Below are five charts showing where a potential escalation in tensions could play out in global markets:
A major risk event usually sees investors rush into bonds, generally considered the safest assets, and this time may be no different, although a Russian invasion of Ukraine is likely to push bonds even higher. oil prices – and therefore inflation.
Inflation at multi-decade highs and impending interest rate hikes have caused a temperamental start to the year for bond markets, with US 10-year rates remaining near the key 2% level and 10-year yields German years above 0% for the first time since 2019.
But an outright conflict between Russia and Ukraine could change that.
In the foreign exchange markets, the euro/Swiss franc exchange rate is considered the main indicator of geopolitical risk in the euro zone, as the Swiss currency has long been considered by investors as a safe haven. At the end of January, it reached its highest levels since May 2015.
Gold, also seen as a shelter in times of conflict or economic turmoil, clings to 13-month highs.
2/ CEREALS AND WHEAT
Any interruption in the flow of grain out of the Black Sea region is likely to have a major impact on prices and further fuel food inflation at a time when affordability is a major concern worldwide at the aftermath of the economic damage caused by the COVID-19 pandemic.
Four major exporters – Ukraine, Russia, Kazakhstan and Romania – ship grain from Black Sea ports that could be disrupted by any military action or sanction.
Ukraine is expected to be the world’s third largest exporter of maize in the 2021/22 season and the fourth largest exporter of wheat, according to data from the International Grains Council. Russia is the world’s largest wheat exporter.
3/ NATURAL GAS & OIL
Energy markets risk being affected if tensions turn into conflict. Europe depends on Russia for around 35% of its natural gas, mainly via gas pipelines that cross Belarus and Poland to Germany, Nord Stream 1 which goes directly to Germany, and others via the Ukraine.
In 2020, gas volumes from Russia to Europe plummeted after lockdowns suppressed demand and did not fully recover last year when consumption surged, helping to send prices to record highs .
As part of possible sanctions if Russia invades Ukraine, Germany has said it may shut down the new Nord Stream 2 gas pipeline from Russia. The pipeline is expected to increase gas imports to Europe, but also underlines its energy dependence on Moscow.
Analysts expect Russia’s natural gas exports to Western Europe to be significantly reduced via Ukraine and Belarus in the event of sanctions, saying gas prices could return to fourth-quarter levels.
Oil markets could also be affected by restrictions or disruptions. Ukraine transports Russian oil to Slovakia, Hungary and the Czech Republic. Ukraine’s transit of Russian crude for export to the bloc was 11.9 million metric tons in 2021, down from 12.3 million metric tons in 2020, S&P Global Platts said in a note.
JPMorgan said the tensions risked a “significant spike” in oil prices and noted that a rise to $150 a barrel would reduce global GDP growth to just 0.9% annualized in the first half, while making more than double inflation to 7.2%.
4/EXHIBITION OF THE COMPANY
Listed Western companies could also feel the consequences of a Russian invasion, although for energy companies any hit to revenue or profits could be somewhat offset by a possible spike in oil prices.
Britain’s BP has a 19.75% stake in Rosneft, which accounts for a third of its output, and also has a number of joint ventures with Russia’s biggest oil producer.
Shell owns a 27.5% stake in Russia’s first LNG plant, Sakhalin 2, which accounts for a third of the country’s total LNG exports, as well as a number of joint ventures with state energy giant Gazprom.
US energy company Exxon operates through a subsidiary, the Sakhalin-1 oil and gas project, in which Indian explorer Oil and Natural Gas Corp also has a stake. Equinor of Norway is also active in the country.
In the financial sector, risk is concentrated in Europe.
Austrian Raiffeisen Bank International earned 39% of its estimated net profit last year from its Russian subsidiary, Hungarian OTP and UniCredit around 7% of theirs, while Societe Generale generated 6% of the group’s net profit through its Rosbank retail operations. Dutch financial firm ING also has a footprint in Russia, though that’s less than 1% of net profit, according to JPMorgan’s calculations.
In terms of lending exposure to Russia, French and Austrian banks are the largest among Western lenders with $24.2 billion and $17.2 billion, respectively. They are followed by US lenders at $16 billion, Japanese banks at $9.6 billion and German banks at $8.8 billion, according to data from the Bank for International Settlements (BIS).
Other sectors are also exposed: Renault generates 8% of its EBIT in Russia. Metro AG’s 93 Russian stores in Germany generate just under 10% of its sales and 17% of its core profit while Danish brewer Carlsberg owns Baltika, Russia’s largest brewer with a market share of almost 40%.
5/ BONDS AND REGIONAL CURRENCIES IN DOLLAR
Russian and Ukrainian assets will be at the forefront of any market fallout from a possible military action.
Dollar bonds from both countries have underperformed their peers in recent months as investors reduced exposure amid growing tensions between Washington and its allies and Moscow.
Ukrainian bond markets are primarily the domain of emerging market investors, while Russia’s overall position in capital markets has shrunk in recent years due to sanctions and geopolitical tensions, somewhat mitigating any threat of contagion through these canals.
However, the Ukrainian and Russian currencies also suffered, with the hryvnia being the worst performing emerging market currency so far this year and the ruble the fifth biggest.
The situation between Ukraine and Russia presents “substantial uncertainties” for currency markets, said Chris Turner, global head of markets at ING.
“Events in late 2014 remind us of the liquidity shortfalls and US dollar hoarding that led to a substantial decline in the ruble at that time,” Turner said.
(Reporting and graphics by Karin Strohecker, Sujata Rao, Danilo Masoni, Mike Dolan, Nigel Hunt and Susanna Twidale; Writing by Karin Strohecker; Editing by Alison Williams, Catherine Evans and Christina Fincher)
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