Following weeks of escalating tensions, Russia launched an attack on Ukraine on Thursday, February 24, 2022. Portfolio Manager John Paul Lech and Senior Research Analyst Alex Zarechnak discuss their views on the potential ramifications for the global economy and the markets.
What are the main overarching economic ramifications of Russia’s invasion of the Ukraine at present?
Russia’s invasion of Ukraine has, unsurprisingly, created shockwaves through the markets. Russian stocks and the ruble have tumbled. Global equities plunged as well while oil, gold and European gas prices have surged. Brent crude, the world’s energy benchmark, climbed over US$100 a barrel for the first time since 2014. Volatility will likely persist in the near term as the conflict continues and there will likely be supply challenges and further upward inflationary pressures.
How effective will Western sanctions be in curbing Russia’s incursion into Ukraine?
The sanctions that have been imposed so far are fairly incremental. We describe Russia as having a fortress, macroeconomic environment. It has a massive budget surplus and a massive current account surplus. These are two classic ways of reducing dependence on the outside world and both have been engineered by Russian President Vladimir Putin.
What else can the West do?
The West will likely rachet up sanctions. In the near term, we don’t believe this will cause significant hardship for the Russian economy. There are also other options. For example, Western European countries could order domestic investors with stakes in Russian companies to exit those holdings. In addition, Europe could try and lessen its dependence on Russian gas and oil but the near-term effect of this could be oil price hikes and more inflation which is an unpalatable prospect for Europe and the U.S. right now.
What about the decision to suspend the Nord Stream 2 pipeline?
The move to prevent the startup of Nord Stream 2, which was supposed to transport natural gas directly from Russia to Europe via Germany, is a meaningful move by the West. But at most, we think it will be a minor irritant to Gazprom, the state-owned energy producer, as it will still be able to sell its gas. For now, Russia has to pipe its gas through Ukraine to its Western markets, but Ukraine has little control over these contracts.
What impact has the crisis had on Emerging Markets generally?
In our view, the crisis is bad for oil consumptive assets as well as risk assets generally. We’d expect—and have seen—risk assets sell off. Profitless technology, high priced stocks will likely be impacted. Russia is a big producer of metals and soft commodities, as well as oil and gas, and the crisis has contributed to rising commodity prices and inflationary tendencies globally. But energy and commodity producers in other emerging markets regions such as Latin America and Africa could potentially benefit from Russia supply concerns.
As of December 31, 2021, portfolios managed by Matthews Asia did not hold Gazprom.
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