The ongoing conflict in Ukraine has had far-reaching effects on the global economy, with disruptions to energy and food prices and the currency market. In this blog post, we will examine five indicators that illustrate how the war in Europe has shaped global financial markets over the past year.
Firstly, we will look at the impact on safe havens, where the US dollar emerged as the ultimate safe haven during times of uncertainty. The energy crisis that the war brought with it, leading to a sharp increase in European natural gas prices. The rise in food prices after the invasion on fears of shortages and disruptions to Black Sea trade. Lastly, we will discuss the wild swings of Russia’s currency, the Rouble, which saw a significant fall after the invasion, followed by a rise to a multi-year high in June.
The last year has seen a war in Europe that has had far-reaching effects on economies and markets worldwide. Russia’s invasion of Ukraine has disrupted everything from energy and food prices to European banks, emerging market stocks and the Russian currency. In this blog post, we will look at five indicators that illustrate how Europe’s biggest conflict since World War Two has shaped global financial markets in the last 12 months.
Steady US Dollar
The US dollar has reigned supreme in the past year as the ultimate safe haven at times of uncertainty. The economic fallout of the war, which hit currencies such as the euro hard, also lifted the dollar. The greenback is down from September’s two-decade highs, but it’s still up 8% against a basket of currencies since the conflict began.
The impact on other safe havens such as government bonds is complicated, however. Yes, US and European bond prices rose in the days following Russia’s invasion as investors sought safety in top-quality assets. But they soon fell and yields soared as the war triggered an energy shock and inflation surged, while central banks responded with aggressive rate hikes. Germany’s 10-year Bund yield has risen to 2.4% from just 0.2% on Feb. 23, 2022.
Impact on Natuar Gas Prices
The war in Ukraine brought with it an energy crisis like no other. Post-COVID-19 reopening had already sent prices for anything from oil to coal to natural gas higher. But when Russian tanks rolled into Ukraine in late February, European natural gas prices rocketed by almost 400% in two weeks. By August, they were 700% higher than a year earlier. Pre-war, Russia supplied over 30% of Europe’s gas, most of it through a network of pipelines thousands of kilometers long.
Once Western sanctions hit, the flows of gas dried up. Energy prices soared, bringing the threat of blackouts, recession, and a worrying switch back to dirtier sources of fuel. Thankfully, winter has proven mild, and Europe has found other suppliers, bringing the gas price back to around 50 MWh, its lowest since August 2021.
Impact on Food Prices
Food prices, which were already on a tear in 2021 after COVID-19, leaped again after Russia’s invasion of Ukraine on fears of shortages and disruptions to Black Sea trade. Last year the U.N. food agency’s average price index hit its highest level on record, up 14.3% from the previous year. The index had already gained 28% in 2021. Higher energy and input costs, adverse weather, and continued strong global food demand are adding to pressure from significant market disruptions.
Over the whole of 2022, four of the five food sub-indexes – cereals, meat, dairy, and vegetable oils – reached record highs. Food price pressures are easing, but that does little to soften the blow for many developing nations, where food and energy prices make up a larger share of spending.
Impact on Rouble
The past year has seen wild swings for Russia’s currency – a more than 50% tumble following the invasion to record lows in March, followed by a more than 200% rise to a multi-year high in June thanks to soaring energy prices, FX restrictions, and the central bank ramping up interest rates. Twelve months on, the Rouble is broadly back to its pre-war 12-month average.
Russia wants a weaker Rouble to boost hydrocarbon revenues, which is helping plug a widening budget deficit and soaring domestic spending due to the ballooning cost of the Ukraine war. The intervention was seen as a signal that the central bank is willing to prevent the Rouble from weakening too much, which could lead to inflationary pressures and potentially destabilize the economy. The challenge for Russia’s policymakers is to strike a balance between a weaker currency to boost exports and a stable currency to avoid financial instability.
The outlook for the Rouble remains uncertain, as it is heavily influenced by geopolitical tensions, global energy prices, and the central bank’s policy decisions. It is a challenge for Russia’s policymakers to strike a balance between a weaker currency to boost exports and a stable currency to avoid financial instability.
Impact on EU Banks
There are two camps for EU banks regarding their Russian exposure – those that have slashed links have outperformed while those that have not continue to see their shares take a hit. Raiffeisen Bank International, deeply embedded in Russia’s financial system, has seen its shares slump over 40% since the start of 2022, while France’s Societe Generale and Italy’s UniCredit, who have cut their exposure, have seen their shares rebound from the post-invasion hit. The concerns over EU banks’ Russian exposure continue to be a topic of interest for investors.
In conclusion, the conflict in Ukraine has had far-reaching effects on the global economy, disrupting energy and food prices and the currency market. The US dollar emerged as the ultimate safe haven during times of uncertainty, while European natural gas prices rocketed after the war, leading to an energy crisis.
Food prices also surged on fears of shortages and disruptions to Black Sea trade. Russia’s currency, the Rouble, saw wild swings, falling significantly after the invasion, followed by a rise to a multi-year high in June. EU banks with Russian exposure have either outperformed or seen their shares take a hit. The conflict continues to influence geopolitical tensions, global energy prices, and central bank policy decisions, making the outlook for the Rouble and the global economy uncertain.