Dating back to 2014, the Russia Ukraine conflict has been present ever since Russia’s annexation of Crimea – a peninsula along the northern coast of the Black Sea in Eastern. Ukraine. Back in Q4 2021, Russia began moving troops and military equipment near the border with Ukraine – leading to a rise in concerns over a potential invasion. Taking advantage of these concerns, Russia issued a set of demands in order to prevent the possibility of a large-scale military conflict in Ukraine. However, both the US and several other NATO allies rejected these demands and continued to warn Russia of the retaliation of economic sanctions and the deployment of assistance to Ukraine – including small arms and different defensive weaponry.
On 24th February – only hours after Russian President Vladimir Putin announced a full-scale invasion – Russia’s ground forces crossed into Ukraine from several directions. This attack has already shaken stock, bond and commodity markets throughout the world. Major US stocks stumbling as the S&P 500 fell almost 1% – bringing the market down almost 10.3% from its most recent peak on January 3rd. Meanwhile, rising oil and gas prices have strengthened the S&P 500’s energy sector – which saw a 21.8% return – positioning it as one of the market’s best performers this week.
OIL & GAS MARKETS
In light of the ongoing Russia Ukraine news, many industries around the world have been affected chiefly the oil and gas sectors – since Russia is the world’s second-largest oil supplier. Since Moscow ordered troops into two breakaway regions in eastern Ukraine, there has been a huge shortage in oil supply and inventories are the lowest they have been for years.
Inventories in OECD countries have dropped down from 3.2 billion barrels in 2020, to 2.6 billion only in 2021 in a sign that the market is overheating. Driven by fears of supply chain disruptions, oil prices saw a major spike approaching $100 a barrel – its highest since 2014. It is expected that oil prices could keep surging – especially if Russia faces other sanctions from the US and EU related to its gas pipes in Europe.
Now that Germany has officially halted the $11 billion Nord Stream 2 pipeline connecting Russia’s oil supply in Siberia to Germany, many are predicting the economic toll to consumers in Europe could be extreme. The Nord Stream 2 was expected to double the capacity of Nord Stream 1 and without it, the already energy-strapped nations in Europe, will see rising energy costs. The pipeline would deliver roughly 10% of current European gas consumption which would help relieve the already five-fold price increase since last year.
How this will impact Europe in the near-term – which currently imports around 35-40% of its gas from Russia – is uncertain, despite the EU announcing that the decision would not affect the bloc’s energy supply. For Russia, the EU’s reliance on Gazprom is an important factor given that Nord Stream 1 provides a large part of the EU’s energy supply. In 2021, Russia accrued $100 billion of oil and gas export earnings from Europe and – despite diversifying its clientele with a pipeline to China – remains reliant on this market.
However, this failed to push oil futures beyond its $100 per barrel resistance and the commodity fell back from this high as sanctions were announced. The market is expected to cool off even more as Biden brings up the idea of another globally coordinated crude stockpile release as oil prices remain above $90 per barrel due to Russia-Ukraine tensions.
Seen as a safe haven, gold is also one of the major sectors to have been impacted by the Russia Ukraine news. Considering gold acts as a hedge against political risk, the industry has benefited greatly from the current crisis. Commenting on that, Exinity analyst Han Tan highlighted that “the Ukraine crisis has given extra momentum to bulls who had been gravitating towards gold as an inflation hedge, evidenced by the recent surge of inflows into bullion-backed ETFs”. In light of this, Gold price has recently seen its 8-months high and continues to trade between $1897 and $1901 per ounce. Now that troop movements have started, analysts are projecting gold prices to rally even further in the coming weeks.
Despite the rise in oil, gas and gold stocks, the overall stock market has been shaken by numerous troubles – including inflation and a rise in interest rates. However, Russia’s threats to Ukraine will likely lead to more volatility within the market. The fact that the market is now red is no surprise given that global markets usually weaken as wars approach.
As of now, an increasing number of investors have been getting into treasuries and selling stocks in an attempt to hedge their investments. Following President Biden’s sanctions, Putin declared that he was “open for direct and honest dialogue” – leaving many investors hopeful that the market will soon rebound. However, if the conflict escalates, the stock market could see more trouble investors will sell their stocks and buy safer investments.
In addition to the stock markets’ fall lately, cryptocurrencies have also been going down – mainly due to the current conflict and the possibility of a spike in interest rates by the US Federal Reserve. In light of this, bitcoin dropped below $40,000 after being as high as $44,000 last week – with other cryptocurrencies dropping too. Ethereum witnessed a drop to $2,500 and Solana had a fall to $82.
With this in mind, the Russia Ukraine conflict is proving a great opportunity for cryptocurrencies to demonstrate their usefulness as a safe haven with gold and treasury securities – after the major decline in the Russian Rouble.
The Russian market has taken a major hit with Russian stocks and currency becoming the global markets’ worst performers thanks to President Vladimir Putin’s decree recognizing two partially separatist-controlled regions in Ukraine as independent states. The threat of severe economic sanctions against Russia if it invades Ukraine has had a major impact on the Ruble which fell 6% in response – valuing the currency at 80.2 against the US dollar.
Russia relies on fuel revenues for 36% of its national budget and has benefited from rising oil prices, but its conflict with Ukraine can cut off its ability to trade with Europe despite oil potentially reaching an ATH of $150 per barrel as a result.
Yet, Russia remains in a good position to withstand sanctions as it has the fourth highest international reserves, in foreign exchange and gold – amounting to more than $630 billion. Only around 16% of Russia’s foreign exchange is held in dollars – a 24% drop from five years ago. Instead, Russia holds 13% in Chinese renminbi, which is a sign of its long-term plan to stabilize the rouble in the event of sanctions.
WHAT TO EXPECT?
Analysts are projecting oil prices will drop below $65 a barrel by EOY as supply picks up again from several countries including – Iraq, Venezuela, US, Canada and Brazil. To add on to that, a potential US Iran deal could help ramp up supply by generating up to one million barrels per day. And, if the Federal Reserve tightens monetary policy to limit inflation, demand for energy could regulate – resulting in greater energy price reductions.
Global stock markets were already headed for a volatile year with modest gains even before the latest escalation of the Russia-Ukraine crisis. Despite the crisis escalating and uncertainty looming, both analysts and investors are bullish this is only but a short-term problem and that the market could see major returns in the near future.
With this in mind, it is becoming clear that uncertain times make cash and Treasuries seem much more valuable. However, history has proved that riding the wave with the stock market can leave investors with very profitable portfolios. While that could be the case in the future, uncertainty and risk surrounding the Russian Ukraine situation remains.
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