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Geopolitical Risk Rises As Russia Orders Troops Into Ukraine

By James PicernoMarket OverviewFeb 22, 2022 09:07AM ET
www.investing.com/analysis/geopolitical-risk-rises-as-russia-orders-troops-into-ukraine-200618489
Geopolitical Risk Rises As Russia Orders Troops Into Ukraine
By James Picerno   |  Feb 22, 2022 09:07AM ET
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It’s not an invasion, but it’s no longer the status quo of recent history. Let’s call it taking the asymmetric-warfare playbook up several notches and raising the threat of conventional military combat closer to Europe’s eastern border. Whatever you call it, the decision by President Putin to send Russian troops into eastern Ukraine on a “peacekeeping” mission substantially raises uncertainty and increases risk for the global economy and financial markets.

Forecasting macro activity and managing expectations, in other words, have become substantially more difficult. What is clear is that the various economic, financial and political scenarios that were unlikely if not unthinkable in recent days and weeks have suddenly become plausible and perhaps likely. At this early stage it’s all guesswork. War, or something approximating war, has a nasty habit of spinning out of control and unleashing forces that can’t be controlled or predicted. A bigger dose of humility, in short, is the only game in town until further notice.

That said, here are several key issues to keep in mind as the world navigates an increasingly treacherous period in the days and weeks ahead.

Russia, the world’s third-largest energy producer, is a major exporter of commodities to the world. As the West imposes sanctions on the country, the potential for a severe supply shock lurks – particularly for oil and natural gas. Roughly half of Russia’s energy exports go to Europe, with another 40%-plus going to Asia, according to US Energy Information Administration.

Russia's Crude Oil And Condensate Exports
Russia's Crude Oil And Condensate Exports

Europe is particularly vulnerable to Russian energy supplies. Nonetheless, it’s notable that Germany today announced that it will suspend certification of the Nord Stream 2 gas pipeline that’s designed to bring natural gas from Russia directly to Europe.

Inflation could spike as Russia-related supply shocks reverberate through the global economy. Joe Brusuelas, chief economist at RSM, said last week:

“Heating the home and putting gasoline in the car will become more expensive in the immediate aftermath of a Russian invasion”

One byproduct of higher energy prices may be a renewed push to revive a deal on Iran’s nuclear program. Iran’s capacity to export crude oil has been severely constrained since the Trump administration withdrew from the nuclear deal and reimposed sanctions in 2018. At a time of rising energy prices, the incentives are stronger in the West to negotiate a new deal that allows Iran to supply more oil to the global economy.

On the geopolitical front, the rising confrontation between Russia and the West looks set to forge a closer relationship between Moscow and Beijing. Carl Weinberg, chief economist at High Frequency Economics, says:

“Russia is likely to pivot all energy and commodity exports to China.”

A greater array of Western sanctions imposed on Russia will impact the energy companies. As FT notes today:

“Some of the world’s biggest oil companies and commodity traders are at risk of disruption to their extensive business operations in Russia if the west follows through with ‘unprecedented’ sanctions against Moscow for any further invasion of Ukraine.”

Macroeconomic risk will rise, perhaps leading to a new recession. It’s too early to estimate the probability of economic contraction in the US and elsewhere. The good news is that recession risk in the US remains low, based on data published to date. Growth is slowing in early 2022 and the Russia-Ukraine crisis will surely create stronger headwinds. Whether this leads to a recession is unclear at this point, but it’s hardly a non-zero threat.

Ultimately, the events on the ground in Ukraine are stress test for the West. It’s premature to predict the outcome and blowback, but it’s not too early to recognize that the stakes are higher this time.

“President Putin is testing our international system and seeing how far he can push us all”

Says Linda Thomas-Greenfield, US ambassador to the UN.

Geopolitical Risk Rises As Russia Orders Troops Into Ukraine
 

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Geopolitical Risk Rises As Russia Orders Troops Into Ukraine

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karl hungus
karl hungus Feb 22, 2022 4:13PM ET
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And round and round we go!
 
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