A view shows a Russian BMP-3 infantry fighting vehicle during a drill held by the armed forces of the Southern Military District in the Kadamovsky range, Rostov region, Russia January 27, 2022.
Sergey Pivovarov | Reuters
LONDON – The recent rise in tensions between Russia and Ukraine could spill over into the European economy, but could also present buying opportunities, strategists have suggested.
Russia’s buildup of troops and military assets around its border with Ukraine has angered NATO and the West, although Moscow has repeatedly denied any intention of invading the neighboring country.
During a press conference with British Prime Minister Boris Johnson on Tuesday, Ukrainian President Volodymyr Zelenskyy warned that any conflict would go beyond the two countries and turn into an “all-out war.”
In a Monday research note, Goldman Sachs Sven Jari Stehn, chief European economist, thinks escalation could spill over into the European economy in the form of lower trade with the region, tighter financial conditions and lower gas supplies.
Goldman Sachs does not expect a significant impact on trade given the relatively small share of eurozone exports to Russia and Ukraine. Stehn also noted that “while tighter financial conditions could, in principle, have significant effects on European growth, eurozone financial conditions have not tightened.” meaningfully during the recent period of Russian-Ukrainian tension.”
“One reason for the limited financial spillover is that the euro area has weak cross-border banking links with Russia and Ukraine,” he added.
Still, the Wall Street giant believes spillovers through the gas market are the most important possibility to watch.
“Although the impact of higher wholesale gas prices on consumers will likely be mitigated by limited wholesale-to-retail support programs and government assistance programs,” Stehn said. , but we recognize that reduced gas supplies could cause significant (albeit temporary) production disruptions across Europe.”
Russia is Europe’s largest gas supplier, typically supplying 30-40% of the continent’s gas needs through its pipelines, but the eurozone has recently begun to shift consumption from Russian pipelines to liquefied natural gas (LNG). Meanwhile, Russian gas flows through Ukraine have decreased significantly in recent years, Goldman strategist emphasized.
“However, there is a potential risk that any escalation could lead to sanctions on Russia’s Nord Stream 2 (NS2) pipeline, slated for 2025,” said Stehn.
Taken together, our analysis suggests that growth risks from ongoing Russia-Ukraine tensions are manageable unless tensions escalate and lead to tighter financial conditions, said Stehn. and/or cut energy supplies across Europe”.
‘Buy opportunity’
Strategists at Oxford Economics reiterated a constructive medium-term outlook, barring any sudden escalation, echoed last week by strategists at Oxford Economics, who said the balance by probability implies a “buying opportunity” for the affected global and regional assets.
However, they note that there will be significant effects on asset prices and volatility in the near term if Russia makes an invasion further beyond Crimea and its western borders.
In this worst-case scenario, Oxford Economics believes the Russian ruble will weaken significantly, testing the 2015 high against the US dollar of 83, while Russian stocks will also suffer.
The strategists added: “Euro zone stocks would also be slightly lower in this scenario as higher gas prices hurt growth and reduce margins.
However, in the basic case that the situation is resolved through diplomatic measures, Oxford Economics expects the market to gradually calm down, Nord Stream 2 will be given the green light and asset prices will recover due to the ” strong fundamentals” of Russia.
In the event of a limited attack, possibly in the form of an air strike to destroy military infrastructure, the company expects the US to respond with “tight-and-fast” sanctions while the EU are divided internally and therefore apply only mild sanctions such as a ban on exports of electronics and semiconductors to Russia, or measures targeting Russian banks.
This very event, the research note adds, will cause the ruble to rise by 83 against the dollar, at which point it could “easily go on a trajectory to 100, especially if there is a major reversal.” decision violation”.
In all three of these more dovish scenarios, the impact on equities is likely to be “relatively benign”, somewhat similar to the 2014 Crimea crisis, when the Russian market sold off in the short term, but the spillover to the euro area is few and far between and the bloc actually outperformed the global index for six months.
