration in their use.

The IMF stated that “while the financial system is resilient to shocks in the past, it could become more dangerous for future ones,”

The sudden decrease in risk caused by an intensification and escalation sanctions can expose some vulnerabilities and interact with them, leading to sharp falls in asset values.

The exposure of global banks to Russia and Ukraine are relatively small and limited to few European lenders. It’s not clear how much financial institutions have an indirect exposure to this conflict, as disclosures can be inconsistent and patchy.

The report stated that indirect exposures to activities like wealth management and investment banking, commodity financing and off-balance sheet supply chain, or derivatives could “meaningful” and shock investors, leading ultimately to an increase in counterparty risks.

Tobias Adrian (Director of IMF’s Monetary and Capital Markets Department), said that derivatives are one of the areas of concern.

“They are very opaque and it is difficult to know to what extent there’s any hidden leverage,” said Adrian. Reporters identified foreign currency swaps and forward contract as an area where banks could be left unhedged in the event that trades need to be cancelled.

“Private markets, private credit, and private equity is another concern. There could be exposures that we don’t see.”

Markets are already suffering from severe Western sanctions that have reduced funding and raised the prices of major commodities, including oil.

A few dealer banks offering commodities financing could cause disruptions to commodity markets, according to the report.

Adrian pointed out that the market is dominated by five trading houses for commodity and five dealers banks, which creates concentration risk. “We do worry somewhat about commodity markets,” he added.