How the Russia-Ukraine Conflict Could Affect Global Markets
The Russia-Ukraine conflict has been a long-running and ongoing battle, with no foreseeable end in sight. Several countries have imposed sanctions on Russia because of their involvement in the Ukraine conflict. Now, with the conflict continuing to intensify, it is causing instability in the global markets.
The west will be looking to protect their interests by attacking Russia’s economy while Russia will be looking to retaliate. Let’s understand the likely impact on global markets as the global financial turmoil ensues.
What is the Russia-Ukraine Conflict?
The Russia-Ukraine conflict began on November 21, 2014, with the annexation of Crimea by Russia. On February 18, 2015, Russian President Putin signed a treaty with the rebel regions of eastern Ukraine. And called for an internationally supervised referendum that would decide whether to remain in Ukraine or ally with Russia. The referendum was held on May 11th and declared it wouldn’t be able to make a decision because of the low turnout.
After months of fighting, on September 5th, 2016, the Minsk II agreement was signed between Kiev and separatists. They called for a ceasefire between Ukrainian forces and Russian-backed rebels in eastern Ukraine. However, this lasted only two days before fighting broke out again on September 7 th. Rebels attacked Ukrainian forces over the withdrawal of heavy weapons from front-line areas as per the agreement.
As of 2022, the crisis has entered into a new phase with a much worse situation prevailing in the region.
How This Could Affect Global Markets
The conflict in Ukraine has had a severe impact on the global economy. The sanctions imposed by the west could lead to a global recession. In addition, Russia may respond to the sanctions by increasing oil prices and raising the interest rates, which could cause further economic instability for countries like the U.S., Europe, and China.
In light of this, countries will be looking to protect their interests by investing in assets that are less vulnerable to these kinds of factors.
A Rush Towards Safer Investments
The Russian invasion of Ukraine is a major risk event that may cause investors to flee bonds, considered the safest investments. This time will most likely not be different from any other because inflation risks from oil prices are very high.
For bond markets, inflation and interest rate hikes have had a negative impact on the first month of 2019. US 10-year rates are still hovering close to 2% while German 10-year yields remain at 0%. But if the Russia-Ukraine conflict escalates, that could change.
The euro/Swiss franc exchange rate is seen as the biggest indicator of geopolitical risk in the eurozone. The Swiss currency has long been viewed by investors as a haven. In late January, it hit its strongest levels since May 2015.
Gold is finding support at 13-month highs, a reminder of the metal’s importance in times of conflict or economic crisis.
Impact on Energy Prices and Petrol
Russia is no one-trick pony. The country ranks third in petroleum and second in natural gas production. While the United States dominates energy production with about 17% of global production (in 2019) according to the U.S. Energy Information Administration (EIA).
If Russia becomes less reliant on its older and more expensive reserves, countries like the UK will have to find alternative solutions for energy. This would impact prices in a similar way, or even potentially increase them depending on how costly these new sources of supply are.
The conflict between Russia and Ukraine has already driven up energy prices. The EU will likely be burdened with even higher costs for these items as a result of the tension in Europe.
Politicians in Germany are calling for a “national gas reserve” to be created as an insurance policy for consumers from price shocks.
Household fuel bills in the UK could reach £3,000 and average petrol prices have already hit a record high of nearly 149.5p on February 23 rd, with diesel at 152.8p.
Airlines may have to pass on the rising costs of aviation fuel to customers, which will also likely lead to an increase in plane ticket prices.
Impact on Commodity Markets
The unintended consequences of any conflict can be disastrous and are one of the biggest dangers. The most severe would be when these uncertainties bring about a change in economic periods which is unexpected.
Russia’s role in the world of commodities has been important for centuries and continues to be so. The country is one of the most significant producers of iron, nickel, aluminum cobalt, copper, and gold as well as diamonds. Russia also suffers from supply-chain bottlenecks that have caused prices to rise worldwide due to shortages in domestic production.
Russia is the top producer of palladium, which it uses to make the catalytic converters required in gasoline-powered cars. These prices have already contributed to a surge in American inflation, but they could be on Western sanctions lists if Russia doesn’t act more responsibly.
Though the Russia-Ukraine conflict could affect global markets in a variety of ways, it’s always wise to be prepared for the worst. With that in mind, it would make sense to put investments into safer havens for when things get worse. Even if you can’t know exactly how bad they’ll become!
Originally published at https://www.redwoodcreative.com on February 28, 2022.