The Fallout: Russia in Ukraine – Part I

Part I: Global equity markets

An overview of what has happened so far, and how global equity markets have reacted.

Affairs so far

Ever since the first tanks rolled into Ukraine in the early hours of February 24, Russian troops under the leadership of Vladimir Putin have gradually intensified their attacks on Ukraine, including widespread explosions and shelling across some of its major cities, including Kharkiv, Mariupol, and the capital, Kiev. As of March 3, Russian troops announced that they had taken control of the strategic city of Kherson as well.

Of its 193 member states, an overwhelming 73% of the members of the United Nations General Assembly have denounced Russia’s invasion over Ukraine, backing a motion demanding Russia stop its offensive and withdraw all troops immediately. Only 5 countries – one of which is Russia itself, voted against the resolution.

The matter of Ukraine joining NATO seems to be one of the driving forces of war currently, with Russia repeatedly demanding Ukraine eschew any NATO alliance now and at any point in the future. Such a move clearly demonstrates Putin’s fears surrounding the eastward expansion of NATO possibly “threatening the territorial integrity of the Russian Federation.”

How the global stock markets reacted

Lessons drawn from past conflicts and military crises have shown global equity markets usually take a major hit; while major developed-market bond yields have responded to movements in factors such as energy prices and central banks’ responses to the crisis.

It is, however, worth stressing that very few past events provide parallels to the current situation in Ukraine. Analogous periods of high geopolitical tensions may include conflicts such as Iraq’s invasion of Kuwait in 1990 or US military operations in Afghanistan in 2001 and Iraq in 2003, which also had profound implications for global energy markets at the time.

Around the early stages of the crisis, even though equity markets unsurprisingly fell sharply, the fall was quickly arrested. The US S&P 500 – currently at about 5% below its pre-crisis level – rose about 3% immediately prior to the invasion. A possible explanation could be the mass movement of investments from highly volatile risky currency assets that could be affected by the war to safe-haven US dollar assets instead.

The EURO STOXX 50, on the other hand, fared much worse in comparison, falling by almost 15% – though the falls don’t seem to be very extreme when compared to other global events such as 9/11 or Iraq’s incursion on Kuwait.

As the crisis has worn on, markets have remained quite volatile, reacting sharply to developments on the war front. The Guardian reported last week that the London Stock Exchange (FTSE 100) had suffered its biggest weekly loss of 6.7% since the onset of the global pandemic in March 2020 owing to the Russian capture of Ukraine’s Zaporizhzhia nuclear power station. The Guardian further reported:

“Currency and commodity markets also ended the week amid fresh signs of turbulence, with a flight to the safe haven of the US dollar and the highest crude oil prices in a decade.”

As for the Russian stock market (MOEX), it lost about 33% of its total value on Feb 24 – making it the fifth-worst crash in the history of markets. As a response to the sell-offs, Moscow closed off trading in a bid to stave off the impact of global economic sanctions for domestic investors.

Bloomberg reported: “…since the Moscow Exchange’s equity trading was last open a week ago, Russian stocks listed in London erased more than 90% of their value before getting suspended, global index providers announced plans to remove the nation’s shares from their indexes and European companies with business exposure to the country lost more than $100 billion in market value.”

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David Malpass, president of the World Bank, told the BBC the war was a “catastrophe” for the global economy – and he’s right!

For an already-struggling global economy to recover from the coronavirus pandemic amidst record-high inflation, slow growth, supply chain problems, a series of anticipated central bank rate rises and tapering of fiscal stimulus is set to be a major challenge for policy makers worldwide.

(This is the first of a series of articles exploring the global economic and geopolitical fallouts of Russia’s war on Ukraine. Read more in Part II.)