The war in Ukraine it has deeply shocked the world since the end of February and is likely to set in motion or accelerate major changes globally. The effects are already going far beyond Russia and Ukraine and will largely be permanent. Europe’s security architecture, geopolitical alliances, the global financial system – there are many things at stake. Recent market movements must be seen in this context and, in this perspective, they do not seem so serious. One of the reasons lies in the difficulty of pricing the long-term consequences of potentially destabilizing events, because the range of possible scenarios in these cases is very wide. However, as certain global economic and geopolitical consequences become clearer and more certain, corresponding market movements are likely to follow.
Consequences on a global level
While the direct effects of the war they are above all a regional problem, the indirect consequences on an economic and geopolitical level will affect the entire globe, although of course not everywhere to the same extent and in the same way. Further massive reorganizations globally in supply chains, sales markets, flows of goods and financial resources are likely to occur in almost any scenario. A detailed examination would be impossible here and, at the same time, the facts are constantly changing. However, some important points can be mentioned:
Irreversible break between the EU and Russia?
We are seeing a significant economic and political split between the Russiaon the one hand, and the EU and most NATO countries on the other. This is unlikely to disappear very soon, not even after the end of hostilities, unless there is a pro-Western change of power in Moscow. If the government of Russia politically and economically survives this war and the sanctions regime, it is likely that in the future it will focus primarily on China and Asia.
Energy, raw materials, fertilizers and food – primary channels of global economic impact
The importance of Russia andUkraine in the world economy it is relatively contained, but in some important sectors (oil, gas, metals, food products, fertilizers) they occupy key positions. Therefore, the potential for continued tensions exists in various sectors of the economy. Depending on how the war and sanctions / counter-sanctions develop, there could be further hikes, especially for oil and gas which would later affect many sectors and countries.
Already soaring food prices before the conflict – is there a risk of a global shortage?
In economic terms, the USA and the Gulf countries are currently emerging as the beneficiaries, in part also the China and theIndia. The biggest economic losers currently are – and this is hardly surprising – Ukraine, Russia and Europe.
Cesura of the global legal and financial system
One possible shortage feeding it could have a particularly strong impact and in the same way also have a geopolitical relevance. Ukraine is a major exporter of wheat and risks losing a significant portion of the crop this year. Russia, another major producer of grain and fertilizers, could act very selectively at least as far as its exports are concerned. The sharp increase in natural gas prices as well as export restrictions have caused a massive increase in fertilizer prices, which should lead to reduced use and therefore tends to lower yields than in the past.
Potentially massive impacts especially through indirect channels which are however difficult to assess and will largely depend on the course of the war and further geopolitical developments
The freezing or even the seizure of the assets of the Russian central bank and the near total exclusion of Russia from the SWIFT payment system are a break in the global financial system. How quickly and to what extent Russian-Chinese alternatives to SWIFT can be established remains to be seen, but SWIFT could lose its monopoly position in the long run. At the same time, transactions in rubles and yuan appear to be gaining ground (India, Saudi Arabia). However, the US dollar is very unlikely to lose its status as a global reserve currency in the foreseeable future.
Overall, the global economy could experience a supply shock in several areas, if only because the goods and raw materials available per se are no longer transported from A to B for political reasons. Its scope, duration and consequences are difficult to predict at the moment and strongly depend on geopolitical developments and the course of the war. However, further price increases, pressures on state budgets and a decline in growth are to be expected. And precisely in this context, the central banks of the United States and the euro zone are beginning to tighten their excessively expansive monetary policy of the last decade.
The Fed and the ECB still see no reason to abandon interest rate hikes
They both keep their own position despite the war in Ukraine and the sanctions and the Fedin particular, he does not believe there are major cyclical risks following the planned interest rate hikes. Financial markets so far largely share the Fed’s view and US bond markets are pricing in very aggressive rate hikes in 2022 and 2023. Doubts that these interest rate plans will (or can) actually be implemented in this way, however, they seem to be justified. Also in this respect, as well as in view of the yield that can be obtained, currently selected bonds from emerging markets (in hard and local currencies) appear quite attractive.