Could the Russian attack on Ukraine turn into a macroeconomic event?

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In the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Investment Strategy Analyst BeiChen Lin discussed the impact of international sanctions on the Russian economy and markets.

They also discussed the likelihood of the Russian invasion of Ukraine becoming a macro event and discussed the removal of Russian stocks from major index providers.

What is the impact of Western sanctions on Russia?

Ristuben said the sanctions imposed on Russia by Western leaders in response to the nation’s attack on Ukraine are on an unprecedented scale, with the main goal being to wreak havoc on the Russian economy.

“In the past week alone, sanctions have been imposed on individuals in Russia – particularly the oligarchs who form President Vladimir Putin’s political base – as well as companies heavily owned by the Russian government,” he said. he declared.

In addition, the withdrawal of some key Russian banks from the SWIFT communication network has made it very difficult for Russian banks to do business outside the country, Ristuben noted.

The United States, Canada and Europe have also imposed sanctions on the Russian central bank, he said, including freezing assets held by the Bank of Russia in other countries.

“Russia’s central bank had built up a war chest of $650 billion – about half of which is outside of Russia – and now the bank will not be able to bring those reserves back into the country to mitigate the sanctions hit,” Ristuben explained.

He noted that so far the sanctions have had predictable effects, with the Russian stock market closed all week of February 28 and its local bond market also closed. Also, securities that used to trade as certificates of deposit outside of Russia — such as ADRs and GDRs — are no longer trading, Ristuben said.

“The idea with all these sanctions is to impose a heavy toll on the Russian economy in order to induce Russia to stop its assault on Ukraine – and for now I think they are working as intended,” did he declare.

Two main ways the Russian invasion could turn into a macroeconomic event

Ristuben said Russia’s invasion of Ukraine – a humanitarian tragedy with terrible consequences for millions of people – is still a geopolitical event, but noted that there is a risk that it could turn into an event. macroeconomic. The Russian economy, he explained, is about 1/13and the size of the US economy.

“There are a few key escalation channels that could turn this into a macro event – ​​and the first would be military escalation by Russia,” Ristuben observed.

This could involve an attack on a NATO (North Atlantic Treaty Organization) country by Russia, he said, which would require a response from NATO members, because an attack on a member is considered an attack on all members.

Ristuben said that while this scenario would have the highest impacts, it also has the lowest probability of occurring. “I wouldn’t stay up at night worrying about this one,” he remarked.

Russia’s use of cyberattacks is another example of how the current crisis could evolve into a macroeconomic event, Ristuben said. He noted that the United States and Western Europe are already experiencing a high level of cyberattacks from Russia.

“The fear today is that Russia could escalate these cyberattacks to target specific infrastructure in the West, which could potentially have quite significant impacts on economic growth rates around the world,” Ristuben explained, adding that at So far, these attacks have been contained.

Markets also appear to view the crisis as a geopolitical event so far, he said, noting that on March 4 at noon Pacific time, the S&P 500® Index was slightly higher than it was. February 23, the day before the Russian invasion. has begun. In contrast, the STOXX® Europe 600 index has fallen by around 4% since then, Ristuben said, adding that this was not too surprising, given that Europe is closer to the crisis.

In fixed-income markets, U.S. government bond yields are trading about 25 basis points lower than before the invasion, Ristuben said, attributing about half of that decline to uncertainties surrounding the Russian crisis. -Ukrainian.

“The other half of this decline can likely be attributed to reduced market expectations for US Federal Reserve (Fed) rate hikes this year,” he said. Ristuben explained that markets are now expecting a 0.25% rate hike at the March 15-16 Fed meeting, compared to earlier expectations of a 0.50% hike. In addition, markets are now forecasting five rate hikes in 2022 instead of seven, he added.

Major Index Providers Ditch Russian Stocks

Ristuben concluded the segment with a look at recent actions taken by major index providers in response to Russia’s attack on Ukraine. He explained that MSCI, FTSE and STOXX have all deemed Russian and Belarusian stocks non-investable and are removing them from their indexes.

“As a result of all of this, at Russell Investments we will work to thoughtfully reduce our holdings in Russia when markets reopen and there is liquidity,” he concluded.


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