Russia and Ukraine war – What is the reaction on the market?
On 24 February 2022, Russia launched a full-scale invasion of Ukraine. The invasion resulted in a global economic disruption. This article provides an insight on the market
Global inflationary pressure
Wars are generally inflationary, the geopolitical tensions led to uncertainties on the market which also resulted in an undetermined period of inflation. The price for the key commodities soared due to the war and sanctions on Russia and Belarus.
Russia is getting increasingly cut off from global markets which leads to the fears and uncertainty among businesses and investors around the globe especially since Russia is one of the world’s key exporters of natural resources, such as oil and gas.
Key contributors to inflation:
- Oil and gas prices are key drivers of inflation. The price of oil hit over $110 per barrel. It is the first time that crude oil has hit over $110 threshold since 2014. Oil and gas price hikes lead to increase in transportation, manufacturing, heating, and costs for many other things. In terms of inflation, oil prices directly affect the prices of products that are partially derived from petroleum such as gasoline, diesel fuel and heating oil, jet fuel, petrochemical feedstocks, waxes, lubricating oils, and asphalt. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers.
- Metal prices surge on fears of supply disruption. Russia is a key producer of aluminium, nickel, palladium, and platinum. Aluminium prices hit a record high of $3,450 per ton on the London Metal Exchange. Nickel is now trading at the highest level in more than a decade: around $25,000 per ton. Platinum raised more than 2%, while palladium surged more than 6%. Metal drive prices higher for the cost of production for steel, chips, semiconductors, technologies, Electric Vehicles.
- Ukraine is one of the key exporters of wheat, corn, vegetable oil and other grains. Due to the war, the commercial shipping from Ukraine was suspended from its ports. This resulted in the supply-chain crisis and shortage of key grains around the globe which raises the threat of food shortage. Less grain production and high demand is further aggravated by soaring prices in fertilisers. Russia, Ukraine, and Belarus account for more than 20% of the fertilisers. This caused farmers not to plant on their land at a time when grain inventories are already extremely low. Higher food prices may result in hunger in many developing nations.
Sanctions and reactions to the war around the world
In response to the military aggression by Russia over Ukraine, some countries added a significant number of individuals and entities to the sanction lists and adopted measures to significantly weaken Russia’s economic base in efforts to limit its ability to wage war.
Key highlights of the sanctions and reactions around the world:
- The West has been imposing sanctions on Russia’s exports of wheat, corn, sunflower oil, fertiliser, metals, gas and oil. Western countries, Middle East and North Africa are diversifying away from dependence on Russian imports. They are seeking alternatives to buy grains, wheat, pasta, barley, sunflower seed oil, corn, and other commodities. Russia decided that they shall temporarily ban export of wheat, barley, rye, and corn to members of the Eurasian Economic Union.
- The Russian financial system was mostly hurt by the sanctions. The Russian Central Bank was also sanctioned. Many banks were sanctioned and cut off from the SWIFT system. Visa and Mastercard suspended operations in Russia. Combined with the fact that more than 1000 international companies have either suspended operations in Russia, or withdrawn altogether, Russia has become very difficult to do business with by many developed countries.
- Russia relies heavily on imports for technology, finance, capital, and consumer goods. A large share of the imports is from the EU. The west deprived them of key technologies by sanctioning technological and consumer goods imports to Russia.
- The UK, EU, US, Japan, and Singapore applied devastating economic sanctions against the billionaire businessmen (Oligarch) who seem to be in President Vladimir Putin’s inner circle.
- Belarus’ financial system and key imports were also sanctioned for its role in the assault and supporting Russia for the invasion.
- Moscow blocked foreign investors, who hold a minimum of tens of billions of dollars’ worth of Russian stocks and bonds, from exiting after its attack on Ukraine provoked a wave of economic sanctions and a haemorrhage of assets.
- The US froze Russian Central Bank reserves kept in the US accounts which barred Russia from making debt payments. This move reignited the trend of bypassing the US Dollar in trade operations between major players, such as Saudi Arabia, China, Russia, and India.
- Beijing criticised the west for imposing sanctions against Russia. China took advantage of the discounted oil price and Russia’s shrinking export markets by increasing the purchases from Russia: trading between the two countries was up by more than 12% in March. However, China’s crude oil import slightly fell in August 2022, the General Administration of Customs showed oil trading in August was equivalent to 1.96 million barrels per day compared to May 2022 the record was nearly 2 million per day.
- Despite condemning the violence in Ukraine, India has chosen to ramp up oil imports from Russia at discounted rates. In 2021 around 2% of total oil imports came from Russia. In Contrast for the year 2022 (ytd) the total import surges to nearly 18%.
Volatility on global stock and commodity markets
The economic growth projections were downgraded in all major countries of the world. The war has affected the developing economies globally as well as all the European countries which were dependent on the Russian energy sources. Political and economic uncertainties, inflation, and global monetary tightening is causing extensive economic damage which is being reflected in the performance of the global stock markets. US and global stocks sank in the strongest bear market since March 2020.
- In the US, the S&P 500 fell more than -23% and Nasdaq fell by – 32.77% till the end of september.
- The MSCI Emerging Markets Index fell by -28.60% over the same period.
- The European indices dropped significantly during the first week of invasion: FTSE 100 by 3.78% and by end of September -6.65%. While DAX fell more than -23%. Moreover, CAC fell by -19% since the beginning of the war.
- In Asia, Nikkei fell by -9%, Shanghai Composite fell by -16.4% over the same period.
- Furthermore, a clear division in performance by sector can be observed. Energy stocks have outperformed the market, while technology, communications and financial sectors were clear losers.
- Year to date performance by sector (US)
- Energy: +31.54%
- Utilities: +3.25%
- Materials: -8.05%
- Consumer Defensive: -4.52%
- Financials: -17.22%
- Industrials: -12.76%
- Healthcare: -11.1%
- Real Estate: -21.43%
- Communications: -35.42%
- Technology: -23.49%
- Consumer Cyclical: -26.01%
Impact on global markets
The financial and stock markets around the world were already vulnerable due to COVID-19, disruptions in global supply-chain and deglobalization trends. The Russia-Ukraine war has further aggravated the situation. Most developed nations reacted in an unprecedented way by using economic sanctions and defensive trade instruments to show political opposition to the invasion. The impaired trade and as result high inflation is inevitably affecting economic growth and causing recession in many parts of the world especially in Europe where extensive sanctions on Russia have pushed the European economy into recession much faster than expected. The world is becoming more fragmented, political and economic instabilities, rising inflation, tightening monetary policies will keep pressuring the global economy and stocks markets in the near future.