After decades of peace, the prospect of war in Europe is back on the news agenda, and with Russia deploying around 150,000 troops on the Ukraine border, the likelihood of conflict is still a very real possibility. The situation has sent shockwaves through the global markets – in this article, we explore what effects the tensions are having on the economy, and the prospect of disruption going forward.
Economic effects
In mid-February, as tensions reached a new peak, we saw European stock markets take big hits as traders sought to cash in gains made during the bumper 2021 investment year. On Tuesday 15th, the FTSE 100 dropped by 1.7%, with French and German markets down around 2%. While the crisis has yet to spook forex traders, experts speaking to Reuters noted that rising tensions could very well affect currencies in the immediate region.
The prospect of a pullback
Crude oil has been affected greatly by the troop build-up, with prices shooting up to above $90 per barrel, but as we saw in mid-February, talk of troop pullbacks by Russia has had a positive effect on prices. As Putin announced troops would be withdrawn from the border, West Texas Intermediate (WTI) crude was reported by Investopedia as having dropped by around 3%.
While the prospect of a pullback is promising, it’s important to note that just days later the United States contested Russia’s claims. As a result, investors should – as always – be wary of taking significant action when it comes to the management of their investments.
Fluctuations are still expected
With the possibility of conflict still very much on the cards, traders, investors, and economic policymakers should continue to expect continued disruption, pricing this into their economic calculations.
If a conflict does indeed occur, the consequences could be huge. 2016 research from the International Growth Centre based on simulations of armed conflict found the growth impact of high-intensity conflicts was up to eight times higher than low-intensity conflicts. They also found that longer wars had a much greater effect on growth than short ones – surely a possibility considering the prospect of a clash between the Russian military juggernaut and a Europe-supplied Ukrainian Army.
One thing is for sure – fluctuations are here to stay. Experts interviewed by Reuters noted that the costs of an invasion have yet to be fully priced in, so it’s important that investors hedge their bets and consider de-risking in the near term.
The tensions on the Russia-Ukraine border are concerning, and while the potential for de-escalation is still there, it’s crucial that investors and traders consider the threat of conflict within their decision-making. What do you think the long-term economic effects will be? Let us know in the comments section.
