Russia-Ukraine tension could be a market opportunity, analysts say

The tense situation between Russia and Ukraine could affect the European economy, but it can also be an opportunity for markets, say strategic analysts, according to CNBC.

The massive concentration of Russian troops and military equipment on the country’s border with Ukraine has provoked reactions from NATO and the West, although Moscow has repeatedly denied any intention of invading Ukraine.

In a press conference with British Prime Minister Boris Johnson on Tuesday, Ukrainian President Volodymyr Zelensky warned that any conflict would spread beyond the two countries and turn into a “full-scale war”.

In a research note, Goldman Sachs Europe chief economist Sven Jari Stehn said an escalation could affect the European economy in the form of lower trade with the region, tighter financial conditions and lower gas supplies.

Goldman Sachs does not expect a significant impact on trade, as the exposure of eurozone exports to Russia and Ukraine is relatively small. Stehn also noted that “while tighter financial conditions could have a significant impact on European growth, eurozone financial conditions have not tightened significantly during previous tensions between Russia and Ukraine.”

“One reason for the limited financial impact is that the eurozone has a small cross-border banking exposure in Russia and Ukraine,” he added.

However, he believes that the secondary effects through the gas market are an important factor to monitor.

“While the impact of higher wholesale gas prices on consumers could potentially be mitigated by the limited switching from wholesale to retail and government support programs, we find that reduced gas supply could cause significant (albeit temporary) “Production disruptions across Europe,” Stehn said.

Russia is Europe’s largest gas supplier, typically supplying 30-40% of the continent’s gas demand through its pipelines, but the eurozone has recently begun shifting consumption from Russian pipelines to liquefied natural gas. (LNG). Meanwhile, Russian gas flowing through Ukraine has dropped significantly in recent years, Goldman analysts say.

“However, there is a risk that any escalation could lead to sanctions on the Russian Nord Stream 2 pipeline, which could lead to restricted flows to Europe indefinitely, exacerbating the bottlenecks in the European gas markets expected by the “Overall, our analysis suggests that the risks to growth from the ongoing tensions between Russia and Ukraine seem manageable, unless tensions escalate and lead to abruptly tighter economic conditions and / or cuts in energy supply across Europe “.

Opportunity to buy

The constructive medium-term outlook, unless there is a sudden escalation, was highlighted last week by strategic analysts at Oxford Economics, who said the equilibrium of chances was a “buying opportunity” for affected regional and global assets.

However, they noted that asset prices and volatility would have a significant impact in the short term if Russia invaded beyond Crimea and its western borders.

In this worst-case scenario, Oxford Economics believes that the Russian ruble will weaken significantly, testing the high level of 2015 against the US dollar – which was at 83 – while Russian stocks will also come under pressure.

“Eurozone stocks would also fall moderately under this scenario, as higher gas prices would strain growth and limit profit margins. The energy sector could offer some shelter to investors who would like to hedge this risk “, add the strategic analysts.

However, in the basic scenario that the situation will be resolved through diplomatic means, Oxford Economics expects that the markets will gradually calm down, Nord Stream 2 will receive approval and asset prices will recover, given its “strong fundamentals”. Russia.

In the event of a limited invasion, possibly in the form of airstrikes to destroy military infrastructure, Oxford Economics expects the US to respond with “sharp” sanctions, while the EU is consumed with internal divisions and therefore develops only mild sanctions, such as a ban on exports of electronics and semiconductors to Russia or sanctions targeting Russian banks.

Such a possibility would send the ruble to 83 against the dollar, so it could “easily be in orbit towards 100”, the research note added.

Under these more modest scenarios, the impact on equities would likely be “relatively mild”, somewhat similar to the Crimean crisis in 2014, when Russian markets sold out in the short term, but the impact on the eurozone was minimal and the bloc actually outperformed the global index for six months.