Ukraine: what a Russian invasion could mean for markets

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A growing mass of Russian troops on Ukraine’s border, escalating rhetoric and dire warnings from military analysts point to one thing: Ukraine is on the brink of a war that could dwarf the fighting of 2014 in size and bloodshed. .

The threat of a Russian invasion of Ukraine has already pushed Russian stocks lower, although its impact on global equities and commodities is not what one would expect. Here’s how a war would affect your portfolio and how it wouldn’t.

raw math

Oil prices have skyrocketed, though so far it’s hard to tell if the situation in Ukraine has anything to do with that. Demand is recovering as concerns about the omicron variant of the virus fade, while OPEC+ members stick to modest step-by-step production increases.

If war does break out, it will certainly be reflected in oil prices. Morningstar strategist Allen Good says the additional geopolitical risk premium, combined with existing drivers, could push crude to $100.

“Western sanctions could lead to a reassessment of geopolitical risk, even if there are no tangible supply and demand issues, which there probably won’t be,” he says.

western energy stocks

The return of a geopolitical risk premium is bullish for global oil producers. Western oil majors have little exposure to Russian oil production and few physical assets at risk.

Meanwhile, sanctions against Russian producers would benefit European and US companies, and especially those more focused on crude oil. US giants Chevron (CVX), Exxon (XOM) and ConocoPhillips (COP) are ahead of their more diversified European peers, such as Shell (RDSB), BP (BP) or Total (TTE).

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Gas utilities and companies exposed to the beleaguered Nord Stream 2 pipeline have the most to fear. High gas prices reduce the margins of suppliers such as the British Centrica (CNA) and gas transport companies such as the Italian Snam (SNAM SpA); both have underperformed this year.

“Nord Stream 2 would seem like an obvious target to punish Russia,” says Good. “War would strengthen the case for the US to shut it down, even if the US can’t do much about Europe’s dependence on Russian gas.” Germany’s Uniper (UN01), Austria’s OMV (OMV) and France’s Engie (ENGI) are interested parties in the pipeline project.

Russian actions in the line of fire

This one is simple. Vulnerable to Western sanctions, and with their physical assets in the line of fire, populations close to the conflict have regressed. Russia’s benchmark MOEX stock index is down 20% since early November, when Russia began its second troop buildup near the border.

Among the biggest decliners are Russia’s banks, which now risk being squeezed out of global capital markets if ties with Western nations are severed. Sberbank (SBRCY), Russia’s largest, has plunged 40% since the beginning of November.

Meanwhile, Russian energy producers have outperformed the benchmark MOEX as rising commodity prices offset geopolitical risk, with Gazprom (OGZPY) and Rosneft (ROSN) both down 15% over the period. .

Lukas Strobl is Editorial Manager EMEA at Morningstar

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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