Markets don’t fear a Russian invasion of Ukraine

“We are in the unusual position of global headlines and politicians warning of the risk of a major war, and yet markets…remain mostly unconcerned,” says Michael Every of Rabobank. The massing of more than 100,000 Russian troops on Ukraine’s borders has not gone unnoticed – but the consequences so far have been very limited.

True, Russian assets have sold off as foreign investors anticipate more sanctions, to the point where some Russian company valuations have started to “look frankly absurd”, say Robert Armstrong and Ethan Wu in the Financial Times. Gazprom, which is benefiting from high oil prices, trades on a price/earnings ratio of just three and a 17% dividend yield for the year ahead, for example. Yet in other respects, investors don’t seem to be positioning for conflict, says Katie Martin in the same paper. If they were, you would expect them to rush into classic safe-havens such as the Swiss franc and Japanese yen, US government bonds and gold. Instead, January has seen US bonds sell off and the franc dip against the dollar. The “yen is flat” and “gold is a snooze fest”.

Western politicians are suggesting that a Russian invasion of Ukraine could be just weeks away, but investors seem inclined to agree with the Ukrainian government, which has been downplaying the threat. “The belief in Kyiv is that Vladimir Putin’s goal is the long-term destabilisation of Ukraine, and that the Russian leader may have other objectives than invasion,” say Dan Sabbagh and Luke Harding in The Guardian. These include forcing the West to accede to its demands, such as a block on Ukraine and Georgia joining Nato.

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Chaos in commodities

If these assumptions are wrong, there will be “huge market implications”, says Every – including a flight to safe-haven assets and turmoil in many commodities. Rabobank analysts reckon that even a limited war could send oil up to $125 a barrel from about $90 a barrel now. In the most extreme (and unlikely) scenario, where US sanctions cut Russia off entirely from supplying world energy markets, oil could hit $175 a barrel.

Russia is also a significant metals producer – it accounts for about half of global nickel exports and a quarter of the aluminium market, according to Rabobank. “Any disruption to flows of… metals, including palladium, nickel and aluminium, could propel prices sharply higher,” says Alexander Nicholson on Bloomberg. For a small taste of what might happen, note that in 2018 the US imposed sanctions on aluminium giant Rusal, only to learn that “cutting off supplies from Russia’s commodities producers” can wreak “havoc on manufacturing supply chains”.

Finally, Russia is the world’s biggest wheat exporter, with Ukraine in fifth place. The countries’ food exports mostly pass through the Black Sea, close to the potential conflict. “About half of all wheat consumed in Lebanon in 2020 came from Ukraine,” says Alex Smith in Foreign Policy. Egypt, Malaysia, Indonesia and Bangladesh are also big buyers of Ukrainian wheat. A decade on from the Arab Spring, which was triggered by rising food prices, war in Ukraine could send another wave of political turmoil “across Africa and Asia”.