Ukraine News - Effect on Global Markets

 

What are the implications of Ukraine News on global markets? The country is an important commodity exporter, and the removal of Russia from emerging market indices by MSCI is a big blow. Moreover, Russia faces higher energy and food prices, and sanctions against it could lead to a future food shortage. What is the effect on currency markets? The following is a brief analysis of the impact of Ukraine News on global markets.

Russia is a key exporter of commodities

The conflict in Ukraine has focused attention on Russia's global exports, including oil, natural gas, wheat, metals, fertilizers, and other resources. With Western sanctions enforcing export restrictions on Russia, the prices of many of these commodities have skyrocketed. Russia is also the world's top producer of oil and gas and exports a sizable amount of it. In addition to oil and gas, Russia is a major supplier of many other commodities including corn, sunflowers, wheat, and soya.

Energy is another important commodity that Russia exports to Ukraine. Since the conflict erupted in Ukraine, the Russian ruble has been dropping to record lows, while Russian gas is a major transit route for the European Union. Brent crude, the global benchmark for oil prices, shot up from $96 to 97 per barrel on Feb. 23 to over $105 per barrel by midday Feb. 24. Prices have since stabilized and are trading in a narrow band of $97 to $107 per barrel.

MSCI will remove Russia from emerging markets indices

MSCI will remove Russia from its emerging markets indices, which are the most widely followed benchmarks of stocks from developing economies. The decision will affect more than a hundred global indexes, including the MSCI Emerging Markets Index. Russia has been excluded from these indices due to recent political and economic developments, including the Ukraine conflict. The country's securities ban and capital controls have kept international investors from investing in its stock market.

Earlier this week, Russia banned foreign investors from selling their securities on its local market, effectively closing the door to exiting the country. This could result in an exodus of $32 billion in investor funds. As such, it could be difficult to know which side of a trade is better to take. Moscow suspended trading on Monday, but announced Tuesday that it would invest $10 billion in supporting its local stock market.

Higher energy prices could lead to future food shortages

Food shortages in Ukraine are likely to worsen as the conflict in the region escalates. Ukraine grows enough food to feed 400 million people, but fifty percent of its grain is imported from Russia. In addition, 50 percent of its fertiliser costs come from Russia. If this situation continues, the world's food supply may be threatened. Several factors could lead to food insecurity, including higher energy costs.

Rising energy prices will also affect the price of food. The world's leading exporter of natural gas has already warned of higher prices, and Ukraine is a major source of corn and wheat. While energy prices are expected to moderate in the next couple of years, food prices will surge by a whopping 22.9% in this year alone. The spike will continue to impact countries that don't directly import from Ukraine.

Impact of sanctions on currency markets

The impact of sanctions on global currency markets reveals a simple truth about global financial integration. Long-term common understanding and standards have supported the move towards greater financial globalisation. The US has served as a global public good by providing and augmenting reserve currency in crisis situations. Its currency is a reliable buffer against financial shocks and helps keep global equilibrium. Sanctions have only brought new risks. So how can globalisation cope with them?

One way to assess the effectiveness of sanctions is to examine the current level of liquidity in the global currency markets. Russia's central bank holds foreign currency securities and accounts with foreign banks. The reversion of its exchange rate is one indicator of the resilience of the economy. The reversal will reduce liquidity in the system and slow payments. Some observers suggest that the exchange rate has lost its role as an allocative price and welfare indicator.

Long-term consequences of a protracted conflict

The current escalation of tensions between Russia and Ukraine has increased the risks of a protracted conflict in Ukraine and a new cold war in Europe. It has also raised concerns about the impact of heightened energy prices on global markets. While markets have responded cautiously to the invasion of Ukraine, geopolitical risk analyst David Bridges says investors should not rule out higher volatility in the days and weeks ahead.

While the immediate impact of the war on the country has been felt, many of its effects will take years to become clear. The disruptions to supply chains in the Black Sea region have already pushed up the costs of shipping, food, and insurance. The automotive, petrochemicals, agricultural, and construction industries are all affected by the disruptions in supply chains. These disruptions will exacerbate already-high prices in these industries.