With Russian troops flanking Ukraine across its borders from the north, east and south, and all military logistics in place, Russia is in a position to attack Ukraine and start a full scale conflict any time now. The US Secretary of State – Antony Blinken is on record stating that Russia could launch a new attack at ‘very short notice’. In the opinion of some geopolitical and military experts too, an invasion is very likely within days or weeks. Should you worry? Of course yes, from a humanitarian point of view. However beyond that, you may need to worry about your investments too ! Here’s what you should know :

What is happening

Only Vladimir Putin knows. For months he has been playing psychological warfare with leaders of Ukraine and Western countries, especially the US. It is clear Putin is very serious about restoring Russia’s status and influence, reminiscent of the Cold war era. However whether he is really going to invade Ukraine (a former Soviet republic) or is he using the current build-up of forces as just a strong arm tactic to gain strategic guarantees from the West is an insight confined only to Putin’s frontal lobe.

So what could be the immediate impact of a Russian invasion, if it takes place?

A spike in crude oil and natural gas prices. According to some commodity analysts, this could result in Brent crude prices rising above $100 from current around $88 levels. Russia is amongst the world’s largest exporter of oil and gas. Crude oil prices are now hovering at a 7-year high. This indicates crude oil demand supply dynamics currently favouring the suppliers. In fact, the recent failed attempt by few global powers to cool crude oil prices by co-ordinated release from strategic reserves, highlights the power that suppliers hold now.

Besides, Ukraine is an ally to western powers and they could respond either by imposing sanctions or sending military aid to Ukraine. If sanctions are imposed, Putin could temporarily disrupt gas supplies to Europe - which is heavily dependent on Russian gas supplies - to push his leveraging power. This could further escalate oil prices.

The other immediate impact could be global investors shifting to risk-off mode or potentially even panic selling.

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Brendan McDermid

Russia Ukraine conflict weighs on markets

Ok, but the 2014 sanctions against Russia hardly had any impact on global economy/stock markets. Post the invasion of Iraq too, oil prices moved up during 2003-07 and stock markets rallied as well. Why will it be different now?

The sanctions against Russia in 2014 were not as severe as what the US is contemplating now. The 2014 sanctions impact was largely limited to pain in Russian economy. While the exact sanctions that will be imposed now are not clear, Russia’s oil and gas trades can be targeted either directly or indirectly.

In 2003, the global economy was recovering from slowdown/recession post the dotcom bubble/crash. Stock markets were substantially lower from their peak levels. Deflation/low inflation was a stronger force then.

This time the picture is completely the opposite. Global growth is strong. Inflation in some developed countries including the US is at multi decades high. And stock markets too are at elevated valuations and closer to all time highs, the recent corrections in US markets notwithstanding.

It needs to be noted here that major global benchmark indices have already entered correction territory (down by more than 10 per cent from peak) in just the last few weeks on concerns centering around inflation and US Fed on a path to monetary tightening. A big spike in crude price could be ‘the last straw that broke the camel’s back’ in a world already reeling under inflation and supply chain issues.

Is Russia-Ukraine tension also a reason why markets crashed in the last week?

No, markets are yet to factor risks from the geopolitical tensions escalating. Last week’s crash was triggered by spike in US bond yields.This was entirely due to concerns that US Fed has possibly made a policy error by extending quantitative easing beyond what was warranted to support the economy.

So why should I worry now if markets are not so concerned?

Over the last decade, emboldened by the back stop provided by central banks, markets have become conditioned to ignore many risks. Quantitative easing, the Fed put etc. have been a panacea to all risks threatening the markets.

However, the liquidity backstop and Fed put may not come to rescue this time due to inflation. Extending the liquidity backstop and Fed put in a context of crude spike in already inflationary environment could have the effect of adding gasoline to fire (albeit with a lag effect).

Bottomline, what should I do now?

Assess the risks in your portfolio. Ignoring this risk the way markets have may not be a wise strategy. There is always a possibility that the situation can be diffused and nothing is going to happen. But what if the crisis escalates? Is your portfolio well diversified to deal with the risk of a big market correction? Some diversification to gold which is a hedge during uncertain times (especially at a time when cryptos are also crashing), some profit booking in stocks maybe ways to be better prepared.

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