How Has The Russia/Ukraine War Impacted The Markets?

The Russian invasion of Ukraine in late-February 2022 brought historic volatility to the financial markets. Traders and investors alike were forced to address the financial fallout as the markets repriced products such as crude oil, wheat and the Russian ruble (RUB).

As the situation developed into an extended armed conflict, asset pricing ebbed and flowed in response to key events. Unprecedented sanctions, logistics challenges and escalatory cycles all prompted periodic uncertainties. Subsequently, the world's commodity, currency and shares markets were impacted dramatically by the geopolitical strife.

Commodities

Although the Russia/Ukraine War was localised, the engagement affected commodity markets around the globe. A few of the hardest hit were crude oil, natural gas and wheat.

Crude Oil

When the Russian invasion of Ukraine commenced, there were immediate questions regarding the international oil supply. Among the key issues was a ban of Russian exports to Western nations. In an 8 March 2022 statement, US President Joe Biden announced strict new regulations regarding Russian oil exports:^[1]

"Today I am announcing the United States is targeting the main artery of Russia's economy. We're banning all imports of Russian oil and gas and energy. That means Russian oil will no longer be acceptable at US ports."

The United Kingdom and European Union proposed similar measures. In the U.K., the government adopted plans to phase out Russian crude oil imports by the end of 2022. The policy was to impact 8% of U.K. oil demand, but lauded by Prime Minister Boris Johnson on 8 March 2022:^[2]

"The UK will move away from dependence on Russian oil throughout this year. Working with industry, we are confident that this can be achieved over the course of the year."

As of 2020, Russia ranked as the second largest exporter of crude oil, shipping US$74.4 billion worth of crude abroad. The top destinations of Russian oil exports were China (US$23.8 billion), Netherlands (US$9.26 billion), Germany (US$6.38 billion), South Korea (US$5.03 billion) and Poland (US$4.22 billion).^[3] The new sanctions were sure to disrupt the flow of oil from Russia abroad.

Following the announcements from the U.S. and U.K., crude oil pricing spiked dramatically on 8 March 2022. For the session, West Texas Intermediate (WTI) crude oil futures rose as much as 7%, trading to multi-year highs above US$128 per barrel. North Sea Brent (Brent) futures followed suit, rallying 7.7% to an intrasession high above US$132.75.^[4]

Although volatility eventually subsided from the early March tumult, oil prices held firm during the Northern Hemisphere summer season. Through 30 August 2022, prices of USOIL (+22.8%) and UKOIL (+28.2%) contracts for difference (CFDs) posted robust year-to-date gains.^[5] The Russia/Ukraine conflict was seen as the single biggest reason for the elevated pricing.

Natural Gas

Alongside crude oil, natural gas is another key Russian commodity export. For the year 2020, Russia stood as the world's largest purveyor of natural gas, sending 238 billion cubic meters of gas abroad.^[6] This fossil fuel accounted for billions in revenue for Russia, with Germany, Turkey, Italy and France as the primary destinations.^[7]

When Russia invaded Ukraine, global stocks of natural gas came into question. Sanctions were put into place limiting Russian imports, with one of the largest commitments being from the EU.

In 2021, EU nations imported 45% of all gas from Russia. In response to Russian aggression, the International Energy Agency (IEA) introduced a 10-point plan to reduce consumption by 33% in one year. IEA executive director Fatih Birol said this about the policy on 3 March 2022:^[8]

"Nobody is under any illusions anymore. Russia's use of its natural gas resources as an economic and political weapon show Europe needs to act quickly to be ready to face uncertainty over gas supplies next winter."

Following the announcements from the IEA, as well as sanctions from United Nations allies, natural gas prices spiked dramatically. For the month of March 2022, the NATGAS CFD rose more than 25% as the markets attempted to value the news.^[5]

However, the volatility did not fade quickly as the war dragged on. June saw a major decline in NATGAS of 32.75%, yet July posted a 52% gain.^[5]

One of the market drivers of July's rally was a Russian cut in gas supplies to the EU. On 27 July, Russian energy company Gazprom reduced the output of the Nord Stream 1 pipeline to 1/5th of its capacity.^[9] The result was a swift rally in natural gas and more volatility in the energy markets.

Wheat

Aside from energy, foodstuffs were also severely impacted by the Russia/Ukraine War. The largest was the international wheat market, which experienced an elevated period of pricing volatility.

