We analyze the economic and financial impact of the Ukrainian crisis with a special focus on our footprint Nordic markets. We view the situation in Ukraine as far from de-escalating as fighting continues in Donetsk and Lugansk, which we expect to weigh on market sentiments near term.
However, we believe an escalating trade war would be unbearable for both Russia and the EU, and that the EU will revoke the sanctions within one to three months, with Russia abolishing its own sanctions.
Both the EU and Russia have too much to lose if the bilateral energy trade is not kept out of the conflict. Consequently, the risk of a near-term supply disruption is limited with modest impact on oil and gas prices.
The Ukrainian crisis will have a modest direct impact on the European economy given manageable trade and financial links for the bigger economies. Instead, the biggest risk to EU activity is likely to come from negative sentiment.
Of the Nordic countries, Finland is clearly the most vulnerable due to trade, tourism and foreign direct investment (FDI) links. We have revised our 2014 Finland GDP forecast down to -0.2%.
The Ukrainian crisis should have limited impact on the Scandinavian countries, with Norway potentially gaining over the longer term if the EU substitutes Russian gas with Norwegian gas. However, this would mainly strengthen public finances unless the conflict is prolonged.
We expect the PLN, CZK, HUF and EUR to continue to underperform on the Ukrainian crisis. However, stabilisation of the crisis should trigger a relief rally in Eastern European currencies. We see the crisis as marginally positive for the NOK relative to the SEK and DKK given lower trade links and potential EU gas import substitution towards Norway and away from Russia.
If the newsflow out of Ukraine stabilises, we expect the global fixed income markets to give back some of their recent gains. This would mean higher rates in the US and steeper curves in EUR core and swap markets.
We believe the recent sell-off in equities is a reflection not of changes in fundamentals but of political turmoil. However, a number of Nordic companies are exposed to the Ukrainian crisis where Finnish and selective Swedish accounts stand out. We examine the individual companies' links to Russia.
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