What effect will the Russian/Ukraine crisis have on global markets?
What risks does the Russia-Ukraine Crisis have for the global economy?
Wednesday 2 March, 2022
Events in Eastern Europe continue to send shockwaves around the world. Recent scenes of the road to Kyiv showing miles upon miles of Russian tanks making their way towards the capital may indicate that Vladimir Putin is becoming frustrated with his army’s lack of progress and aims to tackle that with increased brutality. What has been promising is the West coming together to sanction the Kremlin and whilst this may not have an immediate impact in slowing down their advances, it will certainly make Russian officials contemplate how sustainable this conflict is for their economy. The global financial markets should come through the conflict relatively unscathed, but there are certain risks around trade and supply shortages that are worth highlighting.
It was initially thought that wider economic impacts would not be felt globally., However, events over the weekend have changed the tone somewhat. We have seen sanctions announced on the Russian central bank and several Russian banks being excluded from SWIFT. This will have a major impact for its exporters and banking sector and may have spill-over effects should exposed institutions (notably banks) fail or require significant support.
Russia could very well retaliate to recent sanctions and cut off oil and gas supply entirely. The largest European economies could probably cope with this given the seasonal shift to milder weather and their relatively healthy stocks of energy. However, energy-intensive parts of the industrial sector would be more badly affected, along with economies who rely heavily on Russian energy and where energy stocks are lower.
Another risk relates to trade flows and shortages of goods outside the energy sector. Global supply chain issues are already struggling to get back to normal following the pandemic and shortages remain severe. Whilst Russia is not a large manufacturer of goods, it does control the supply of certain key commodities including metals like palladium and gases such as xenon – crucial components in the production of semiconductors. This could well put further pressure on the auto sector.
The duration of the war, and whether sanctions succeed in curtailing it, is key to how much of an impact it could have on growth via higher prices and further supply chain issues. However, it may also impact market sentiment too. The extent of these risks will depend heavily on Russia’s actions and on the response from the West, which is highly uncertain.
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