Today is a grim day as we wake up to the news that Russia has invaded Ukraine. It is hardly a surprise but still has shaken up some financial markets which have seen big moves. It also will have longer-term consequences. I would say that all roads lead to Russia except of course for the fact that presently we are also concerned with the tanks using them to exit it and enter Ukraine.
The Rouble and stock market collapse
We can look at the stock market situation with a wry smile via the lens of Reuters on the 1st of December.
MOSCOW (Reuters) – Russia’s stock market will recover in 2022 from the November sell-off……..The MOEX rouble-denominated index was expected to reach 4,100 by mid-2022, up about 5.7% from Monday’s close of 3,879.54, according to the Nov. 15-30 Reuters poll.
Well that is not quite the state of play today.
#RussiaUkraine Tensions | #Russia‘s #RTS Index Tumbles 50% & #MOEX Slides 45% ( CNBC)
It has been quite a day already with the MOEX initially falling below 1700 ( in such wild moves there are always disputes about exact levels) and has now rebounded as I type this to 2300 which is still around a quarter lower on the day and comes on the back of earlier losses this week already. So we have a starting point of what central bankers hate which is falls in asset prices and negative wealth effects.
The Rouble has followed a similar pattern as the present level of 84 versus the US Dollar would be an all-time low except for the fact that it fell below 87 on the invasion news. Again we have a pattern of a fall but wild swings within it. This led me to believe that the Bank of Russia was intervening and I had a look.
Russia’s central bank said Thursday that it would start interventions in the foreign-exchange market after the ruble plunged to a record low in the hours after troops invaded Ukraine. ( MarketWatch)
It is not short of ammunition for this and as we noted back in January you could say it was getting ready for it,
Russia holds a formidable warchest of more than $600 billion in foreign-exchange reserves and gold that it can use in currency markets to prop up the ruble.
According to its website it has acted to support the stock market as well.
the Bank of Russia ordered brokers to suspend short sales on exchange and over-the-counter market.
So we have a lot of intervention, more inflation and heavy losses on assets as our opener for the economic impact on Russia.
However that mostly affects the ordinary Russian whereas those in power will be getting a boost from this.
Wti Crude 99.58 +8.12%
Brent Crude 104.96 +8.39
Natural Gas 4.91 +6.19%
Gold 1,963 +2.77%
Palladium 2,670 +7.69% ( @InvestorsHaven )
There is a discount for the Urals benchmark oil price and there may be restrictions but for the moment there are views that the West may even be sourcing more rather than less energy from Russia.
I’m hope to be proven badly wrong on this: I believe Europe will buy more (no less) Russian natural gas in the next few days. Yes, that’s right: more. That’s capitalism in times of war. The reason is linked with how Gazprom import contract pricing is structured. ( @JavierBlas )
Russia in short looks like it is winning from its commodity resources and also from its policy of building up gold reserves. Ir rather the Russian state is as the ordinary Russian will be seeing inflation as a minimum.
The rest of the world
Inflation
This will come from the commodity prices we have just noted. Already many countries were seeing an energy price crunch which now looks set to worsen. There is also the issue of this.
Wheat prices jumped to a 9-year high as global shipments are seen facing disruption from Russia’s invasion in Ukraine The two countries supply 21% of the world’s wheat, barley and maize Food prices are set to rise worldwide. ( @SalehaMoshin)
US wheat futures are up 50 cents at US $9.26 per bushel this morning giving us a nine-year high. If we add in a factor we have been following higher food prices are on their way.
Russia + Belarus supply 20% of fertilizer exports, key for world food production ( @SalehaMoshin )
So a mixture that would be described by Britney like this.
With a taste of your lips, I’m on a ride
You’re toxic, I’m slippin’ under (toxic)
Central Banks
These have a problem and let us start with the ECB for two reasons. One is that it has an informal meeting today by chance and next because in many ways it is in the biggest mess. Let me hand you over to @fwred.
Oil prices are 35% higher than assumed by the @ecb
staff in December. The first-order impact will push headline inflation higher (+40bp), also raising concerns over second-round effects. But from these levels, higher/sticky energy prices will ultimately be disinflationary.
As you can see the inflation move poses a challenge to the ECB ( and wider central banking view) that inflation is about to flaw. Although of course from their point of view the food and energy inflation is non-core.
But there is an associated issue as well.
The ECB’s piece included an estimate of the growth impact of last year’s surge in gas prices, which could reduce euro area GDP by around 0.2% by the end of 2022. The latest rise in gas prices (and oil) has the potential to have a much larger impact on growth. ( @fwred )
So we will be seeing yet more of our stagflation theme. Which way will they move? Well one policymaker seems to have already decided.
FRANKFURT, Feb 24 (Reuters) – The European Central Bank should continue its bond-buying stimulus programme at least until the end of the year and keep it open-ended to cushion the fallout from any conflict in Ukraine, ECB policymaker Yannis Stournaras told Reuters.
To Infinity! And Beyond!
Defence Expenditure
We have lived through a period called the Cold War dividend where its end meant we in the west spent less on defence. Sadlt that is changing as Francine Lacqua reflected on earlier.
Our world has changed overnight. Next 24 hours will be critical to understanding how.
We will have to spend more and only time will tell how much more. But there are things the UK can do in the relatively short-term.
1. Keep the tranche 1 Typhoons
2. Accelerate frigate production and order the FSS supply ships.
To which I would add speed up the modifications to the Type 45 frigates.
There is a reason I am looking at the RAF and Royal Navy which is that the British Army has been dreadfully led and run in recent times and can only help in a minor way until we sort it out.
Comment
There is much that is in flux right now but I am afraid we are back to our stagflation theme and more inflation. So we will be poorer. There will also need to be thought on the issue of how we have left ourselves so dependent on potential enemies for vital products.
Let me finish with a glimmer of hope. At a time like this we would expect to see the safe haven of the Japanese Yen soar but in fact it has only moved marginally to 114.80. So from the Pacific region at least there is no panic at this stage.