Russia-Ukraine Tensions: Implications for Russia and Global Markets

Feb 27 2022 | 3 min

Recent escalations in the Russo-Ukrainian War, a conflict that has been ongoing since February 2014,[1] have come to dominate headlines and consume the attention of world markets.

The impact of the standoff between the two nations is already felt in higher gas prices[2], and may extend to the world economy if the conflict escalates.

In this article, we review some of the key data so far.

Russian markets

The prospect of a sustained armed conflict has already raised the prospect of more severe economic sanctions from the US and other major trading partners[3]. These will impact the Russian economy first and foremost, and markets are already pricing this in.

Stocks: Decline in the MOEX

On February 21st, Russia’s benchmark index (MOEX) dropped 11%, as roughly three-quarters of the companies listed fell to 52-week lows (see chart below).Russian Stocks Struggle

Source: Bloomberg

This is the biggest fall in the MOEX since the global financial crisis in 2008 that was driven by falling oil prices and fears concerning the Russian-Georgian war[4].

Impact on the Ruble

Aside from the equity markets, the geopolitical tension surrounding the prospect of a Ukrainian conflict is placing pressure on the Russian Ruble.

The Russian ruble has weakened markedly since the beginning of the crisis. The recognition by Putin[5] of two separatist-controlled states in Eastern Ukraine on February 22 brought the ruble to US dollar rate near its previous record of 82.4 in 2016, before rising another 10% to 87.8 on February 24 following the announcement of the beginning of Russian military operations in Ukraine[6].

Russian RubleSource: Bloomberg 

Global markets

The effects of the conflict on the global economy begins with global energy markets.

Gas prices

Germany has already frozen developments of the new Nord Stream 2[7] gas pipeline project in response to the actions taken by Russia. Furthermore, the knock-on effect of sanctions from the U.S. and Europe could significantly reduce oil and gas trading between Russia and European Union (EU), if not halt it altogether[8].

Russia is Europe’s largest energy source, supplying roughly 27% of its oil[9] and 35% of its natural gas[10]. Awareness of the European gas reaching record prices in December (see chart below) given the EU’s reliance on Russia for energy.

European gas prices hit record high in DecemberSource: Refinitiv Datastream/Karin Strohecker

Wider economic repercussions

A possible rise in oil prices to $150 per barrel[11] risks reducing global GDP growth to 0.9% in the first half of the year, while increasing inflation to 7.2%[12].

This would affect the profitability of publicly listed firms across the world, especially European firms that own stakes in Russian energy companies[13].

European banks that face the highest risk[14]. French and Austrian banks have the largest loan exposure to Russia ($24.2 billion and $17.2 billion, respectively), followed by U.S. lenders at $16 billion, and Japanese and German banks at $16 billion and $8.8 billion, respectively.

Ukraine crisis_ European banks are most at risk

Source: Refinitiv Datastream/Karin Strohecker

Conclusion

The fundamentally unpredictable situation in the short term makes speculative trading riskier than usual, especially with the number of countries involved in the nearly decade-long history of the conflict.

Until the scale of the conflict and the reaction of world powers is better known, the long-term effects are also hard to predict. The wisest strategy would be to avoid predicting the short-term and focus instead on long-term investing, risk diversification and asset allocation.

 

 

 

[1] Britannica.com - https://www.britannica.com/topic/Ukraine-crisis
[2] USA Today - https://www.usatoday.com/story/money/economy/2022/02/23/gas-prices-russia-ukraine-invasion/6893130001/?gnt-cfr=1
[3] The Guardian - https://www.theguardian.com/world/2022/jan/30/ukraine-crisis-us-sanctions-russia-putin
[4] The Telegraph - https://www.telegraph.co.uk/business/2022/02/21/ftse-100-markets-live-news-house-prices-shares-covid/
[5] New York Times - https://www.nytimes.com/live/2022/02/21/world/ukraine-russia-putin-biden
[6] Time - https://time.com/6150679/russia-ukraine-war/
[7] Reuters - https://www.reuters.com/business/energy/germanys-scholz-halts-nord-stream-2-certification-2022-02-22/
[8] NBC - https://www.nbcnews.com/news/world/russia-ukraine-crisis-severe-sanctions-trigger-crippling-moscow-respon-rcna13691
[9] Bloomberg - https://www.bloomberg.com/news/articles/2022-02-10/russia-and-europe-are-vital-to-each-other-when-it-comes-to-oil
[10] Reuters - https://www.reuters.com/business/energy/what-are-europes-options-case-russian-gas-disruption-2022-02-15/
[11] Business Insider - https://markets.businessinsider.com/news/commodities/oil-price-outlook-russia-ukraine-tensions-150-per-barrel-supply-2022-1
[12] Reuters - https://www.reuters.com/markets/europe/how-russia-ukraine-conflict-might-hit-global-markets-2022-02-19/
[13] Reuters - https://www.reuters.com/business/energy/companies-with-exposure-russia-react-ukraine-crisis-2022-02-22/
[14] Reuters - https://www.reuters.com/markets/europe/how-russia-ukraine-conflict-might-hit-global-markets-2022-02-19/

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