What Russia’s invasion of Ukraine means for markets a year later
Russia invaded Ukraine a year ago Friday, triggering a cascade of shocks that continue to reverberate through the global economy even if the war no longer appears to significantly sway financial markets on a daily basis.
Skeptics had doubted that Russian President Vladimir Putin, having illegally annexed Crimea in 2014 and actively backed Russia-aligned forces in eastern Ukraine since that same year, would mount a full-scale invasion. When he did, there were widespread expectations that Kyiv would quickly fall and that divisions among Western powers would result in relatively mild sanctions.
Instead, Russia soon found itself bogged down and Moscow was hit with sweeping rounds of sanctions aimed at disconnecting its economy from the global financial system.
Breaking news: U.S. slaps new sanctions on Russia as Ukraine invasion reaches one-year mark
As a result, “we have a very fundamentally different set of trade and financial flows in the world today, having essentially shut off most trade between Russia and Europe, the United States, and some countries in Asia and sealing off Russian access to dollar markets,” said Christopher Smart, Barings chief global strategist and head of the Barings Investment Institute, in a phone interview.
While it pales next to the death and destruction of war, 2022 was a brutal year for investors, with the Federal Reserve leading most major central banks in an aggressive round of rate hikes and monetary tightening that sank stocks and bonds simultaneously.
U.S. stocks had started their bear-market slide well ahead of Russia’s Feb. 24, 2022, invasion of Ukraine. In the 12 months since the invasion, the Dow Jones Industrial Average
is effectively flat, up less than 0.1%, while the S&P 500
is down around 5.1% after a strong start to 2023 that continued a bounce off of October lows.
The invasion may not have been the root cause of an inflationary surge in the U.S. that sparked the scramble by previously flat-footed central bankers to get inflation under control, but a surge in crude prices and other commodities didn’t help.
In Europe, a spike in inflation and a sharp economic slowdown was more directly the result of the invasion and resulting energy shock, though warmer weather and a substantial effort to replace lost Russian energy flows meant the threat of a nightmarish winter was kept at bay.
See: Inside Germany’s industrial-sized effort to wean itself off Putin and Russian natural gas
“Besides the horrendous cost in human lives, the cost to the world has been slower growth, higher inflation, higher policy rates and asset price destruction,” said Steven Barrow, head of G-10 strategy at Standard Bank, in a Wednesday note.
The war no longer seems front of mind for investors and traders, though the disruption to energy and trade flows endures and has yet to fully play out. Oil prices
are today below where they stood on the eve of the invasion.
Read: Why U.S. fuel prices continue to feel the effects of Russia’s invasion of Ukraine
Other commodity prices also spiked but fell back as markets adjusted to supply shocks.
Commodities Corner: The real impact of Russia’s invasion of Ukraine on commodities
It’s not uncommon for shocks such as the war to lose their ability to influence markets the longer the disturbance continues, Barrow wrote. But could that change?
Barrow said there are two questions for investors to consider:
- “The first is whether certain adverse developments in the conflict, such as Russia ‘winning’ the war, or expanding its quest to another country, could still create a surge in global risk aversion and an asset price implosion after all this time.”
- “And the second, more optimistic question is whether a sudden, and admittedly surprising, outbreak of peace could create a ‘peace dividend’ that lifts lowers risk aversion and allows global asset prices to surge?”
Barrow argued the most likely answer to both questions is no.
A decisive victory by either side could fan the flames of market volatility, but Barrow said it appears unlikely either side can win the war militarily.
See: Russia, Ukraine prepare for potentially more disastrous path ahead as war reaches one-year anniversary
Ukraine doesn’t look like it can push Russia out of the regions it occupies and Russia doesn’t look like it can take the whole country and install its own leaders, which leaves battles to rage while financial markets remain focused on other things, like central-bank policies and recession worries, Barrow said.
Progress toward a peace deal also appears doubtful, he said, but, even if it were possible, it would do little to undo the shocks that have already occurred.
“For instance, a peace deal is not going to make Europe rush back to buy precrisis levels of Russian oil and gas,” he wrote. “The sanctions imposed by the West would likely persist as well, not least because the U.S. hegemon will want to maintain a hostile message towards China as it too faces its own issues over Taiwan.”
Granted, a sudden surge of optimism would likely allow financial assets a knee-jerk rally, but it probably wouldn’t amount to much more than that, according to Barrow.
The most likely outcome is that the fighting remains a background factor for global asset prices, “with much more focus on how policy makers like central banks are coping with the fallout from the conflict that started almost a year ago,” Barrow wrote.
Expect Russia’s war in Ukraine to continue into 2024, with higher prices for oil, gas and defense stocks
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