We are now seeing that the market is no longer only concerned about inflation and higher interest rates, but also about an armed conflict in Eastern Europe. The topic of potential Russian invasion of Ukraine is not a new one, however, concerns regarding escalation of the conflict have increased recently.
The genesis of the conflict
It is worth recalling that the whole situation began in 2014 due to Russia, which did not want Ukraine to assimilate further with the West following the changes which occurred in 2013 during the events of Euromaidan. Eventually, Russia took over Crimea at that time, almost without firing a single bullet. On the other hand, the Ukrainian government is still fighting with Russian separatists in eastern Ukraine. The conflict became increasingly heated when it was indicated that Ukraine was willing to take the next step in order to join NATO. Russia has also tried to fight back on the gas front, not only by turning off the tap on the pipeline flowing through Ukraine, but also by building a new pipeline at the bottom of the Baltic Sea called Nord stream II.
The risk of war
Towards the end of 2021, speculation began to mount that Russia would be willing to attack Ukraine in full force, no only to protect its citizens in the separatist republics and to secure its gas interests, but mainly to establish a new government in the country that was reluctant to the West. This information has been confirmed by the fact that between 100,000 to 150,000 troops have been redeployed to the border with Ukraine. Of course, many observers point out that the war will probably be fought in hybrid mode, as it has been since 2014. On the other hand, such a mobilization of troops is puzzling, although at the same time it may be an attempt to show Russia strength and force the West to turn its back on Ukraine.
Western countries' response
At the moment, only sanctions have been imposed on Russia, but for some time Ukraine has been receiving large amounts of weapons, and Western armies have been training Ukrainian soldiers. Now, additionally, NATO has announced an increase in the number of troops stationed in the countries of Eastern Europe and the Baltic states. The United States announced that it will send up to 5,000. soldiers, while NATO troops in the Ukraine region would be increased to 50,000. Several countries, including Spain, the Netherlands, France and Denmark announced willingness to send their military units. Moreover, planes and ships are to be directed to this area.
Stock market in full retreat
The current situation on the Russian market is much worse than during the occupation of Crimea. Sell-off is stronger in the presence of relatively high oil prices. At the beginning of 2014, the oil price was oscylating around $ 100 level, but a strong sell-off started in the second part of the year. Now RUS50 (RTS) index fell nearly 35% from October high. In 2014 index fell 30% following Russia's miliatary actions, although managed to recover quite quickly.
RUS50 fell sharply in recent days, although no military action has yet been initiated. Source: xStation5
Russian response
Russia wants legal assurances that Ukraine will not be allowed to join the U.S. and European military alliance NATO. Russia assumes that in the event of its passivity, Ukraine may become more Europeanized, which may lead to the loss of influence in this country. Western countries are announcing strong sanctions or some kind military help. Of course, at this point in time, no declaration has been made that the alliance troops would enter Ukraine for the purpose of stabilization or assistance in the event of an actual invasion. One of the key issues in the event of Russia's attack on Ukraine is not only the suspension of Nord Stream II certification, but the possible suspension of gas transfer to all of Europe!
RTS companies
It is worth noting that during today's session, from the 50 companies included in the RTS index, only 1 is trading higher. Companies which would be the most affected by potential sanctions are the worst performers. Ozone is an e-commerce company which also deals with payments, Yandex provides internet services, Aeroflot is an aviation company, and Sistema is an investment company. The imposition of sanctions would make it practically impossible for these companies to operate on foreign markets, or even their activities could be blocked in Russia itself. Through ADR, investors have the opportunity to trade on selected Russian companies: OZON.US or YNDX.US.
Today, almost all companies listed on the RTS index were trading in the red. Sell-off was strong and the index dropped to the lowest since November 2020. Source: Bloomberg
