Why should the market care if there’s a fracas in Ukraine, a country of 41 million people boasting of a nominal GDP of just about $200 billion? The earlier internal turmoil in Ukraine in 2013 that led to the annexation of Crimea by Russia hardly caused a flutter, though the following sanctions did dent the Russian economy. But that was about it.

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Russia as an economy today contributes 1.75 percent to world GDP, so a dent there too should hardly be a bother, one would think. But it is. The big factor in focus is energy, at a time when crude and gas prices are already soaring due to demand, controlled supply and years of underinvestment in exploration. It is expected that any conflict and resultant action will first result in a jump in gas prices in Europe over a gas supply disruption from Russia. And that’s just the start, but we’ll get to this. First, let’s look at what the likely measures could be and their likely implications.

WHAT A UKRAINE ESCALATION CAN SPELL

Sanctions against Russia if it invades Ukraine is the big threat. And this has significant implications. While one of the measures proposed is to cut-off Russia from the international financial transactions system SWIFT, the other is to impose severe restrictions on the top Russian banks. Both will dent the ability of Russia to receive payments and trade with other nations, especially in Europe.

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A note by Rabobank's global strategist Michael Every, covered by ABC News, points out that Russia supplies 30 percent of Europe's oil and 35 percent of its natural gas, and an escalation in conflict can lead to this being cut-off or curtailed and cause oil prices to surge to $125 a barrel, with gas prices following higher. But energy isn’t the only concern. Metals is another. According to Rabobank, Russia's share of global nickel exports is estimated to be about 49 percent, palladium 42 percent, aluminium 26 percent, platinum 13 percent, steel 7 percent and copper 4 percent.

"Removing half of global nickel exports for kitchenware, mobile phones, medical equipment, transport, buildings, and power; palladium for catalytic converters, electrodes, and electronics; and a quarter of aluminium for vehicles, construction, machinery and packaging would result in huge upside pressure on prices," Rabobank warned.

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That is the big worry. Inflation could go out of whack. Bharat Forge’s Baba Kalyani told CNBC-TV18 last week that he hasn’t seen this kind of inflation inEurope in the past 50 years. And that is without a Ukraine conflict escalation.

So, Ukraine by itself may not hurt the world economy, but an energy crisis in Europe (Euro Area accounts for 15.4 percent of world GDP) and inflation can definitely cause more than a flutter. Will it? That remains the big question.

THE MARKET AND FLASHPOINTS

The US launched an attack on Iraq on March 20 in 2003. In the next trading session, the Dow Jones Industrial Average gained 3 percent, but lost 6 percent from the close over the next six sessions, but was back on even keel in about 10-11 trading sessions. Clearly the shock and awe attack had nothing more than a transient impact on equities, even oil didn’t do much.

The event that truly shocked the western world was the terror attack on the World Trade Centre and Pentagon in the US on September 11 in 2001. The market didn’t open for trading on September 11 and remained shut till September 17. During this period, the Nifty lost over 11 percent in value. But by mid-November, the market was back to where it had sold-off from.

The US market, when it opened on September 17th ended 7 percent below its earlier close, and lost about 14 percent from its pre-attack close before bottoming out. But by early December of 2001, the Dow Jones Industrial Average had regained its pre-attack level.

Crude immediately flared and held firm for a few sessions, but then dropped off sharply.

CAUTIOUS OPTIMISM

What’s clear from history is that conflicts having little global geopolitical and economic implications don’t tend to affect markets. The Ukraine conflict of 2013 didn’t, nor did the Syrian war in 2014. Even the attack on Iraq had short-lived market implications. But the 911 attack saw a deep impact and took a little more time to get over.

The current conflict has the potential for greater impact than some of the other fringe conflicts, given the economic implications, especially for Europe. But that is also the hope. That European economies can suffer in case of a severe sanction, may keep countries in the bloc from taking strong action. Germany for one, has a high level of trade with Russia. Germany imports oil & gas and metals from and exports a whole swathe of manufactured products to Russia.

This, and historical evidence that markets tend to look beyond the impact and move on within a few months of any such incident, suggests that any sharp slide in the market could be reversed. Today, though, the other factor also weighing on the markets is the likely Federal Reserve action on interest rates. That’s a heady cocktail for bears. But I would rather be a patient bull on a slide, even though that isn’t bereft of risks.

Retail investors should steer clear of the market till things settle. This isn’t a market for the faint hearted or those who aren’t willing to take big risks. The sidelines are safer for now.

(Edited by : Bivekananda Biswas)

First Published:Feb 13, 2022 4:09 PM IST