The Russia-Ukraine conflict, a possible invasion of the latter by the former, could affect a plethora of markets, from wheat and energy rates and the territory’s sovereign dollar bonds to safe-haven assets and stock markets.
Below are some indications that portray a probable surge of tensions that can be felt throughout global markets:
How the Russia-Ukraine Conflict will Affect Safe Haven Assets
Inflation at multi-decade highs and imminent interest rate surges have fabricated a lousy month for bond markets, with the United States 10-year rates still soaring close to the maximum 2% level and German 10-year profits increasing more than 0% for the first time since 2019.
However, an absolute Russia-Ukraine conflict could transform that.
An enhanced risk event, such as the prevailing conflict, witnessed investors rushing back to bonds, usually seen as innocuous assets. However, this time may not be unalike, even if invasion jeopardy enhances fanning oil rates – and hence inflation.
In foreign exchange markets, the Euro/Swiss Franc exchange rate is seen as a colossal indicator of geopolitical risk in the Eurozone. As a result, investors have long considered the Swiss currency a haven.
Gold also witnessed as a safe investment for budding and matured investors alike in periods of economic strife or conflict, is snug to two-month peaks.
Any disruption to the flow of gran out of the Black Sea territory is most probable to have a tremendous impact on prices and include further fuel to food inflation when inexpensiveness is a significant concern throughout the globe. The era of food inflation commenced during the economic damage induced by the coronavirus pandemic.
Four principal exporters – the conflicting countries, Kazakhstan, and Romania – procure grain from ports in the Black Sea, dealing with military actions or sanctions disruptions.
According to the International Grains Council data, Ukraine is considered the world’s third-biggest exporter of corn in the 2021/22 season and the fourth biggest wheat export. On the other hand, Russia is the globe’s top wheat exporter.
Strategist at UBS Dominic Schnider stated that geopolitical risks have surged in recent months in the Black Sea territory, impacting wheat prices in the foreseeable future.
Manufacturing supply chains also would not be protected from either the conflict.
Russia’s share of international copper exports is approximately 4%, steel at 7%, platinum at 13%, aluminium at 26%, palladium at 42%, and nickel at 49%.
Rabobank warned that eliminating 50% of the global nickel exports for mobile phones, kitchenware, medical equipment, buildings, transport, and power; a quarter of aluminium for vehicles, construction, machinery, and packaging; 50% of palladium for catalytic converters, electrodes, and electronics would result in immense positive pressure on rates.
A hostile peace with enduring sanctions could be a terrifying prospect for the cost and supply of these commodities than the interruption from a short-lived war. Unfortunately, however, there is also a probability of war and sanctions.
Energy markets are most likely affected if tensions transform into an enhanced conflict. Europe depends on Russia for approximately 35% of its natural gas, majorly coming via pipelines that traverse Belarus and Poland to Germany, Nord Stream 1, which goes unswervingly to Germany, and others via Ukraine.
In 2020, volumes of natural gas to Europe from the Russian Federation plunged after lockdowns inhibited demand and did not recuperate entirely in 2021 when consumption increased, assisting in guiding prices to record surges.
As a faction of possible sanctions, if there is an invasion, Germany has stated that it could prohibit Russia’s new Nord Stream 2 gas pipeline. The pipeline is expected to surge gas imports to Europe and underline its dependence on Moscow.
SEB commodities analyst Bjarne Schieldrop stated that markets would estimate natural gas exports to Russia from Western Europe to be crucially inhibited via Ukraine and Belarus if sanctions and gas prices revisit Q4 of 2021 levels.
Oil markets could also be affected via restrictions or interruptions. For example, Ukraine transfers Russian oil to Hungary, the Czech Republic, and Slovakia. S&P Global Platts highlighted that Ukraine’s cargo of Russian crude oil for export to the Soviet bloc was 11.9 million metric tonnes last year, a depletion from 12.3 million metric tonnes in 2020.
JPMorgan stated that the tensions imperilled a hike in oil rates and noted that a surge to USD 150 per barrel would inhibit global GDP maturity to merely 0.9% annualised in the H1 of 2022, whilst more than doubling inflation to 7.2%.
Listed western companies could also witness the consequences of a Russian assault. However, any setback to revenues or profits might be somewhat counterpoised by a probable oil price surge for energy companies.
Britain’s BP possesses a 19.75% stake in Rosneft, which comprises a third of its production, including several joint ventures with Russia’s biggest oil producer.
In the meantime, Shell possesses a 27.5% stake in Russia’s foremost LNG plant, Sakhalin 2, book-keeping for a third of the nation’s total LNG exports, and has several joint ventures with Gazprom, the state energy mogul.
Exxon, a United States energy company, functions via a subsidiary, the Sakhalin-1 oil and gas project, in which India’s state-operated explorer Oil and Natural Gas Corporation also possess a stake. Norway’s Equinor is also active in the nation.
In the financial sector, the jeopardy is focused in Europe, as per the estimations by JPMorgan.
Austria’s Raiffeisen Bank International spawned 39% of its estimated total profit in 2021 from its Russian subsidiary, Hungary’s OTP, and UniCredit, approximately 7% from theirs, whilst Societe Generale was witnessed as producing 6% of group net profits via its Rosbank retail proceeds. ING, a Dutch financial company, also possessed a footprint in Russia, accounting for less than 1% of the total profit, JPMorgan estimates portrayed.
Austrian and French banks are seeking loan exposure to Russia. Austrian and French banks possess the biggest Western lenders at USD 17.2 billion and USD 24.2 billion. American lenders follow the banks at USD 16 billion, Japanese at USD 9.6 billion, and German at USD 8.8 billion, estimates from the Bank of International Settlements (BIS) portrays.
Other industrial sectors have also witnessed exposure. For example, Germany’s Metro AG’s 93 Russian stores produce merely under 10% of its sales and 17% of its principal profit, whilst Carlsberg, a Danish brewer, possesses Baltika, Russia’s most colossal brewer with a market share of approximately 40%.
Local Dollar Bonds and Monies
Russian and Ukrainian assets will be at the forefront of any market fallout from possible military action.
In recent months, both nations’ dollar bonds have floundered their contemporaries as investors cut exposure amidst escalating tensions betwixt Washington, its associates, and Moscow. Ukraine’s fixed income markets are principally responsible for developing market investors, whilst Russia’s complete standing on capital markets has withered in recent years amidst sanctions and geopolitical tensions, somewhat padding any threat of contamination via those channels.
However, the Russian Rouble and the Ukrainian Hryvnia have also agonised, making them the foulest performing developing market currencies so far in 2022.
The state on the Russia-Ukrainian border offers considerable qualms for foreign currency markets, stated Chris Turner, the global head of markets at ING.
Turner stated that the events of late 2014 serve as a reminder of the liquidity bridges and the American dollar hoarding that facilitated a considerable drop in the Russian Rouble at that time.
Rabobank predicted that either war or heavy sanctions could witness a flight to protection on monetary markets, boosting bond prices up and interest rates smaller.
Heavy sanctions owing to the conflict could be a persuasive counterbalance to the present trend towards surging interest rates throughout advanced and progressive economies.
However, the scenario could be complicated by enhanced inflation steered by potential commodity scarcities.
How much central banks are keen to look through inflation facilitated by foreign sources outside of their control is yet to be tested in the prevalent period as the Fed concocts to enhance American interest rates in March 2022.
Satirically, an extension to the period of low-interest rates might assist seize the prevalent market-sell off. However, the counterbalance of either a cold or hot conflict concerning the EU, the US, Russia, and probably even China, and the international supply interruptions characteristic in that, might overshadow the profit of lower rates for a long time.