Ukraine: What a Russian Invasion Might Mean for Markets

Joe Biden has declared that trying to guess Vladimir Putin’s intentions is “like reading tea leaves”, but the consequences for markets are easier to understand

Lukas Strobl 26 January, 2022 | 1:57PM
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Pair of Ukrainian combat aircraft in flight
A growing mass of Russian troops on Ukraine’s border, escalating rhetoric, and dire warnings by military analysts all point to one thing: Ukraine is on the brink of a war that could dwarf 2014’s fighting in size and bloodshed. 

The threat of a Russian invasion of Ukraine has already pushed Russian stocks lower, though its impact on global stocks and commodities is not what one might expect. Here’s how a war would affect your portfolio – and how it wouldn’t.

Crude Math

Oil prices have been on a tear, although so far it’s hard to tell whether the situation in Ukraine has anything to do with it. Demand is picking up as concerns over the omicron virus variant fade, while OPEC+ members are sticking to modest step-by-step output hikes.  

If war actually breaks out, it will certainly show up in crude prices. Morningstar strategist Allen Good says the additional geopolitical risk premium, combined with existing drivers, could push crude towards $100.

“Western sanctions could lead to a re-rating for geopolitical risk, even if there aren’t any tangible supply and demand issues—which there probably won’t be,” he says.

Western Energy Stocks

The return of a geopolitical risk premium is bullish for global oil producers. Western oil majors have little exposure to Russian oil production, and few physical assets at risk.

Sanctions against Russian producers would benefit European and US firms, meanwhile, and especially those most focused on crude oil. US behemoths Chevron (CVX), Exxon (XOM) and ConocoPhillips (COP) stand to rise ahead of more diversified European peers such as Shell (RDSB), BP (BP) or Total (TTE).

Gas utilities and companies exposed to the embattled Nord Stream 2 pipeline have more to fear. Elevated gas prices eat into the margins of suppliers like Britain’s Centrica (CNA) and gas transport firms like Italy’s Snam (SNAM SpA); both have underperformed this year.

“Nord Stream 2 would seem like an obvious target to punish Russia,” says Good. “War would strengthen the US’s resolve to shut it down, even if there isn’t much the US can do about Europe’s reliance on Russian gas.” Germany’s Uniper (UN01), Austria’s OMV (OMV) and France’s Engie (ENGI) are stakeholders in the pipeline project.

Russian Stocks in The Line of Fire

This one’s straightforward. Vulnerable to Western sanctions, and with their physical assets in the line of fire, stocks close to the conflict have been in retreat. Russia’s MOEX stock benchmark is down 20% from early November, when Russia began its second buildup of troops near the border.

Among the biggest decliners are Russia’s banks, which now risk exclusion from global capital markets if relations with Western nations break down. Sberbank (SBRCY), Russia’s largest, has slumped 40% since early November.

Russian energy producers, meanwhile, have outperformed the MOEX benchmark as rising commodity prices offset geopolitical risk – Gazprom (OGZPY) and Rosneft (ROSN) are each down about 15% during the period.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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