Followingthe outbreak of the Ukraine war, a broad cross-section of countries imposed unprecedented financial sanctions on the Russian central bank. With the integration of global financial markets, financial warfare has become much more powerful than before. At a seminar held by TABF, central bank and financial industry experts reminded us that Taiwan is at the center of rivalry between major powers and faces a serious military threat. TABF, together with the Chung-Hua Institution for Economic Research (CIER), Taiwan Economic Association, Taiwan Public Issues Research Association, and the National Taiwan University Public Economic Policy Research Center, held a joint seminar on “Surreal Financial Warfare.” Financial industry experts such as Central Bank Vice Governor Chen Nan-kuang were invited to attend for in-depth discussion on resilience for Taiwan in the face of financial warfare.

Lin Ming-jen, Chairman of the Taiwan Economic Association: reallocation of global resources

Lin Ming-jen, Chairman of the Taiwan Economic Association, said in his introduction that the “surreal” part of the “Surreal Financial Warfare” seminar title sounds fancy, evoking the surrealist artist Salvador Dalí. Starting from the trade war in 2018, the outbreak of the COVID pandemic in 2020, and the Ukraine war this year, there have been many changes in the world in just a few years.

Lin emphasized that the 2008 financial crisis was a stress test for banks, and pandemic has become a stress test for the entire financial market. The financial war will be an important front.

Hank Huang, President of TABF: Internationalize and participate in global financial affairs

Hank Huang, president of TABF, said that a good international financial system has been established, but it can also serve as a method of war. Financial warfare is not new. As early as 1956, war broke out over the Suez Canal, which controlled international trade. The United States used financial warfare to force the UK and France to withdraw, demonstrating its power even at that time.

''Finance can be used as a weapon,'' said Huang. In the case of Ukraine, democracies around the world joined forces to help achieve peace. Taiwan hopes to participate in the economic sanctions against Russia, which is the first time for Taiwan to participate in an international war. This is a subject which will require more attention from Taiwanese society in the future.

Huang also said that Taiwan can learn from the precedents of Hong Kong and Ukraine. Foreign aid makes a big difference when an aggressor bullies a democracy. Taiwan used to passively accept international systems and regulations, but now it is different, with more international connections and greater participation in international affairs. It also has strong savings and financial talent. It must have more discussions with the international community so that its participation in global financial affairs can be better supported.

CIER President Chang Chuang-Chang: financial sanctions have become ''invisible weapons''

Although financial warfare draws no blood, its impact is greater than that of kinetic warfare. Zhang Chuan-chang, President of CIER, said that combatants in the world wars had to fight to the death for a winner to be determined. However, this situation shows that economic and financial sanctions have become “invisible weapons.” The expulsion of seven banks by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), preventing Russia from participating in international settlement, had a profound impact. Since war requires weapons and cash flow, this move made it more difficult for Russia to finance the war. In addition to cutting off and slowing down Russia's war resources, it also had a great impact on overall allocation of resources. The Russian ruble has depreciated, and Russia's economic restructuring is expected to take a long time.

Central Bank Vice Governor Chen Nan-kuang: three key points to consider regarding China

Chen Nan-kuang said in his keynote speech, “In fact, financial warfare has existed for a long time.” The financial sanctions various countries launched against Russia have expanded in scale and participation scope, but Russia’s foreign exchange and gold reserves are much larger than those of countries like Iran, Venezuela, and Afghanistan that have been sanctioned in the past. Russia has closer contact with other central banks and international institutions, and its asset portfolio has also changed significantly in recent years. Therefore, these sanctions and their follow-up effects are worthy of close attention.

Chen said that these sanctions have begun to paralyze the ability of the Russian central bank, preventing it from supporting the ruble. Even though Russia implemented capital controls and raised rates sharply to curb capital outflow, the ruble still depreciated heavily, which has caused bank runs and increasingly severe inflation. The recent rebound in the ruble, he said, was mainly caused by strict capital controls and restrictions on foreign exchange transactions, as well as forcing exporters to convert 80% of their foreign exchange earnings into rubles. ''Seeing the small trading volume of the ruble, however, the rebound can be said to be artificial.''

