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An analysis of the factors that triggered the conflict, what the current situation is, how it impacts the markets and what trends to watch closely


Tensions between Russia and Ukraine have escalated since late 2021. It started with the movement of Russian troops – ground forces and navy – along the Ukrainian borders for training exercises. The Russian recognition of the eastern territories Donetsk and Luhansk as independent states followed, and finally, Russia launched a large-scale invasion of Ukraine. The magnitude of this crisis has led the European Union, the United States, and the United Kingdom to impose unprecedented sanctions on Russia.


What happened in Crimea, and what is happening now

An important precedent of the current events in Ukraine occurred in 2014, amid the protests that resulted in President Viktor Yanukovich being ousted. On that occasion, Russia sent troops to support the creation of a new government for the Autonomous Republic of Crimea. A few months later, a referendum was held, which resulted in its annexation.

These events led to the signing of the Minsk Agreement in 2015, aimed at solving the conflict between the Ukrainian government, the separatists, and Russia. Under the Minsk Agreement, the government of Ukraine was obliged to acknowledge special status to the separatist regions, which would allow them to create their own police force, and give them influence over the appointment of local prosecutors and judges. However, the implementation of the agreement has stalled, which resulted in a tense, undefined situation, and led Russia to recognize the eastern regions, Donetsk and Luhansk.

The recognition resulted in the first entrance of Russian military troops into Ukrainian territory, beginning with the Dombas region and then en masse, seeking to seize Kiev, so that Ukraine could become what they have called a “neutral” state. Ukraine not being a NATO member was supposed to be a sign of this neutrality, and a clear goal of Russia’s since the start of its actions.


Western nations have decided not to send troops in response to this escalation and the invasion of Ukrainian territory, seeking to avoid further intensification of the conflict. However, there has been an increase in the weapons and ammunition that are being sent to Ukraine.

Yet, the most powerful weapon deployed by the EU, the US, and the UK is the set of economic sanctions imposed on Russia. Germany halted the Nord Stream 2 gas pipeline, designed to increase the gas flow from Russia to Europe through its territory. Also, the access of international markets to Russian sovereign bonds, banks, and institutions was closed, and access of some banks to the SWIFT international banking payment system was blocked.

SWIFT is a secure communication channel between banks that allows international funds transfers. Blocking SWIFT access would practically isolate the Russian financial system and affect the flow of its international trade.

In addition, President Volodymyr Zelensky has signed an application for Ukraine’s membership in the European Union, which, if accepted, would put this conflict in a new light, confronting Russia with the entire bloc.


Impact on the markets

Given that Russia has a prominent role in both the oil and the gas market, hydrocarbons should be the starting point for this analysis.

It must be remembered that Russia supplies about 37% of the EU’s natural gas imports, transported by pipelines that run through several countries, like Germany, Poland, and Ukraine. Therefore, any conflict will increase investors’ risk perception, and make them react in a volatile manner to changes in the scenario. The dotted box in Chart 1 indicates the moment when the price of the generic natural gas future touched USD6/MMBtu, corrected in January to levels below USD4.

Chart 1. Own elaboration. Data by Bloomberg

The increased risk perception has affected oil, as well, that reached over USD100 per barrel, its higher levels since 2014. This gave an additional boost to prices, in an extension of the rally that originated last December under expectations of a persistent excess in demand, at least in the short term.

Nevertheless, other commodities could be affected as well. Wheat prices, for example, are soaring. According to the U.S. Agriculture Department, in 2021 Russia and Ukraine were the second and fourth largest wheat exporters, respectively. A conflict that could disrupt wheat supply will be an additional factor in the global inflation trend that can be seen since 2021.

The gold market has also shown a price rally. Considered a safe haven in times of financial or political uncertainty, greater risk aversion has led to increased demand, reaching USD1.900/oz.

It is clear that, at least in the short term, the tensions between Russia and the US, UK, and Europe will continue, maintaining investors in Risk-On mode, increasing commodities volatility, and the demand for safe-haven assets.

Chart 2. Own elaboration. Data by Bloomberg

Finally, it is worth noting (Chart 2) the 30% drop in the Russian ruble against the dollar, that went from 75.37 to 98.06 per dollar, reflecting precisely how risk perception has increased in Russia, particularly after its blocking from the SWIFT system. The Central Bank has taken measures such as capital controls, and an increase in the interest rate, which went from 9.5% to 20%.

The trends that should be closely monitored from now on are the impact of the conflict on economic growth and inflation, not only in Russia but in Europe as a whole. China’s position regarding sanctions, and the possibility of Russia turning to cryptocurrencies as an alternative to the SWIFT system, should also be closely observed in this constantly changing geopolitical scenario.


This report was written only as content by Gandini Análisis for SupraBrokers. It shall in no case be considered an investment recommendation.  

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