Russia-Ukraine crisis shakes markets, but long-term outlook is better

Global markets typically rebound from war and disaster, and they are likely to do so this time, too. But Russia’s nuclear arsenal raises the risks beyond calculation.

  • By Jeff Sommer,
  • The New York Times News Service
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Global markets usually weaken as wars approach, strengthen long before wars end and treat human calamity with breathtaking indifference.

That’s been a common historical pattern, anyway. And, with some important caveats, it seems to be playing out with Russia’s latest aggression toward Ukraine.

President Vladimir V. Putin of Russia has already rattled stock, bond and commodity markets around the world. On Tuesday, U.S. stocks stumbled, with the S&P 500 () falling 1 percent, into what Wall Street calls a correction — a decline of least 10 percent from the most recent high.

The escalating conflict has shifted the value of mutual funds and exchange-traded funds in millions of retirement accounts, even for people who have not thought deeply about Eastern Europe and who have never invested directly in oil, gas or other commodities.

Mr. Putin’s announcement on Sunday that he was recognizing the sovereignty of two Russian-dominated breakaway Ukrainian regions and ordering the dispatch of Russian troops represented a serious increase in the risks of a much wider war.

Where the conflict may be heading exactly isn’t clear, but the short-term market implications are. “The near-term consequences for markets are relatively simple,” said Claus Vistesen, chief eurozone economist for the research firm Pantheon Macroeconomics. “Energy prices will keep rising, and equities will keep falling.”

Pockets of profit

Not all stocks have been falling, of course. Rising oil and gas prices have bolstered the S&P 500’s energy sector, the best performer this year, with a return of 21.8 percent through Monday. This came even as the overall index, which often serves as a proxy for the entire stock market, has fallen 8.8 percent.

Energy companies like Halliburton, Occidental Petroleum and Schlumberger are leading the S&P 500. And American investors have nearly $140 billion stashed in commodity E.T.F.s, mainly those focused on energy, like the $35 billion Energy Select SPDR Fund, which has returned 23.4 percent through Monday.

But the overall stock market has been afflicted by multiple troubles: fears of rising interest rates, sizzling inflation and continuing supply-chain bottlenecks. Russian threats to Ukraine are likely to whipsaw the market further.

The immediate market effects

The price of oil is already steep: approaching $100 a barrel, from about $65 a year ago. It is likely to soar higher, especially if Russia mounts a full-scale invasion and, in return, faces harsh financial sanctions by the United States and its allies.

Oil prices are already painful for consumers. They are reflected in the most salient marker of inflation in the United States, the cost of gasoline, which already averages $3.53 a gallon, according to AAA. Inflation is already 7.5 percent, a 40-year high in the United States.

As Caroline Bain, chief commodities economist for the research firm Capital Economics, wrote on Feb. 16: “Much would depend on whether Western sanctions are placed on Russian energy companies and/or Russia decides to withhold energy supply to the West.” In a worst-case outcome, she said, “oil and gas prices could easily double temporarily and the impact on gas prices could last for longer.”

That said, Capital Economics and many other analysts view so severe an outcome as unlikely. Even if energy prices continue to spike — largely because of speculation in financial markets — they are likely to decline quickly, based on fundamental supply and demand, said Edward L. Morse, global head of commodities research at Citigroup and a former deputy assistant secretary of state for international energy policy.

He said it was unlikely that there would be a significant, long-term “disruption in supply of Russian oil or natural gas,” essentially because cutting off the flow of Russian exports is not in the interest of either Russia, European consumers or the United States.

Mr. Morse projects a decline in oil prices by the end of this year to less than $65 a barrel, with extra supplies probably coming from Iraq, Venezuela, the United States, Canada and Brazil. And a U.S.-Iran diplomatic deal could add more than one million barrels a day.

If the Federal Reserve and other central banks go ahead and tighten monetary policy to curb inflation, the economy will cool off, reducing demand for energy, all of which would add to the momentum of a reduction in energy prices, Mr. Morse said.

Hedge your bets

The economic damage caused by the conflict could spiral in unexpected ways. “The biggest danger, of course, is the unintended consequences that we’re bound to see,” Mr. Morse said.

Russia isn’t just a heavyweight in energy production, where it ranks third in petroleum (behind the United States and Saudi Arabia) and second in natural gas (behind the United States), according to the U.S. Energy Information Administration.

It is also one of the world’s most important producers of minerals and metals like platinum, nickel, aluminum cobalt, copper and gold and diamonds. Prices of these commodities have been rising, but that’s the least of it. Shortages of Russian commodities could cause further supply-chain bottlenecks in the United States.

Russia ranks No. 1 in production of palladium, for example, a critical component of the catalytic converters required to reduce emissions in gasoline-powered cars, whose rising prices have already contributed to a surge in American inflation. Much of Russia’s palladium is mined by Norilsk Nickel, which could be included on Western sanctions lists.

On Tuesday, Chancellor Olaf Scholz of Germany put a stop to the Nord Stream 2 natural gas pipeline linking Germany to Russia. But it will be challenging for policymakers to calibrate further sanctions and monetary policy in a manner that satisfies Western geopolitical objectives without damaging the global economy.

Economics aside, Russia’s grievances with the West have already led to a partial rapprochement with China. If that evolves into a strong alliance, it would shift the balance of global power in a direction that generations of Western strategists have tried to prevent.

“This crisis is a trip back to the future,” Ian Bremmer, president and founder of the risk consultancy firm Eurasia Group, said in a video conversation from the Munich Security Conference last week. Russia’s actions have moved the world closer to a great-power military conflict than at any time since the end of the Soviet Union.

The possibility of a confrontation between NATO forces and Russia, with its nuclear arsenal, raises the risks of the Ukraine crisis beyond rational calculation.

Even so, the markets will perform those calculations anyway.

History tells us that the worse things get, the more valuable cash and Treasuries seem. And it also says that Cold Warriors who stuck with the stock market ended up with big fat portfolios.

That’s likely to be the case in the future, too. But it’s impossible to be certain of it.

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