How Russia's Invasion of Ukraine Changed Financial Markets

Russia's war of aggression against Ukraine has severely disrupted trade links between it and many industrialised economies, leading to higher prices for key commodities in both energy and agriculture sectors.

Unfortunately, markets have entered correction territory, with both the Dow and S&P 500 down 10% or more from their recent highs.

1. Oil

Russia's invasion of Ukraine has had a devastating effect on financial markets, leading to unprecedented changes in oil prices and other commodities.

Oil is an essential resource in modern life, used as fuel for transportation and heating as well as an important industrial input. Unfortunately, oil's price has recently gone up due to several reasons.

After Russia's invasion of Ukraine, Western nations responded by impositioning economic sanctions that made trading Russian oil difficult. This has resulted in a shortage of the fuel - which accounts for 10% of global supply - which had become hard to come by due to this blockade.

Global economic analysts are concerned about the implications of high energy prices and a slowdown in economic growth. Furthermore, inflation-linked bonds - securities whose payouts rise with inflation - could be affected.

Russia's currency, the ruble, has suffered sharp depreciations against the dollar since conflict began. This turmoil in the ruble is already having an effect on global trade and finance - particularly within the banking sector.

The war has also driven up food and energy prices around the globe, causing immense hardship to both consumers and industries alike, particularly in Europe.

Therefore, the European Union has been closely coordinating its efforts to combat rising prices and limited natural gas supplies. They aim to lessen the adverse impact of the war on their economies as well as that of the global market overall.

Tom Wilson of The Financial Times has explained how Ukraine's invasion has altered oil market dynamics. Even before there was a full-scale invasion, there was already an underlying crisis within the market that had yet to be fully addressed.

2. Commodities

Commodities are the raw materials that manufacture most of our everyday items. Furthermore, they play an integral role in the financial markets.

Commodity prices tend to shift drastically due to how they're traded. This makes them distinct from stock and bond markets, which tend to be more stable. Commodities depend on supply and demand and can shift due to unpredictable factors like wars or pandemics.

Commodities may have higher volatility than stocks and bonds, but they still provide investors with a way to diversify their portfolios. They provide protection from inflation as well as potential growth potential.

Commodities range from oil and metals to agricultural products like wheat. Some of the most prevalent are crude oil, natural gas and wheat.

Oil prices can fluctuate due to the economy's state, while wheat and corn prices depend on how much consumers want them. Both commodities are essential for food production, so any disruption to them could have a substantial effect on people's budgets and overall economic situation.

Due to the Russian invasion of Ukraine, it's essential to comprehend how markets for energy, agricultural products and metals have been affected. This article will look at how these changes have manifested themselves.

Russia is a major exporter of commodities, and the invasion has had an enormous impact on its economy. For instance, if Russia can no longer sell its oil to the world due to sanctions, its revenue will drop precipitously.

3. Stocks

On February 24, 2022, Russia invaded Ukraine and sent stock markets around the world into a tailspin. But it wasn't until several weeks after that events had passed that global stocks returned to pre-invasion levels.

Investors have been focused on three primary themes since the conflict: slower growth, higher inflation and increased risk. Many businesses have announced their intentions to withdraw from Russia and Ukraine due to this conflict, which has also caused investors to worry about commodity prices.

Therefore, some of the world's largest companies have seen their market share shrink due to foreign competitors and even had to shut down operations.

Philip Morris International is one such example; it generated nearly 8% of its sales from Russia and Ukraine before the conflict. Unfortunately, it has seen its earnings per share growth cut by 10% and forced to relocate more than half of its employees. Bank of America analyst Lisa Lewandowski notes that while this has made Philip Morris International more cautious, they remain optimistic about its long-term prospects.

An example is EPAM Systems, a digital engineering and consulting platform that generates about 4% of its revenue from Russia and Ukraine. Despite the effects of the conflict, Bank of America analyst Jason Kupferberg remains bullish on EPAM with a "buy" rating and $443 price target for the stock.

Though the financial system hasn't felt any immediate effects of this war, Carmen Reinhart - World Bank chief economist - is worried about its potential negative repercussions. She states that slow economic growth, high inflation rates and new monetary policies combined can pose major economic hazards.

4. Bonds

Russia's invasion of Ukraine radically altered financial markets and global geopolitics. As a result, energy prices have shot up, food costs are on the rise, and financial conditions around the world are becoming tighter.

The European Union, Bank of England and other central banks are determined to contain inflation caused by rising energy costs. Unfortunately, this will put additional strain on households and businesses who can no longer afford higher prices; potentially leading to recessions in some countries.

Since the start of this year, Russian gas exports have drastically declined in Europe. As a result, EU members that depend on Moscow for 40% of their natural gas supply are paying much more than before for it.

As a result, many of the world's biggest oil companies have pulled out of Venezuela. Agricultural markets had been highly volatile but have recently come to an end, with wheat and corn prices declining precipitously.

A key consequence of the war has been a decline in investor confidence, with equity markets declining since its start and bond prices dropping, especially across Europe. It's uncertain how long these market reactions will persist, so investors need to pay close attention to geopolitics and economic developments as they unfold.

5. Money

Since Russia's invasion of Ukraine in February 2022, financial markets have witnessed a major shift. Shares in European car parts makers like Volkswagen and Mercedes have taken a substantial hit while oil prices have reached their highest levels in years.

Due to the market turmoil, many companies have been forced to make decisions that may not have been prudent before the conflict began. Some even abandoned Russian markets altogether.

However, the extent of its effect on the economy varies by industry. Chemical manufacturers, for instance, are particularly hard hit as they rely on natural gas to manufacture their goods. Furthermore, shares in some European automobile companies have declined sharply amid fears about how the conflict might impact demand for their cars.

Another way of looking at this is that Russia's invasion of Ukraine has created a new set of challenges for Ukraine's economic and social development. Before the conflict, Ukraine had implemented ambitious regional development and decentralisation reforms with the purpose of increasing local capacity to provide public services.

These reforms had the potential to address some of Ukraine's most pressing problems, such as growing regional disparities, an inconsistent regional development funding framework and discrepancies in municipal administrative, human resource and fiscal capacity.

Yet the country's political and economic problems caused by the invasion have only compounded them, necessitating further reforms to increase Ukraine's capacity for service delivery to citizens while creating a sustainable and prosperous future.

Reforms to the Ukrainian economy are likely to have the most immediate and long-lasting impacts, as it currently struggles with significant structural weaknesses. The country has entered a deep recession, while inflation is on the rise. These factors, combined with an ongoing pandemic and other economic shocks, are exerting immense pressure on consumer spending.