The focus of the market is on Russia and Ukraine. All eyes are on the rapidly evolving situation. This review is written based on the situation on Monday morning.
How has Russia’s assault on Ukraine impacted the markets?
The night between Wednesday and Thursday, Russia began a war of aggression against Ukraine on several fronts. Russian troops have approached the capital Kyiv and other major residential centres, but have not, so far, been able to seize any of them. Russia’s intentions are still unclear, but many things suggest that the objective is to paralyse Ukraine’s government and prevent the country from continuing its Western integration in the future.
When the attack began, stocks plunged dramatically, especially in Europe, and money sought out safe havens such as government bonds and the dollar. However, on Friday, the markets recovered with news of peace talks between Russia and Ukraine. For instance, the S&P 500 index ended the week in positive territory.
During the weekend, the previously more cautious sanctions against Russia were tightened drastically. The markets are now focused on the sanctions and Russia’s possible countermeasures. This week has begun on a downward note again.
The sanctions against Russia were tightened drastically on the weekend. What were the new sanctions and what impact are they having on Russia?
The initial sanctions set by western countries were still relatively limited, but they were tightened significantly over the weekend. The freezing of the currency reserves of Russia’s central bank, the expelling of Russian banks from SWIFT and many other measures are even tougher than expected. However, the energy sector has largely been exempted from the sanctions so far.
The sanctions have made a mark on Russia’s economy and will continue to do so for a long time to come. Russia’s equity markets have fallen dramatically, as has the rouble, and there are fears of a bank run. Russia’s key interest rate has been raised to 20%, compared to “just” 9.5% on Friday. It seems that recovery will take some time.
At the end of last week, the list of sanctions against Russia was as follows:
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Sanctions against politicians and citizens:
- The number of politicians on the sanctions list was increased significantly, now also including Belarusians.
- Putin’s and Lavrov’s assets will be frozen.
- Russian citizens cannot deposit sums exceeding EUR 100,000 in financial institutions in the EU.
- The acquisition of golden passports, i.e. citizen-by-investment programs, will be prevented.
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Sanctions against financial institutions:
- The assets of Russia’s central bank will be frozen and it cannot sell its dollar, pound or euro currencies on the market.
- Russian banks will be expelled from the SWIFT system.
- Russia’s largest banks, VTB and Sberbank, have, in practice, been shut down from dollar access and their assets in the USA have been frozen.
- It will be difficult or impossible for Russian banks and companies and the government to raise funds from the Western markets due to various prohibitions and limitations.
- Norway’s petroleum fund will exit from its Russian holdings.
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Technology, energy and others:
- The export of technology to Russia will be restricted.
- Europe’s airspace will be closed to Russian airlines.
- The opening of the NordStream 2 gas pipeline will be put on ice.
Why are Russian banks’ expulsion from the SWIFT system and their shutting out from dollar access considered to be such significant measures?
The SWIFT system enables financial messaging between banks and institutions around the world. In practical terms, the system relays information on what is transferred, to which account and for what reason. Being excluded from the system therefore makes money transactions to and from Russia difficult. In principle, the information required for transactions can be relayed in other ways also, and being excluded from SWIFT does not entirely exclude Russia from money transactions with banks outside SWIFT.
In addition, Russia’s largest banks, VTB and Sberbank, have, in practice, been shut down from dollar access and their assets in the USA have been frozen. This is an even more significant measure in the sense that it prevents banks from operating very effectively on the global financial markets. The SWIFT system could be compared to a thermostat in a pipeline and the freezing of bank assets and exclusion from dollar access to blocking the pipes entirely.
US banks have been given a 30-day transition period for carrying out the exclusion, but the assumption is that they will want to carry out the measures as quickly as possible.
Will Russia shut off the energy supply in response to the sanctions?
How Russia responds to the sanctions is essential to the markets. Many European countries are dependent on Russian energy and now the question is whether Russia will shut off the energy supply. If Russia were to shut off the energy supply to Europe, this would raise energy prices and cause inflation to rise. On the other hand, because of the currency restrictions, energy could be one way for Russia to get currency, which is why shutting off the energy supply is not entirely problem-free.
It is currently impossible to say what direction things will take, but, in any case, the energy issue is key for both Europe and Russia. The USA is clearly less dependent on Russian energy, but a surge in prices would also affect the USA as higher inflation and a weakening economic outlook.
How does the war between Russia and Ukraine affect the global economy?
The war’s impacts on the global economy depend above all on the impacts of the imposed sanctions and countermeasures imposed by Russia, and the availability of energy and its price development. The rise in the price of energy would dampen the outlook on the European economy in particular, and it would make central banks’ mission more difficult, especially in the USA.
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Scenario |
Energy trade continues, markets settle |
Energy trade hampered, energy price rises, markets reduce risk |
Energy trade stalls, temporary market shock |
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Sanctions |
Extensive restrictions concerning banks, private individuals and technology. |
In addition to the previous sanctions, Russian companies would be shut outside global trade, with the exception of the energy sector. |
Russia would be subject to a trade embargo and excluded from the SWIFT system. Russia would shut off the gas pipeline to Europe. |
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Impact on Europe |
Rising energy prices weaken growth, inflation remains higher than expected. Tightening of monetary policy still likely. |
High energy prices and their multiplicative effects push Europe into a slight recession. Inflation continues to be high, the central bank postpones interest rate hikes to 2023. |
High energy prices and a shortage of energy lead to a downturn. |
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Impact on the United States |
Higher energy prices slightly depress growth expectations while at the same time raising inflation expectations. The central bank’s task becomes more difficult. |
Higher energy prices and market challenges slow growth and raise inflation. |
The spike caused by energy prices forces the central bank to raise interest rates as demand falls. |
Have changes been made to Mandatum’s portfolios?
We made a small change in our portfolios on Monday, slightly reducing the weight of European equities and correspondingly slightly raising the weight of US technology stocks, which, however, are still underweight compared to the global equity markets. In the short term, the Russia–Ukraine war will continue to depress European stocks. On the other hand, it will reduce the risk of rising interest rates for technology stocks. Otherwise, we have kept our portfolios’ risk level at neutral, where it was last year already.
What market data will we receive this week?
We will receive interesting data this week, such as the inflation figures for certain euro countries, the final PMIs and US employment data. From the market perspective, economic data will take second place, however.
Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.