The climax in Ukraine

Russian troops entered Ukraine today. Airports throughout the country are being attacked from Russia, Belarus, and Crimea. Martial law has been declared in Ukraine. The airspace is closed. Putin states that he wants to ‘demilitarise’ and ‘denazify’ Ukraine. Russia wants Ukraine to become the vassal state it once was. Financial markets reacted sharply to the news. In recent weeks, the escalation has already caused oil and gas prices to rise further, and today, for the first time in a long time, the price of a barrel of oil has passed the 100 dollar mark. Although this was always one of the scenarios that financial markets took into account, the base case was based on a gradual de-escalation. Now that the raid is a fact, at least the uncertainty about the different scenarios falls away. Markets will now focus on the possible consequences.

The consequences of this possible annexation for the world economy are mainly felt in commodity prices. Russia is a major oil and gas producer. Although Putin has promised that natural gas deliveries to Western Europe will not be disrupted, there is already a third less natural gas being delivered to Europe than before the corona crisis. Cutting off gas and oil supplies is really the only way Russia has responded to new Western sanctions. These sanctions have had no economic impact to date, but this is the first war on the European continent where social media will influence the reaction of various governments. The shutdown of the gas tap will mainly affect the European economy, as shortages of natural gas, in particular, mean that it will have to be rationed. Large gas consumers that are not essential to the economy will then be temporarily shut down. This, of course, impacts economic growth in Europe. Furthermore, rising commodity prices will fuel inflation. Besides oil and gas, Russia is also a major exporter of many metals. Ukraine is one of the largest exporters of agricultural raw materials, but in terms of size, the economy is of little significance for the world economy. However, the climate crisis and La Niña are already threatening food shortages and a further rise in food prices could cause much social unrest in countries where a large part of the budget is spent on food.

The ultimate impact on the global economy will depend on developments in the coming weeks. Once the West accepts that Ukraine has become a vassal state, Russia will no longer have any interest in cutting energy supplies. The fact that Russia is using energy supplies as a means of pressure will make Europe decide to be less dependent on Russian oil and gas in the long run. Historically, we see that the negative effect of even the largest military conflicts on the stock market is usually short-lived. Often stock exchanges are under pressure in the run-up to the conflict, and the start of the conflict is often the property of the business. A new reality that is quickly discounted, but otherwise has no significant impact. Consider further that the worst days on the stock market and the best days on the stock market are typically clustered. Historically, these are typically not the best times to exit. Prices that come under pressure do, at the same time, ensure lower valuations. People who would rather not get in at the top now have the chance to take advantage of the opportunity. Today, our hearts and minds are first and foremost with the people of Ukraine.