Ukraine crisis: A nasty wobble for stockmarkets

Russia’s invasion of Crimea is “the worst crisis in Europe in the 21st century”, according to British foreign secretary William Hague. Western markets had a nasty wobble early this week as a result. Germany’s Dax index, for instance, lost 4%, its worst one-day performance since November 2011.

Still, market history shows that “geopolitical risks have a tendency to go away” before too long, as Economist.com’s Buttonwood blog points out. And while stocks slump when a crisis first breaks, they are typically higher a few months or weeks later once the uncertainty begins to lift.

Markets dropped for two to six months after Saddam Hussein’s invasion of Kuwait, for example, but bounced back once the bombing of Baghdad actually started in early 1991 and a quick American victory looked imminent. By the summer the S&P had risen by 25%. Hence, says the FT’s James Mackintosh, the old adage “buy on the sound of cannons”.

Will it be a similar story this time? Many reckon that while there may be some targeted sanctions against specific individuals, Iran-style sanctions are off the agenda, given the close links between the European and Russian economies.

London, for example, is a key finance and service centre for Russians, who are also propping up the property market. A total of 9.5% of our car exports went to Russia last year. Europe as a whole gets a third of its oil and gas from Russia.

Assuming sanctions don’t happen, economic paralysis in Ukraine – or Russia, for that matter – shouldn’t have a significant impact on Europe. Less than 1% of eurozone exports go to Ukraine and under 5% to Russia.

Markets assume that military action to force Russia out of Crimea makes no sense and Russia’s president, Vladimir Putin, won’t risk a long war with Ukraine by invading the east of the country, where the majority of people speak Russian. Then again, he has shown form when it comes to walking into neighbouring countries to bolster Russian influence.

Economic interdependence is no guarantee of peace, says Buttonwood. In 1910, journalist Norman Angell famously said that, thanks to financial and trade links, war between the great European powers would be futile. That didn’t stop World War I. Markets may not shrug off this crisis as fast as usual.

Merryn

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