From the archive. First published on 28 February 2022 on weprivate.com.au. It reflects markets, rules and our views at that time and has not been updated.

Russia’s invasion of Ukraine has been rapid and dramatic, but the economic consequences will be slower to arrive and less spectacular. The war is a tragedy, first and foremost for the Ukrainian people, but also for the many Russians who do not support it. These notes focus on the developments most likely to affect financial markets.

The state of play

Some positive news: President Zelensky says Ukrainian and Russian delegations could meet for talks without preconditions on the Ukraine-Belarus border. It’s doubtful anything will come of it soon, but it is a positive sign.

Reliable information is hard to come by. Fierce Ukrainian resistance and logistical problems appear to be slowing the invasion. At the time of writing, no major Ukrainian city has fallen. Vladimir Putin has put Russia’s nuclear forces on high alert, an alarming sign of his lack of restraint, and likely to weigh on consumer and business confidence, especially in Western Europe.

Sanctions and their side effects

The US, EU and allies, including Australia, are cutting a number of Russian banks off from the SWIFT payments system. That will undermine Russia’s ability to defend the rouble, which has already fallen sharply, and help track down the assets of sanctioned oligarchs. Exemptions are likely for energy transactions.

The SWIFT sanction cuts both ways. German financial institutions have extensive exposure to Russia, and after Ukraine, Germany is the most exposed major economy. In a major policy shift, Germany will send anti-tank weapons and Stinger missiles to Ukraine, lift defence spending above 2% of GDP, create a strategic gas reserve, and back two new LNG terminals after cancelling the Nord Stream 2 pipeline.

The end of the peace dividend

Expect the peace dividend Western Europe has enjoyed since 1989 to reverse. Defence budgets are likely to rise in Europe, the US and Australia. That won’t reduce GDP growth, but resources spent on defence are diverted from consumption, education, health care and infrastructure.

Food, energy and commodities

Global food prices are spiking. Russia and Ukraine account for most of the world’s sunflower oil exports and about 26% of global wheat exports in 2020, and Russia is the largest exporter of fertiliser. Supply chain problems, weather and energy prices are adding to the pressure, imposing a heavy burden on poorer people and threatening social unrest.

Even with energy exemptions, Russian commodity exports will be badly disrupted by sanctions or retaliation. Russia holds near-monopolies in several strategic metals and minerals. Chipmakers, including TSMC, have begun halting sales to Russia, and it remains to be seen whether Russia can source alternatives from China. Whether China helps Russia evade sanctions is a key question.

Markets

The flight to safety continues. The US dollar has surged, the euro dipped, the rouble plunged, and gold and silver have jumped. Bitcoin and other cryptocurrencies have been a no-show as a safe haven. US Treasuries were already volatile as the Federal Reserve prepared to raise rates, and sanctions on Russia’s central bank will add to that.

Sources at the time included the Financial Times, the Economist, the Australian Financial Review, Bloomberg, Reuters, the IMF and others.

General information only. It does not take into account your objectives, financial situation or needs. Past performance is not a reliable indicator of future performance.