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Impact of the Russia-Ukraine crisis on financial markets


Abi Oladimeji (pictured), head of investment strategy at Thomas Miller Investment, argues that any escalation of the ongoing crisis could have severe ramifications for the global economy and financial markets…

So far, the impact of the crisis has largely been confined to the Russian markets where equities have sold off and the currency has been very volatile. Beyond Russia, the financial market response has been relatively muted. However, investors must not get complacent. Clearly, there remains lots of scope for the crisis to escalate and undermine investor sentiment.

With global growth slowing in recent months, the last thing financial markets need is a significant negative shock coming from a trade war or military stand-off between the West and Russia. While such an outcome will have far reaching consequences, in the developed economies, the bulk of the damage will be felt in Europe, which receives some 40% of its natural gas supply from Russia. The region’s nascent recovery could be nipped in the bud by a significant energy price shock. Elsewhere, a severe escalation of the crisis, with negative knock-on effects on global trade, could be the trigger that turns weak growth in the major emerging markets into outright contractions. It also has the potential to turn modest growth in the major developed economies into stagnation. Financial markets could be particularly vulnerable to any negative shocks during the summer months as volumes will typically be lower and volatility may therefore be amplified.

At this point, the most likely outcome seems to be an extended period of diplomatic gridlock between Russia and the West. But what is clear is that a military solution seems inconceivable. Moreover, sanctions alone will likely have slow incremental impact. A broad-based diplomatic solution appears the only viable option.

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