The growing tensions between Russia, Ukraine and NATO keep the world in a state of tension and many investors are worried about the implications on the financial markets. A geopolitical event of this size can in fact send heavy shock waves on the various asset classes. Predicting the behavior of global leaders can be difficult for even the most seasoned foreign policy observers. That’s why the Macro Strategies Group by Loomis Sayles, a subsidiary of Natixis IMhe analyzed three scenarios and three related possible outcomes of the Ukrainian crisisalso considering the current strong leverage that Moscow can exercise over the West.
Scenario 1 – A stalled conflict
Russia, Ukraine and NATO could remain in a stalled conflict, with neither side making a move that significantly aggravates the situation. “We think this scenario would maintain the status quo, without further impacts on financial markets or changes in government or central bank policy,” say experts from Loomis Sayles.
Scenario 2 – A partial invasion
A partial invasion would result in Russia taking over a portion of the territory in Ukraine and / or initiating an aggressive cyberattack against the country or its allies. In this scenario, the US is likely to apply some sanctions to Russia. On the other hand, the potential European response would be less clear, since there is a strong economic interest and therefore the interest in maintaining constructive relations with Russia.
“We believe the markets would have a strong risk-off reaction and then quickly normalize once it is clear that a full invasion is not underway – predict from Natixis IM affiliate – We would expect a short-lived rally for Treasuries and for the US dollar. From our point of view, the euro could have a modest impact in terms of risk sentiment, but the currency’s fundamentals should support it over the longer term. ” According to experts, in this scenario, energy prices could soar, with a further increase if energy were included in the sanctions. In a more uncertain environment, the Federal Reserve and the European Central Bank would stay on course, cautiously removing financial easing.
Scenario 3 – A complete invasion
If Russia were to launch a full invasion of Ukraine, more severe sanctions would have to be triggered by the United States and NATO. The US Congress would likely put aside the Build Back Better discussion in favor of a bipartisan deal that would increase spending on the military and cybersecurity, including a possible tax hike.
In this case, the markets would have a strong risk-away reaction, with a flight to perceived “safe haven” assets such as Treasuries and the US dollar. The euro would likely take a temporary hit. “From our point of view, a complete invasion would trigger a sharp surge in energy prices – experts say – We also see a possible impact on the prices of aluminum, titanium and uranium if Russia were to use these raw materials. as a lever against the West “. In this scenario, the Fed could temporarily delay the first rate hike and the ECB could increase bond purchases if there was an impact on credit spreads, but any action would be the result of market behavior rather than a fundamental deterioration.
Russia and the draft against the West is not just about oil and gas
Whatever the outcome, it is worth remembering that Russia currently has significant leverage against the West and plays a critical role in the global supply chain, beyond the Petroleum he was born in gas. The Russian state owns a significant stake in VSMPO-AVISMA, a Russian company which accounts for more than 30% of the global production of titanium. This company supplies approximately 65% of Airbus’ titanium consumption, 35% of that of Boeing and all of that of the Brazilian company Embraer.
Russia’s influence is not limited to raw materials produced within its own borders. Moscow maintains enormous influence in other former Soviet states, including Belarus and Kazakhstan. Belarus is not just a major producer of potassium and other commodities, but also the headquarters of BelAz, a Soviet-era manufacturer of the world‘s largest heavy trucks, used in mines globally. The Kazakhstan is a central player in numerous commodity spheres, having the largest reserves of zinc, tungsten and barite in the world. Kazakhstan also accounts for nearly a quarter of global production of uraniumthe second largest reserves in the world.
“We believe – conclude by Loomis Sayles – that the markets can underestimate the role of Russia in these global supply chains”.