Similar to crude oil and natural gas, wheat faced supply chain challenges in the export sector. For 2021, Ukraine wheat exports were valued at US$5.2 billion, with the top destinations being Egypt, Indonesia and Turkey.^[10] This made Ukraine the world's ninth largest wheat producer and seventh largest exporter for 2022. However, exports for the 2022/23 marketing year were forecast to be down 50% due to the war.^[10] The swift drop in output had many believing a global food shortage was imminent.

During the initial stages of the Russian invasion, Ukrainian ports were blocked, essentially stopping wheat exports. The result was a dramatic runup in prices of nearly 40% from February to May.^[5]

However, the rally underwent a large correction upwards of 25% during June and July. The catalyst for the wheat sell off was a deal to allow 20 million tonnes of grain to be exported through the Black Sea.^[11] Once again, the evolving geopolitical situation brought tremendous uncertainty to the markets.

The Forex Market

The commodity markets weren't the only ones impacted by the Russia/Ukraine war. Many forex majors, minors and exotics were privy to the war's fallout. In countries such as the U.K., U.S. and members of the EU, inflation reached multi-decade highs—some of which was attributable to the uptick in commodities.

Central banks around the world shifted to hawkish policy to combat rising consumer prices. In Congressional testimony from 3 March 2022, US Federal Reserve (Fed) Chairman Jerome Powell weighed in on the impact of the Russia/Ukraine War on inflation:

"Commodity prices have moved up, energy prices in particular. That's going to work its way through the US economy. We're going to see upward pressure on inflation, at least for a while."^[12]

In an attempt to restore pricing stability, the US Fed enacted a collection of interest rate hikes—the first since 2018. The forex majors then exhibited sustained volatilities as traders and investors actively repriced global currencies. Two of the most volatile were the United States dollar (USD) and Russian ruble (RUB).

USD Strength

Shortly after the mobilisation of Russian forces into Ukraine, the USD gained strength as a degree of market capitulation ensued. Late February brought weakness to the US indices, as the US30 (-3.25%), US500 (-2.78%), and US100 (-4.39%) all retreated by month's end.^[5] Conversely, the USD held its value and functioned as a moderate safe-haven asset. February showed flat performance with the DXY posting 0.07% gains for February 2022.^[5]

Despite the geopolitical situation in Eastern Europe stabilising in the following months, the USD showed strength across the forex marketplace. The primary reason was a series of interest rate hikes instituted by the Fed and projected hawkish policy spanning into 2023.

From March through July, the Fed raised the Federal Funds Target Rate from 0.0% to 2.25% to check inflation partially-induced by the Russia/Ukraine War. Accordingly, the DXY rallied from 99.44 on 1 March 2022 to 105.56 on 1 August 2022, a gain of 6.1%.^[5] The stiff rally in the USD Index was brought on by robust performance versus the GBP, EUR, CHF and JPY.

Ruble Volatility

The ruble was impacted the most, by a wide margin, compared to other assets. After invading Ukraine, Russia was hit with a collection of sanctions designed to negatively impact economic and financial performance. Immediately, the RUB showed historic weakness against several FX majors.

The price action of the USD/RUB from 21 February to 7 March illustrates the degree of volatility present in the ruble. For the period, the USD/RUB spiked from 77.35 to an all-time high of 154.25. The move represented an approximate 50% loss in the RUB's value in three week's time.^[5]

To mitigate the damage, Russian institutions took action in several ways.

• First, Russia required that natural gas purchases were to be made in rubles.^[13]
• Second, the Russian Central Bank raised domestic interest rates to 20% to restore pricing stability.^[14]
• Last, the RUB was pegged to gold at a rate of one gram to 5000 RUB.^[15]

In the weeks following the actions taken by the Russian Central Bank and government, the RUB recovered all losses and posted gains versus the FX majors. For the USD/RUB, rates rapidly plunged by 22.7% for the week of 14 March.^[5] Values of the USD/RUB continued to fall over the summer, trading well below pre-war levels for an extended period.

Summary

The Russia/Ukraine War had a dramatic influence on the world's financial markets. Western sanctions and retaliatory policies from Russia contributed to supply chain disruptions and currency volatilities. Ultimately, commodities and currencies experienced periods of chaotic price action as palpable uncertainty entered the marketplace.

As of this writing (30 August 2022), the Russia/Ukraine war continues with no end in sight. Its future impact on the markets is uncertain, but it will likely remain a key influence until a lasting resolution is found.