The situation in Ukraine looks bleak. The conflict between the country and Russia is not new, but in recent days, Russia’s launched a full-scale invasion. Many Western countries have responded by imposing sanctions on Russia.  

Investors are now wondering how these events will affect the global economy and financial markets. 

From a military perspective, how might this situation play out? 

The current state of affairs in Ukraine is almost certainly not Russia’s desired endgame and there may well be more deterioration to come. The situation is fluid and could go on for months. 

The conflict could potentially drag in other neighboring countries such as Poland or even the entirety of the North Atlantic Treaty Organization (NATO), which would include the United States.  

This appears to be a remote possibility for now despite calls for intervention. However, as it would represent a game-changing escalation, the possibility should not be dismissed when gauging potential risk to asset valuations.  

How might this affect commodity prices? 

Global economic activity has remained robust as COVID-19 lockdowns and other measures continue to recede. The world economy does not appear to be at risk of recession in the near term.  

Commodity prices have spiked since the start of hostilities, however, and high commodity prices do benefit Russia. At the same time, the country’s economy is heavily dependent on foreign trading relations and the sanctions it has been put under are significant.  

Energy price pressures have triggered negotiations between the US and Venezuela and may also encourage negotiations with Iran to bring its oil production back onto global markets. 

Both OPEC (the Organization of the Petroleum Exporting Countries) and non-OPEC oil production remains below pre-pandemic levels, which indicates the spare capacity that may help offset high oil prices. 

What about effects on inflation, interest rates, and central bank policy?  

Global central banks were already in a difficult situation before the conflict between Russia and Ukraine began. Ongoing supply bottlenecks and robust demand pressures were pushing up inflation. Adding a high-profile geopolitical conflict to the mix may further complicate the situation. 

If Russia succeeds in overtaking Ukraine, would this encourage China to do something similar to Taiwan? 

From Russia’s perspective, a successful invasion would be one that neither leads to a coordinated military response nor undoes the Russian economy via sanctions. While this conflict could affect the strategic calculus for China, this was a well-established risk already. 

When might sanctions against Russia start to undermine overall investor confidence in emerging markets? 

While this is a valid concern, emerging-market investments have lagged developed-market counterparts for a while now. Most risk assets (be they stocks, high-yield bonds, commodities, or currencies) are likely exposed to further escalation of the conflict. 

Parting words 

There is a wide range of risks and uncertainties associated with the conflict in Eastern Europe. While there are no simple answers, keep in mind that geopolitical conflicts occur fairly regularly. Russia’s aggression toward Ukraine will not be the last one that has the potential to affect markets. Let this serve as a reminder of the importance of sensible portfolio diversification and disciplined rebalancing. 

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