“There is a whiff of 1914 to the crisis in Ukraine,” says Jeremy Warner in The Telegraph. Russian president Vladimir Putin’s decision to send troops into two separatist-held regions in eastern Ukraine has heightened the risk of “the most serious outbreak of hostilities in Europe since the Second World War”. Yet major stockmarkets are surprisingly “insouciant”. Investors may think a major war would be irrational for all sides and therefore won’t happen, but “the irrational has always played a major role in history”.
The Ukraine crisis has so far been felt most acutely in energy markets. Brent crude oil prices rose above $99 a barrel on Tuesday, their highest level since 2014. Russia provides about one-tenth of the global oil supply, but those exports may be curbed by future sanctions. European wholesale gas prices have fallen back sharply this year, from a December record high of €188 per megawatt hour to around €79 at present, but Germany’s decision to suspend certification of the Nord Stream 2 gas pipeline in response to Russian actions raises the risk of a renewed spike. Europe’s biggest economy gets two-thirds of its natural gas from Russia.
Russian markets wobble
Russian assets have been hit hard. The benchmark MOEX stock index has plunged 27% since last October and lost 10.5% on Monday alone. The rouble fell close to a two-year low against the dollar before rebounding. London-listed Russian stocks have also plunged, with gold miner Petropavlovsk down 20% during the first two trading days of the week.
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Sanctions mean it could soon be all but impossible for Western investors to hold or trade Russian government bonds. That has sent yields (which move inversely to prices) on ten-year rouble bonds up to 10.9% on Tuesday, a 1.3 percentage-point increase in just four days.
Western sanctions following the annexation of Crimea in 2014 shaved 2.5% off Russian GDP and triggered a local financial crisis, says Neil Shearing of Capital Economics. This time Moscow looks better prepared, with less external debt and fewer “financial linkages” with the West than in 2014. Sanctions this time might knock around 1% off Russia’s GDP. “This could rise to 5% if more stringent sanctions (such as blocking Russia from the Swift payments system) are imposed.”
Mostly about commodities
Oil, gas and other commodities aside, “Russia is incredibly unimportant in the global economy”, says Jason Furman, a former economic adviser to Barack Obama, tells the New York Times. With an economy smaller than Italy’s, “it’s basically a big gas station”. Still, that’s enough to risk “dizzying spikes in energy and food prices, fuel inflation fears and spook investors”, note Patricia Cohen and Jack Ewing in the same paper. “These are nail-biting times,” says Niall Ferguson on Bloomberg. Putin has reminded us that even bottom-up value investors – who say they don’t care about either geopolitics or macroeconomics – can’t afford to ignore political risks entirely. “As an investor, you may not be interested in war, but war is interested in you.”
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