US president Donald Trump met Russian counterpart Vladimir Putin in Alaska on Friday 15 August for a much-anticipated summit on ending Russia’s invasion of Ukraine.
The onset of the conflict in 2022 prompted a notable market downturn, and it is no exaggeration to say that much of the world is still struggling in the wake of the economic fallout.
Russia is one of the world’s largest oil producers, and the sanctions imposed against its exports by the US and Europe fuelled runaway inflation by pushing up oil prices.
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Ukraine, meanwhile, is a key producer of wheat, often referred to as the breadbasket of Europe. The decimation of its economy has been a key driver of food inflation (which, in the UK, ran at 4.5% in the year to July, according to the latest ONS data).
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So, besides the obvious human benefits, there are significant financial implications for Europe, the UK and the world if the conflict can be brought to a close.
Sadly, Friday’s summit didn’t reach any meaningful breakthroughs on that front. The summit concluded without any agreement being announced.
“Finding a solution to the Russia-Ukraine conflict was never going to be easy,” said Hector McNeil, co-founder and co-CEO of HANetf.
What was discussed during Russia-Ukraine peace talks?
It isn’t known exactly what Trump and Putin discussed during the summit. However, Trump’s comments following the talks suggest that the US may be about to formally recognise Russia’s 2014 annexation of Crimea.
If true, McNeil thinks that sets a dangerous precedent.
“It would mark the first time the US has acknowledged the outcome of territorial aggression in Europe,” he says. “Such a move would plunge Europe, and indeed the world, into a more unstable and worrying geopolitical environment.”
Today (Monday 18 August), Ukraine’s president Volodymyr Zelenskyy is set to meet Trump and European leaders in Washington DC. The meeting could lead to a peace deal between Russia and Ukraine, depending on what Zelenskyy is willing to concede, and no doubt what Ukraine can expect to receive in return.
Reports suggest Russia could demand that Ukraine commits to never joining the NATO alliance, but in exchange for this commitment, the country is subject to something akin to the alliance’s Article 5 which states that an attack on one member state is considered an attack on all.
That would, in theory, protect Ukraine from further Russian aggression. As much as Zelenskyy will be loath to officially cede any territory that Russia has taken by force – whether in Crimea or the Donbas region – a concrete safeguard against future attacks such as this could convince the president to compromise in order to end the conflict.
Hopes for a Ukraine peace deal, though dented by the outcome of Friday’s summit, remain alive for the moment.
How might a Ukraine peace deal impact inflation?
The war in Ukraine caused an upsurge in inflation, and it follows that a pause or end to hostilities would have a disinflationary impact, particularly if it enabled an easing of the trade sanctions that have been in place since it began.
Oil prices have been falling this week ahead of the meeting between Trump and Putin. Brent crude prices fell to a two-month low of $65.63/bbl last week, which Jim Reid, global head of macro research and thematic strategy at Deutsche Bank, says “helped to alleviate some concerns about inflationary pressures in Europe”.
Kaan Nazli, EMD portfolio manager at Neuberger, says a ceasefire would offer global disinflation tailwinds. These would be particularly pronounced in Central and Eastern Europe as well as Turkey, and could lower headline inflation rates in the eurozone by 20 to 30 basis points.
“The impact on the UK economy is likely to be slightly better due to the higher reliance on energy imports,” said Nazli, “easing pressure on energy-intensive sectors such as chemicals and manufacturing.”
The investments that could win or lose from a Ukraine peace deal
In essence, a Ukraine peace deal would be great news for risk assets, which typically underperform during periods of turmoil, but it would impact certain investments which have seen gains during the conflict negatively.
Gold is one of these. The events of 2022 prompted a rush to invest in gold as consumers and central banks moved to protect themselves from the impact of the global market downturn.
“In most cases, global conflict and trade uncertainty drive gold prices, and with many hoping for a positive outcome ahead of Friday’s meeting, investors will be keeping a close eye on how the gold market responds,” said Rick Kanda, managing director at The Gold Bullion Company. “A breakthrough in talks could impact gold's safe haven appeal.”
Defence stocks have also been big winners from the conflict, for obvious reasons, but could lose out in the event of a peace deal. Military suppliers like BAE Systems and Rheinmetall fell on 11 August as news of the upcoming summit broke.
It is highly unlikely, though, that European nations would scale back their increased military spend in the event of a deal.
“While a ceasefire may slow the pace of further increase, defence spending is expected to remain structurally higher than before the conflict,” says Nazli.
Similarly, McNeil highlights that geopolitical instability remains rife, especially if recognition of Russian territorial gains prompts other world leaders to chance their arm at military conquest.
“In such an environment, defence spending remains paramount,” he said.
