What’s the likely financial impact if the Russia/Ukraine crisis drags on?

Bloomberg have a very helpful piece where they outline three scenarios for how the Russian Ukraine crisis impacts the global post-Covid recovery. Surging oil, soaring commodity prices, and attacks around nuclear plants as citizens flee Ukraine on Russian attacks will all weigh on the global economy. Bloomberg’s piece outlines three scenarios with 1 being the mildest and the third scenario being the third. 

Three scenarios ahead

3 scenarios for the Russian/Ukraine crisis

The best case scenario is that of scenario 1 where the fighting sees a quick end. Commodity markets should peak and the recovery of the US and Europe should not be too badly impacted. The ruble would rise again and Russia’s stock would pick up. However, depending on how the fighting ends we may see a divide building between Europe and Russia. President Putin’s actions in Ukraine do run the risk of a isolationist path for Russia and investors may be concerned about investing in Russia due to concerns over Russia’s next actions. 

The second case scenario is if the conflict lingers on. Russia has a long term presence in Ukraine and painful guerrilla warfare cripples Ukraine’s major cities. This would slow down the ECB’s desire to hike rates allowing the euro to slide further. The Fed would likely be more dovish and that would result in US 10 year yields falling. It would also open up the stagflationary environment and that should mean gold keeps lifting higher.

The third case scenario is where Russia responds fully to the sanctions already placed on it by the West. Russia enters a long standing conflict and cuts off the 40% of all Europe’s gas supply it provides. This would mean that oil prices will remain high and that in turn will put pressure on inflation around the world. The Fed will be forced to hike as inflation rises, but growth slows, Europe will fall into a recession and Russia will suffer a deep recession too with the potential for domestics unrest making Russia potentially even more unpredictable. See the impact that oil prices are expected to have on US inflation below. 

High oil prices boost inflation

The takeaway

The euro looks set to remain weak as long as the conflict remains. Stagflationary pressures, with high commodity prices, will only increase and this means gold should continue to find dip buyers as long as the conflict continues too. If the conflict ends quickly, in the next two weeks,  then oil prices should fall from their current lofty levels and the euro should recover.

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