Russia’s invasion of Ukraine has so far resulted in a series of sanctions hindering the attacker’s economy massively, but alongside this news, we should also consider the knock-on effects the conflict may have on the continent’s economic performance as a whole. As Brent crude oil prices rise yet again over $100 per barrel today, European equities have significantly lowered. Concurrently, Eurozone bond prices have firmed up amongst investors continuing to assess the impact of Russia’s invasion on Ukraine. This has been notable in a number of the economies: the yield on Germany’s 10-year Bund dropped 0.05 percentage points to 0.1% as the price of the benchmark Eurozone debt instrument rose, and Italy’s equivalent bond yield fell 0.1 percentage point to 1.66%.
There is palpable wariness regarding the possible long-term effects that the ongoing conflict may have on Europe’s economic growth. This said, fairly commonly, market downturns in response to geopolitical tensions tend to be brief and have a limited amount of lasting impact on the affected nations. In a note to their clients, JPMorgan equity strategists wrote that “if one is selling on the back of the latest geopolitical developments now, the risk is getting whipsawed,” discouraging rash decision-making.
Evidence does show military conflicts which do not spread in scale generally do not harm investor confidence for long. They also warned, however, that “the key will be the duration of the dislocation, and whether the commodity supplies will be cut off.” Amongst expectations of the USA and its allies discussing tapping strategic oil reserves to ease supply tensions, we have reasons to hypothesise about the future of the market with optimism.
In the meantime, Monday saw the price of Brent crude oil rising by to $100.51 per barrel once Kadri Simson, the EU Energy Commissioner, announced that the International Energy Agency (IEA), which represents key industrialized consumers, would organise an emergency meeting to discuss the release of oil reserves from stockpiles around the world. Yesterday, she stated that if there was any disruption to oil deliveries, Europe would be “prepared.” The members of the IEA agreed on the coordinated release of 60 million barrels to combat the soaring prices resulting from the Ukraine crisis, and in a bid to ensure additional emergency supplies of crude, the EU has also held recent talks with oil-producing countries.
It is unofficially rumoured that half of the amount will come from the US Strategic Petroleum Reserve alone. Notable is also that whilst the release is significant and not to be undermined in terms of value, it does only contribute to less than two-thirds of the daily global consumption, so its upcoming impacts on the inflationary surge are unclear as of yet. Certain is the pressure to reduce the dependency on Russian gas within Europe, seen by the IEA urging the EU to not sign new supply contracts with Gazprom, which would equate to a reduction of roughly 12% of Russian supplies coming into Europe. Executive Director of IEA, Fatih Birol, reasoned that Russia has been using its resources “as an economic and political weapon,” being a supplier of 40% of European gas and 10% of world oil production.
Despite investors momentarily treading with care, it is visible that the EU is prepared for several possible situations that could occur within the energy market as a result of the conflict taking place. With the imposition of the sanctions on Russia, we can also see that they are experiencing much harsher economic problems, the central bank more than doubling the interest rates to 20% being a sign of this. Whilst European shares might only be experiencing a minor, temporary setback, it is harder to claim the same concerning the superpower which invaded Ukraine.
Written by Nicola Craciun
Research compiled by Joe Eastment