He mentioned that Russia already has a plan. After it was sanctioned for invading Crimea in 2014, the central bank adjusted its foreign exchange allocation to “de-dollarize.” In 2018, it sharply reduced its holdings of US government bonds. Its proportion of US dollar assets in foreign exchange reserves and gold fell from 43.7% to 21.8%; at the same time, it greatly increased its renminbi and euro holdings. In particular, its renminbi assets soared from 0.1% to 14.7% of its portfolio. Russia also continued to buy gold in large quantities.

Chan also said that Russia is fully prepared to stabilize the ruble. It can also sell its euro bonds to buy rubles, but this will involve bond brokers, custodians, bond insurers, and foreign exchange brokers. For financial institutions such as commercial banks and correspondent banks, a blockage in any link can have the effect of freezing bond assets. In addition, it has been difficult for Russia to use China to make up for the loss of SWIFT in cross-border payments.

In light of the consequences of these sanctions, the People's Bank of China may further evaluate and adjust its allocation of foreign exchange reserves in order to reduce its own financial vulnerability, Chen said. It may expand the external connection of its Cross-border Interbank Payment System (CIPS) to promote bilateral trade denominated and settled in RMB to end its reliance on US dollar payments and settlement and SWIFT, and accelerate promotion of the digital RMB abroad.

Chen emphasized three key points regarding Taiwan and China. First, if China issues a digital RMB and expands its application in the next few years, it will have a spillover effect on Taiwan. Second, China might require cross-strait trade to be denominated and settled in RMB; “although the current probability is assessed to not be very high, the possibility cannot be completely ruled out.” Third, Taiwan must also plan for China freezing RMB assets belonging to Taiwan’s central bank, financial institutions, companies, and public.

''No matter how large Russia’s foreign exchange reserves were, if they are frozen, they cannot be used when they are urgently needed.'' In addition to accumulating foreign exchange reserves, Taiwan should also pay attention to whether its reserves have “the most suitable scale” and improve their utilization efficiency - for example, investing in strategic resources to enhance its national strength.

Alicia Garcia Herrero, Chief Economist at Natixis: The war has gone well, but the impact will continue

Alicia Garcia Herrero, Chief Economist at Natixis, said that the financial sanctions are divided into three types. The first was currency sanctions, which turned debt repayment into a major problem. the second was to expel some Russian banks from SWIFT, blocking international payments; but since two banks were not included within the scope of the SWIFT sanctions, this impact was not as big as expected. The third was to freeze the assets of the Russian Central Bank. Taken together, the three sanctions were quite effective. Taiwan also banned export of semiconductors to Russia, which has effectively hampered Russia’s military manufacturing.

She also reminded Taiwan’s financial industry that although the war has gone well, its impact will last for a long time. After all, ''there is no winner in war,'' and Russian President Vladimir Putin as well as European countries will be fighting for a long time. From a geopolitical point of view, squeezed between the US and China, if the sanctions drag on for a long time, Taiwan may find itself in a more difficult position. ''Due to sanctions, the financial industry will find it difficult to do business across the Strait.''

Lin Chi-chiao, Chief Economist of Cathay United: Beware excessive or disorderly fluctuations

Lin Chi-chiao, Chief Economist at Cathay United, said that ''from the perspective of five years ago, the current situation is indeed surreal.'' The market value of stocks and bonds held by foreign investors as a percentage of Taiwan’s foreign exchange reserves has been continuously increasing. The inflow and outflow of foreign capital has a great impact on the new Taiwan dollar. If a financial war has a direct or indirect impact on Taiwan, foreign capital will make great moves. Taiwan's financial industry should beware of excessive or disorderly fluctuations, which have been a major issue in the Ukraine war.

He also mentioned that the public has two major feelings about the current financial war in the short term: the rising inflationary pressure on the economy, and stock market volatility. Since Taiwan's inflation is already high, the central bank has begun to raise interest rates, but if the war is not over after a quarter, uncertainty will continue to increase.

Tsai Ming-fang, Professor of Economics at Tamkang University: China is the biggest loser of the war

Outside of Taiwan, Tsai Ming-fang, Professor of Economics at Tamkang University, said that “China is the biggest loser in this war.” Overall prices have risen sharply. Due to imported inflation, plus unemployment due to lockdowns, income has been reduced. President Xi Jinping may find it difficult to stabilize China’s inflation.

China’s growth will continue to slow, and its economy will eventually start to falter. Taiwan holds RMB assets, and it should not assume these assets cannot be frozen. The Financial Supervisory Commission has paid attention to financial exposure in China, and should continue doing so in the future.