Russia-Ukraine Tensions: Implications for InvestorsLearn more about this firm
Tensions between Russia and Ukraine are showing no signs of abating. The geopolitical implications of further escalation could be quite dire and complicated. Although the deadlock may be resolved through diplomacy, we are watching for the impact on asset prices if the conflict escalates. Energy and commodity markets could be in the immediate line of fire, but repercussions may also be felt in the region’s equity and fixed income markets. Finally, if the situation worsens, the ripple effects could be more broad-based and have an impact on global inflation expectations and monetary policy.
First, Some History
Before declaring independence in 1991, Ukraine was part of the former Soviet Union. After breaking away, Ukraine began developing stronger ties with the West, much to the dislike of Russia. Former Ukrainian President Viktor Yanukovych attempted to revert to old allegiances with the Kremlin, but his actions led to an uprising and he was removed from power in 2014. In response, Russia annexed Crimea and supported a separatist uprising in Ukraine’s southeastern region. The 2015 Minsk protocol was signed as a peace deal between the two countries. Nonetheless, low-level fighting has continued over the years as both sides have accused the other of violating the agreement. Agitated by NATO and the West’s support of Ukraine, Russia is continuously looking for ways to assert control over Ukraine and reclaim its sphere of influence. Amid brewing tensions, Russia has deployed more than 100,000 Russian forces at the Ukrainian border. The U.S. and a few other allies are strategizing sanctions or other diplomatic approaches to de-escalate the situation.
A Conflict with Broad Implications
Russia is the world’s largest exporter of natural gas and second-largest exporter of crude oil and petroleum products. It supplies about a third of Europe’s energy and is a major producer of grains, ammonia, aluminum, nickel, palladium, and platinum. At a time when the world is dealing with rising energy prices and supply-demand imbalances in several metals and commodity markets, a steady supply of commodities from Russia is crucial. Hence, talks of steep sanctions on Russia have so far remained largely speculative.
On the other hand, the ruble and Russian equity and fixed income markets are already pricing in increased risk of economic damage to Russia from the ratcheting up of war rhetoric and potential for sanctions. Russia’s defense spending will rise even as its export revenues might fall. Its international financial linkages might be frozen, at a time when its economy is recovering from the Covid-19 shock.
Given this environment, there are two broad categories of outcomes of the current standoff between Russia and Ukraine: escalation and resolution.