23 Feb Markets Brace for Impact Amidst Russia-Ukraine Conflict
An unintended casualty of the ongoing Russia-Ukraine conflict are stocks, especially in the European stock market, which are under pressure amidst escalating tensions and the looming threat of a war.
The U.S President Joe Biden issued a warning that Russia could invade Ukraine, while NATO allies accused Russia of “disinformation” regarding claims that it was retreating its troops. Washington refuted claims by Russia that it was withdrawing troops, stating that Russia is “engaged in a false flag operation to have an excuse to go in.” There are reports of over 150,000 Russian forces, including ground troops, aircraft and ships, gathered around Ukraine’s borders, in preparation of what some believe is an imminent attack.
The news has had a very deep impact on markets around the world, many of which are falling to new lows owing to the increased volatility. Germany’s main stock index, most susceptible to the outcomes from a potential war, hit a 4-month low after sliding by 1%.
Companies and stocks with exposure to Russia and Ukraine are watching with bated breath to see what happens next. Companies, including oil, mining, consumers, banking, construction, are facing repercussions from the ongoing conflict, a situation which could quickly worsen if the threat becomes a reality. Many companies are putting their IPO plans on hold, as evidenced by the fact that proceeds from European initial public offerings decreased by 79% at $3.1 billion, compared to $15.1 billion during the same period last year.
Stocks with Russia-Ukraine Exposure likely to be impacted
A Research report by CitiGroup shows companies such as Coca Cola, Carlsberg, Beiersdorf and Danone, are some of the organizations that derive a significant portion of their sales from Russia. On the other hand, companies with considerable operations in Ukraine include Ferrexpo and Ubisoft, while Medicover, a healthcare and diagnostic services provider derived 8.5% of its sales in the country.
Banking Stocks are at most risk, especially those that have extensive operations in Russia and derive a significant portion of their net profits from their Russian and Ukrainian subsidiaries. For instance, the Raiffeisen Bank International (Austria) Russian subsidiary contributed to 39% of its net profit, while other banks with significant presence in Russia include Societe Generale and Unicredit.
Escalating Oil Prices
Oil prices have surged on the news of escalating tensions. U.S Crude rose by 3.61% to $94.36 per barrel, while Brent surged by 2.6% per barrel to $97.87. The crude prices have risen by over 80% since the beginning of 2021, having crossed $90 a barrel, owing to other factors such as tight supply. The prices are likely to touch new highs if Russia experiences disruption to their oil and gas supplies.
Russia is a major supplier of oil and gas to the European market and the west is heavily reliant on the country for their energy supplies. In 2021, Russia was the largest supplier of natural gas and petroleum oils to the EU as per a report. The imposition of sanctions in the event of a war, will necessitate an alternate source of energy supply for countries in Europe as well as the U.S.
Ursula von der Leyen, President of the European Commission has stated that energy sanctions against Gazprom, a Russian energy corporation, are a possibility, in case Russia invades Ukraine. Energy supply disruptions could cascade down to several industries, hindering manufacturing activity, causing delays and backlogs and putting a spoke in the wheel of developmental activities.
The supply disruptions could further exacerbate the increasing imbalance between demand and supply, as economies around the globe open up after the pandemic and resume economic activity.
Impact on Global Markets
According to Goldman Sachs, the conflict as well as the resulting sanctions could result in the U.S stock market sliding by further (6% lower from Friday’s Close), with Europe and Japan likely to see worse losses. According to their estimates, a 10% decline in the Russian currency would push oil up 13% and cause a 27-basis-point decline in benchmark Treasury yields. The worst-case scenario also estimates A fall of about 9% for European and Japanese equities, an almost 10% slump in the tech-heavy Nasdaq and a 2% decline in the euro against the dollar.
The conflict will increase short-term volatility in the stock market, but it also augurs well for North American energy companies as the prices for oil and gas escalate. However, the impact of such geo-political tensions is mostly short-lived, with markets bouncing back with renewed vigour once the dust settles.
References
https://www.cnbc.com/2022/02/20/olaf-scholz-the-west-has-to-reduce-energy-dependency-on-russia.html
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