What a Russian invasion of Ukraine would mean for markets as Putin orders troops to separatist regions
Fears of a Russian invasion of Ukraine are keeping investors on edge.
Russian President Vladimir Putin on Monday said he would recognize the independence of two Russian-led breakaway regions in eastern Ukraine and ordered troops to the separatist territory, moves that could result in additional sanctions against Moscow and stoked fears that an invasion could soon take place.
While recognition stops short of annexation, “Western leaders will see this as the crossing of a clear red line…bringing closer the point at which the sanctions hammer will fall,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note. “If it does, it will fall hard, sending energy prices higher and equities lower.”
President Joe Biden on Friday said he believed Putin had made up his mind to invade in coming days but that until he did so there was still scope for diplomacy. Biden on Sunday agreed in principle to a summit meeting with Putin, provided there was no attack on Ukraine.
See: Russia extends troop drills in Belarus; U.S. says it’s part of Ukraine invasion ‘playbook’
Headline-driven volatility
U.S. investors may have been reluctant to hold on to assets perceived as risky heading into a three-day holiday weekend. U.S. markets will be closed Monday for the Presidents Day holiday.
Read: Here’s the technology being used to watch Russian troops as Ukraine invasion fears linger
Wall Street suffered weekly losses for the second week in a row, with the Dow Jones Industrial Average DJIA,
Oil last week failed to get a lift from Ukraine tensions, though invasion fears were credited the previous week for driving both the U.S. CL.1,
In European trade Monday, Brent crude, BRN00,
Energy shock?
So what happens if an invasion of Ukraine takes place?
For investors, the focus would be on energy prices, with analysts warning that crude oil remains likely to shoot above $100 a barrel.
Biden has said U.S. troops won’t be deployed to Ukraine but has promised “severe” sanctions against Moscow in the event of an invasion.
“Biden remains adamant that Ukraine will be defended, and that sanctions such as blocking energy sales will be deployed as a counter to Russia’s militant action. With oil prices already at multiyear highs due to misaligned supply/demand dynamics, further tension could mean more upside potentially (north of $100) that could negatively impact both the U.S. and global economy,” said Larry Adam, chief investment officer for the Private Client Group at Raymond James, in a note.
“While we remain optimistic that a diplomatic resolution and/or de-escalation (base case) will ultimately result, this is not a certainty with tensions high. A favorable outcome would reduce the current geopolitical risk premium built into oil prices (at least $5-$10) and return oil closer to our year-end target of $80,” he wrote.
Beyond crude oil, Russia’s role as a key supplier of natural gas to Western Europe could send prices in the region soaring. Overall, spiking energy prices in Europe and around the world would be the most likely way a Russian invasion would stoke volatility across financial markets, analysts said.
Bread basket
Not everyone is convinced significant supply disruptions, particularly for crude oil, would be inevitable.
“We suspect that neither the West or Russia has much appetite for curtailing the trade in energy, and that prices could fall back fairly swiftly,” wrote commodities analysts at Capital Economics, in a note.
“By contrast, the West has sanctioned Russia’s metal producers before and, with most of Russia’s grain exports leaving from Black Sea ports, the risk of supply disruption there is high,” they said.
Indeed, analysts have warned that wheat prices W00,
In depth: Why the Russia-Ukraine crisis may make food-price inflation even worse
Stocks and geopolitics
For the most part, equity analysts continue to play down the potential for an invasion to have more than a passing impact on U.S. equities.
Despite near-term volatility in the wake of geopolitical events over the past three decades, ranging from terrorist attacks to the start of wars, stocks have tended to bounce back relatively quickly, Adam noted, rallying 4.6% on average in the six months following such crises dating back to 1990 and rising 81% of the time.
“In general, Fed policy and economic conditions tend be the more long-term drivers of the economy and financial markets rather than isolated geopolitical events,” he said.
Still the economic and market ramifications of an invasion “may pose a near-term downside risk to the global economy and cause market volatility to persist,” he said.
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