Russia – Market Reaction from the Ukrainian War

The conflict between Russia and Ukraine escalated on Thursday, February 24, after Russian President Putin announced in his speech to the nation that a special military operation would begin in Ukraine.

Post Russia Building tens of thousands of troops along the Ukrainian border, with estimates by US President Biden of about 150,000 troops, large-scale military operations across the country began early Thursday, ending hopes that the conflict could be resolved peacefully.

Prior to the conflict was the Russian decision to recognize the sovereignty of Luhansk and Donetsk, known as the Donbas region, where Moscow’s Foreign Ministry is instructed to establish formal diplomatic relations with the two areas held by pro-Russian rebels on eastern Ukraine.

Two sides, Russia and Ukraine, backed by NATO and the Western world, have conflicting views on the whole issue and opposing reasons for the start of the war.

While Russia blames NATO for attempts to further expand in the east by bringing Ukraine into its membership, which would bring the alliance to Russia’s border for which it will cross the red line, the western world sees Ukraine as a bigger stage for Russia. to try to reassert its influence in Europe and the rest of the world.

The United States and Russia have drawn firm red lines that help explain what is at stake.

Russia has submitted to the United States a list of demands, some of which were non-existent for the United States and its NATO allies. Putin demanded that NATO stop its eastward expansion and refuse membership to Ukraineand that NATO would reverse troop deployment in countries that joined after 1997, which would turn back the clock decades on Europe’s security and geopolitical alignment.

As expected, the United States and NATO rejected these demands.

Some prominent U.S. foreign policy experts have argued at the end of the Cold War that NATO should never have moved close to Russia’s borders in the first place. But NATO’s open door policy says sovereign countries can choose their own security alliances. Yielding to Putin’s demands would give the Kremlin veto power over NATO’s decision-making, and through it, the security of the continent.

Russia wants Ukraine to be a demilitarized zone between the eastern borders of the NATO alliance and the western borders of Russia, with the latest comments that Ukraine will not join NATO in the near future, confirmed by US President Biden, but the core of NATO treaty. is Article 5, a commitment that an attack on any NATO country is treated as an attack on the entire alliance – meaning that any Russian military involvement of a hypothetical NATO member Ukraine would theoretically bring Moscow into conflict with the United States and other NATO members.

Ukraine is the fourth largest recipient of US military funding, and intelligence cooperation between the two countries has deepened in response to threats from Russia, implying that Ukraine has become an informal NATO member without a formal decision, yet no country can join. the alliance without the unanimous vote of all 30 member states, and many opposed Ukraine’s membership, in part because it did not meet the conditions for democracy and the rule of law.

After five days of heavy fighting, the Russian army, which attacked from three sides, took control of much of Ukraine and reached the suburbs of the Ukrainian capital Kyiv, but faced much stronger than expected resistance.

Sanctions

With many casualties, some Ukrainian military installations being destroyed and thousands of people leaving the conflict or the country, the Western world has sharply increased pressure on Russia through the media and imposed severe sanctions that have never been seen before in history.

La United States, The United Kingdom and the European Union have adopted sanctions aimed at freezing the assets of President Vladimir Putin and his foreign minister, Sergei Lavrov, in response to the war in Ukraine. They also put sanctions on Russia’s central bank and removed the country’s Swift lenders from the global payment system, in addition to other economic sanctions.

Some European countries have closed their eyes to Russian airlines, blocked a number of Russian banks, financial services and companies, especially those critical of the country’s economy, as well as limited access by wealthy Russians to Western banks.

The US administration has announced further sanctions against Russia’s central bank for effectively banning Americans from doing any business with the bank and freezing its assets within the US, also targeting the Russian Federation’s National Wealth Fund and the Russian Ministry of Finance. Federation.

On the other hand, the negative impact of sanctions could be expected in the western world, with the vulnerable European Union, whose economy is heavily dependent on a number of goods from Russia and less prepared for the situation than Moscowwill probably take the hardest hit by Russian countermeasures.

In this scenario, the energy sector is expected to be hit hard because Russia is the EU’s largest energy supplier, with about 40% of the bloc’s natural gas imports and nearly a third of oil imports coming from.

Russia.

The European Union’s gas reserves are below historic levels and prices have soared in recent months, giving Russia increased leverage and in the event of further escalation of the conflict, natural gas prices could explode, likely to cause power outages and likely push the economy into recession. . .

Draconian sanctions against Russia and its possible response, as Russian oil and gas are still flowing through Ukraine to Europe, mark an economic dimension of the war, in addition to a so-called hybrid war that includes a range of cyberattacks and media propaganda. , completing the dark prospect, as the world fears the worst case scenario.

After the first round of negotiations between Russian and Ukrainian delegations did not yield significant results, media reports say the second round will begin today, with hopes of success that could end a battle.

Market reaction

Global markets reacted strongly when Russia attacked Ukraine, with expected action on strong risk aversion and migration to security seen on the first day of the conflict.

Global stocks fell, along with riskier currencies, as the safe-haven dollar took advantage of the situation and rose against its main counterparts.

Another key safe haven instrument, Gold, has risen to its highest levels since August 2020, approaching a psychological level of $ 2000 per ounce, while both oil contracts, WTI and Brent have risen above $ 100 per barrel, for the first time since 2014.

Financial markets have temporarily regained confidence in hopes of a successful ceasefire negotiation, but overall bias has remained negative, and the yellow metal has continued to rise after a brief retreat, due to renewed demand for safe-haven assets.

Crude oil returned above $ 100, and natural gas prices rose 17% as market participants fear that disruption of air and sea transportation would severely damage global supply.

Wheat prices have also risen significantly, as Russia and Ukraine are major world suppliers, keeping third world wheat exports low.

Financial markets are expected to remain highly volatile, with no sign of a decline in the conflict so far.