Directly, no, because few private investors have invested in Russian shares and bonds. But many banks, especially on the Continent, are holding Russian debt, on which they can no longer expect interest, and they will suffer heavy losses on the debt if they try to resell it on the international capital markets.
But are there indirect effects?
Yes, because banks which have lost money may themselves go bust, and will certainly suffer financial losses which will make them more cautious about lending to their customers in the West. Loans may be harder to get and more expensive, capital investment may fall, and western economies could be nudged more sharply towards the recession that many experts are already predicting.
Is this any different from previous economic crises?
Yes and No. Yes because the exposure of investors is wider now. There is also an added risk when the crisis centres on a nuclear power with a large army and a strong Communist party. No because similar events occurred in the mid-Seventies when the banks lost money on massive loans to developing countries which defaulted after oil prices rocketed, in the Eighties on loans to domestic industries and property companies, and in 1995, on loans to Latin America.
So we know how to cope with the crisis then?
Well, the answers will not be quite the same. The oil exporting countries had huge surplus revenues in the Seventies crisis which helped banks recycle cash and prevent the finance for the world trade system drying up. In the Eighties the problems were mainly domestic. This crisis, however, comes on top of the financial crisis which hit east Asian currencies and markets last year, and it shows signs of spreading to Latin America. A general collapse of currencies and worldwide debt defaults would be serious and could come at a time when richer countries are more than ever reluctant to do very much to put their hands in their pockets to help contain the problems.
What would be the impact of a serious crisis on investors and savers here?
We have already seen UK share prices fall by 13 per cent, wiping pounds 130bn off share values. That affects all shareholders directly, as well as holders of PEPs and unit trusts invested in shares, and it affects the value of pension funds, especially personal pension funds, most of which are heavily invested in the stock market.
If I hold shares, PEPs and unit trusts, should I sell them now?
The majority view is that it is too late to cut and run now. If you can wait, share prices will recover, although it could take months to get back to last month's record levels.
What should I do in the meantime?
If you have a lump sum to invest, put it in the bank or building society for the time being. But if you are putting a regular sum into shares or PEPS or a pension plan each month there is no reason to stop. While prices are depressed you'll actually get more investment for your money.
What about government bonds?
Bond prices usually go up when shares fall but government bond prices are already at their highest level for 30 years. You won't lose money, but the big profits were made last year.
What else could be a safe but attractive investment?
Many financial advisers think this is a good time to buy "guaranteed" equity-linked investment bonds which promise to return your capital in full if you keep your money invested for the full terms, usually five to five-and-a-half years even if the stock market falls. If it rises, you get a percentage of the gain which should give a better return than a savings account or TESSA.
What is likely to happen to mortgage rates and house prices?
The Bank of England is in charge of interest rates, and is supposed only to put them up when there is a risk of inflation. If the economy goes into recession, raw material prices will fall and upward pressure on earnings should ease, allowing inflation and therefore interest rates to fall rather than rise. But in the short run an increase in job insecurity could deter house buyers and property price rises may well slow to a halt or even fall over the next 12 months.Reuse content