Energy prices are expected to soar in the event of an invasion, likely sending the price of crude above the $100-a-barrel threshold for the first time since 2014. Beyond crude, Russia’s role as a key supplier of natural gas to Western Europe could send prices in the region soaring. Overall, spiking energy prices in Europe and around the world would be the most likely way a Russian invasion would stoke volatility across financial markets.
Russia: The Toxic Ex-Partner…
It all started when the Soviet Union broke up in the early 90s. Ukraine, a former Soviet Republic, had the third-largest atomic arsenal in the world. Anticipating a friendly relationship with Moscow moving forward, Kyiv gave its considerable nuclear stockpile back to Russia in exchange for security guarantees that protected it from a potential Russian attack. “The Great Mistake” at the time, Russia seemed to be a toothless powerhouse on the international stage.
Fast-forward to between then and 2014, after Russia ramped up its global standing and emerged as a considerable military power once again, it decided to invade Ukraine and claim the Crimean Peninsula (the biggest land-grab in Europe since World War II) on the back of concerns Ukraine was going to associate themselves with the European Union.
Russia matched further into Ukraine, sending a large part of its regular troops to Donbas in eastern Ukraine, succeeding in causing huge casualties on the Ukrainian side but ultimately failing to capture the Donetsk and Luhansk regions. In a show of compromise, Ukraine and Russia adopted the Minsk Agreements in 2015, which stipulated that Russia must remove all its troops and machinery from Ukraine. Which begets the question, “did Russia abide by the agreement?” I guess you know the answer to that already.
In opposition, Russia continued to adopt a series of unconventional tactics against Ukraine, including cyber-attacks, funding, arming irregular militias, and spreading mass disinformation. Russia also installed puppet governments in Donetsk and Luhansk, creating military dictatorships in the occupied territories which were initially run by Russian citizens. Over time, Russia began to change the narrative of the conflict, framing it as a Ukrainian civil war that Russia was involved in simply as a mediator. Talk about a toxic ex!!!
Valentine by force…
Renewed tension started building up in 2019 when Volodymyr Zelensky was elected president; a comedian who played a president on TV and then became the actual president. I just saw Sola Sobowale from King of Boys becoming the actual Governor of Lagos. Oh well, anything is possible. Banky W tried, didn’t he?
President Volodymyr Zelensky promised during his campaign that he would “reboot” peace talks to end the conflict in eastern Ukraine, including dealing with Putin directly to resolve the conflict. Russia, too, likely thought it could get something out of this: It saw Zelensky, a political novice, as someone who might be more open to Russia’s point of view.
However, under continued Russian pressure, President Volodymyr Zelensky has turned to the West for help, talking openly about wanting to join NATO. That may have left Russia feeling as though it has exhausted all its political and diplomatic tools to bring Ukraine back into the fold.
Perfect timing to strike, don’t you think?
The EU and the UK are still dealing with the fallout from Brexit. Everyone is grappling with the ongoing Covid-19 pandemic. Germany has a new chancellor, Olaf Scholz, after 16 years of Angela Merkel, and the new coalition government is still trying to establish its foreign policy. Germany, along with other European countries, imports Russian natural gas, and energy prices are spiking right now. France has elections in April, the timing couldn’t be perfect for Russia.
Where does the markets fit into all this?
Investors on Friday got a taste of the sort of market shock that could come if Russia invaded Ukraine. The spark came as Jake Sullivan, the White House national security adviser, warned on Friday afternoon that Russia could attack Ukraine “any day now,” with Russia’s military prepared to begin an invasion if ordered by Russian President Vladimir Putin. U.S. stocks extended a selloff to end sharply lower, with the Dow Jones Industrial Average dropping more than 500 points and the S&P 500 SPX, sinking 1.9%, oil prices also surged to a seven-year high that has crude within hailing distance of $100 a barrel.
Where is the Money?
ETFs
The Energy Select Sector SPDR ETF XLE tracks the energy sector of the S&P 500 SPX. That’s a group of 21 stocks. This is the only sector of the S&P 500 that is up this year. We could see more upside if crude continues to rally in the near term on the back of increasing demand and supply shocks.
SPDR ETF XLE CHART
