Russia-Ukraine Crisis: Its Effect on Global Markets and What Happens Next
Over the past year, Russia has been tightening its military grip around Ukraine, however, Russia’s Vladimir Putin has repeatedly denied any plans to invade Ukraine – that is until just yesterday (Thursday, February 24th) when Russia carried out airstrikes on civilian and military infrastructure across Kyiv and Kharkiv.
Russia’s recognition of two breakaway territories earlier this week (the Donetsk and Lugansk People’s Republics (DLPR)) sparked global outrage and resulted in the first tranche of sanctions from the West and at the same time wreaked havoc in the financial markets. Just two days later, on Thursday February 24th, Russia launched a full-blown attack by land, air, and sea. This marked the biggest attack by one state against another in Europe since World War II.
Why is Russia Invading Ukraine?
After the Soviet Union collapsed in 1991, the North Atlantic Treaty Organization also called the North Atlantic Alliance or NATO – an alliance created to counter the Soviet – continued to move ever so close to Moscow and in 2008, a statement was made that NATO planned to add Ukraine in its list of Allies. Naturally, Russia fiercely protested NATOs invitation to Ukraine.
It all came to a head in early 2014, when mass protests in Ukraine forced out a president closely allied with Putin. Russia swiftly invaded and annexed Crimea, in a war that never really ceased. In 2022, Russia has continued to escalate tensions on the Ukrainian border by amassing tanks, self-propelled artillery, and even short-range ballistic missiles.
On Tuesday, February 22, 2022, Russia made headlines again when Putin officially recognised breakaway rebel provinces in the east as independent and rolled in his own troops. Just a few days later Putin declared in a televised address that he had approved a “special military operation” launching a full-blown invasion of Ukraine.
The West responded with wide-ranging sanctions. Specifically, access to certain financial markets was blocked, a number of Russian banks have had their assets frozen, and Germany stated that they won’t be approving the use of the newly built NorthStream 2 gas pipeline. Against this backdrop, diplomatic talks between Russia and the United States and its allies have yet to yield any solutions.
Global markets usually weaken in times of war and uncertainty but tend to recover long before wars end. And while the outcome of the Russia-Ukraine conflict is still unclear, its short-term market implications are plainly seen. In short, the rising global tensions and the threat of war in Ukraine have caused oil and gold prices to surge and the stock markets to crash. As Claus Vistesen, chief eurozone economist for the research firm Pantheon Macroeconomics affirms, so long as Russia’s offence lasts, “Energy prices will keep rising, and equities will keep falling.”
Oil Prices Rally
Crude and Brent prices oil surged in late February as tensions escalated. Russia is a major energy supplier for the EU, and with demand for oil and brent rising as the economies re-open, investors expect the resulting shortage in supply to push prices higher. That being said, the United States has made it clear that sanctions agreed thus far, and those which may be imposed in the future, will not target oil and gas flows. This may mean that oil prices may deflate as soon as the situation clears and in spite of any sanctions imposed.
Stock Markets Plummet
Global stock markets plummeted on the news that Russia had launched an attack on Ukraine on Thursday, February 24th, with the pan-European Stoxx 600 dropping by to its lowest level of the year, and bank stocks leading losses with a 6.8% slide. Meanwhile, the rising energy and agricultural prices added to inflation fears and reinforced expectations of Central Bank rate hikes pushing the USD even higher. Not all stocks have been falling, of course. Rising oil and gas prices have bolstered energy stocks. While stocks often depreciate amid global turmoil, Gold prices tend to rally as investors seek havens and drive up their prices.
In 2022, global stock markets were already headed for a volatile year with modest gains even before the latest escalation of the Russia-Ukraine crisis, according to a Reuters report. As most Central Banks will now seek to raise rates, another bull year for the stock market seems highly unlikely. Overall, risk sentiment is set to remain largely dependent on the geopolitical developments, with markets now hoping for a de-escalation of tensions.