Impact of Ukraine’s Invasion On Global Economy

Financial markets are so edgy about tensions in eastern Europe, for good reason. Geopolitical scares typically produce very short-lived market disruptions, with commodities and risk assets quick to recover.

The standoff between Russia and Ukraine could be different. Russia is threatening a massive invasion that could quickly subdue Kyiv, the nation’s capital, and return the country to de facto Russian rule.

Ukraine is a former Soviet republic that has been independent since the USSR dissolved in 1991, and is increasingly aligned with the West. Russian President Vladimir Putin wants to turn back the clock and reassert Russian influence, or perhaps dominance, over his western neighbor.

A Russian invasion is far from certain. The Biden administration says Russian ground, air and naval forces have Ukraine hemmed in on three sides and all the resources needed to invade. The US is closing its embassy in Kyiv and relocating to western Ukraine, farther from Russian forces.

Putin may prefer the threat of an invasion to the casualties and multiple complications of actual warfare. The next few weeks will be telling, since it would be optimal for Russian troops to move when the ground is frozen and hard. If they haven’t moved by springtime, Putin probably has other plans.

The problem for markets is guessing which of many levers Putin will pull. A full invasion would convulse energy and commodity markets and probably trigger a sharp stock selloff, which markets are already pricing in.

But Putin could agitate just below the level of aggression likely to trigger US and European sanctions, with markets continually trying to gauge whether Putin will cross the line and invade. Here’s the outlook under four different scenarios:

A full invasion. Many analysts think it’s very unlikely Putin will send troops all the way to Kyiv, if only because it would provoke a damaging economic and perhaps military response by Europe and the United States. Yet this is also the biggest tail risk investors face from the standoff and the one that would cause the most damage.