(Cover Image Source: Stijn Swinnen)
Russia’s full-scale invasion of Ukraine shocked the world and triggered widespread volatility in global financial markets as investors tried to grasp both the humanitarian and economic consequences. The initial reaction in markets last Thursday was predictable, stocks sold off sharply and funds flowed into safe-haven assets such as government bonds, precious metals and cash. However, markets have rebounded with some investors prepared to take a longer view.
International markets closer to Russia were hit hardest and the Euro Stoxx 50 and FTSE 100 declined 1.5% and 0.4% respectively. US markets fared better and the blue-chip S&P 500 gained 0.6%. The technology focussed Nasdaq index briefly entered a bear market, a 20% correction from its most recent high, last Thursday but by the end of the day it had rallied 7% from its lows to finish up more than 3%. Cybersecurity stocks, such as Crowdstrike (+17%), were some of the strongest performers.
Russia’s $1.5 trillion economy represents just 3% of global GDP but it is a major geopolitical power and a leading supplier of energy and commodities. It is the world’s third-largest oil producer, behind the United States and Saudi Arabia, with a circa 11% share of total global production and is the largest exporter of natural gas. Russia is also a major producer of wheat, aluminium, nickel and other metals.
The speed and severity of sanctions imposed by the west, particularly the US and EU, on Russia was surprising. They have frozen the assets of Russia’s Central Bank, excluded Russian banks from the Swift messaging system and ordered personal sanctions on President Putin, Foreign Minister Lavrov and oligarchs.
The sanctions have had an immediate impact on Russian assets and its stock market fell 20% in the first two days of the conflict before Monday’s trading day was cancelled entirely. However, London-listed shares of Russian companies continued to trade and depositary receipts for Sberbank fell 74% and Gazprom by more than 50%.
The Ruble also dived more than 30% to an all-time low versus the dollar which prompted the Russian central bank to more than double interest rates from 9.5% to 20% in a bid to prop up the currency.
The fallout extended to Russian sovereign bonds with some investors fearing the financial crunch could push the nation towards its first debt default since 1998. Standard & Poor’s cut its credit rating into ‘junk’ territory, warning further downgrades are possible. Russia’s largest US dollar denominated bond, which is due to mature in 2047, fell to less than 40% of face value.
Oil prices surged to new 7-year highs when the conflict broke out and Brent crude is trading above $100 a barrel. Constraints on global production had already underpinned a recent surge in energy prices and markets are now pricing in more disruption of Russian oil and gas exports. Oil majors have also pulled back from their operations in Russia, including BP which announced it will divest its near 20% stake in Rosneft and Shell will end all its joint ventures with Gazprom.
Agricultural commodity prices also soared. Russia and Ukraine are two of the world’s largest exporters of wheat and its price on the Chicago futures exchange jumped to a 10-year high of $9.70 a bushel.
Cryptocurrencies surged on Monday and Bitcoin and Ethereum gained 12.4% and 9.2% respectively over the week. The moves came after Binance, the largest crypto exchange, refused a request from Ukraine to block Russian users. Trading volumes between the ruble and bitcoin surged to a 9-month high, adding weight to Ukraine’s fears that Russia will use cryptocurrencies to skirt sanctions and capital controls.