Summary: These types of crises generally tend to only have a significant and lasting impact on global financial markets if they have a sustained macroeconomic impact on major economies. While Russia’s economy ranks as the world’s 11th largest before it invaded Ukraine, according to the International Monetary Fund, the Russian economy is only 1/20th the size of the US economy and 1/15th the size of China’s and therefore, Russia is likely not big enough by itself to affect global markets or economic growth, even if it were to suffer significant economic damage as a result of sanctions or other measures taken against it by the US and Europe. Still, because Russia is also the source of 10% of the world’s energy — and nearly 50% of the energy consumed in Europe — the conflict does pose risks that could extend beyond the two countries’ borders including higher energy prices, global food instability, and increased financial market volatility.
Lets look at some key elements, some of their details, and how it may affect your business:
Russia is one of the world’s largest producers of crude oil and natural gas, providing roughly 40% of the European Union’s gas. Sanctions from the West could affect access to that supply, especially with Germany putting a halt to the Nord Stream 2 pipeline that was intended to bring natural gas from Russia to the EU via the Baltic Sea. Russia’s invasion of Ukraine has caused global energy prices to spike, with WTI crude oil remaining elevated above $105 on Monday of this week which has not happened since 2014, 2011, 2010 and 2008. To put things in perspective, $100 dollars oil generally has lead to $5 dollar gas prices in the United States which some states are now seeing at a sustained level.
With inflation already at high levels, this could increase the likelihood that pricing pressures could become more severe. Russia happens to be the largest exporter of palladium — a metal used in automotive exhaust systems, fuel cells, mobile phones, even jewelry and dental fillings. With rising prices of palladium and other essential metals — Russia is also the second-largest producer of platinum, after South Africa — which could place additional upward price pressures that could lead to price increases for manufacturers and, ultimately, consumers.
This is arguably one of the biggest concerns for Community Financial Institutions as Russia is historically known for being able to target financial institutions which in turn can cause significant disruption to their individual economic systems and have the potential to erode confidence in effected institutions and more broadly. Because Community Financial Institutions tend to use similar Cyber Security companies, one concentrated attack can affect many firms at once. With that said, the Departments of Treasury and Homeland Security have both sounded the alarm over possible cyberattacks on US based financial institutions, hospitals, government offices and power grids as possible retaliation for sanctions levied against Moscow. Katerina Sedova, a researcher at Georgetown University’s Center for Security and Emerging Technology, told NPR she’s more concerned about misinformation and influence campaigns intended to “sow discord between us and our allies.” Earlier in the conflict, websites for the Ukrainian cabinet and foreign affairs and education ministries were all experiencing disruptions.
Inflation is already hitting American and European wallets, and its effect on pocketbooks could get bigger given the Russian invasion. Ukraine, considered the “breadbasket of Europe”, is one of the top five corn exporters in the world, trading some 35.9 million metric tons in 2019 alone. An extended open conflict would likely see prices go up in Europe, not just for corn itself but also for related goods, including cooking oil, corn syrup and livestock feed. Soybean prices have also surged in the US in recent months, following an unusually poor crop in South America. If US farmers have to make up the difference in both corn and soybeans — which compete for land — prices for both crops will likely rise here, as will the cost of packaged goods made from them. In addition, Russia is the world’s largest exporter of wheat, a crop that Ukraine exports as well, commodities economist Arlan Suderman told MarketWatch. Together the two nations account for nearly a third (29%) of the global wheat trade which has the potential for significant geo-political instability in developing and third-world countries.
The escalating conflict has all-but shut down travel from the US to both Russia and Ukraine: On February 10, the US Embassy in Kyiv issued a travel advisory warning Americans not to travel to Ukraine “due to the increased threats of Russian military action and COVID-19” and these could expand depending on escalation and potential accidents.
As word of the Russian invasion broke, the global stocks market volatility has increased as the markets seek to digest the status of affairs and its impacts. The Dow Jones Industrial Average tumbled 830 points after the invasion, the Nasdaq composite slipped about 1.5%, and the S&P 500 tumbled 2.5% at the start of trading. While markets have recovered, their daily and weekly gyrations have played out in the VIX which remained at elevated levels during much of the initial month of fighting but has recently settled back to pre-invasion levels for now. Russia’s main stock market, the MOEX Index, took a record hit early on dropping over 35%, or more than $150 billion in value, Bloomberg reported. It suspended trading and while open now, has lost over 30% of its pre-invasion value as of Monday. The Russian Ruble has still lost some 26% of it’s value to the Dollar.
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