EDITORIAL: As Ukraine tensions simmer, markets remain on the boil

Could the western nations and Russia really be so careless as to allow their dispute over Ukraine to result in a full-blown war?

It’s hard to imagine that they would sleepwalk into what would be the world’s biggest conflict since World War 2. What’s without doubt is that it would result in thousands of deaths, displacements and economic disruption for Europe and beyond.

That may perhaps be why the conflict — driven by Russia’s complaints and insecurity over the expansion of Nato, a military alliance formed in 1949 specifically to counter perceived or real threats from the former Soviet Union — will be contained eventually.

It’s no secret that since the fall of communism and the end of the Soviet empire in 1991, which US philosopher Francis Fukuyama famously and mistakenly called the end of history, an initially weak Russia watched as the countries that were in its sphere of influence were drawn to the West. Nations such as the Czech Republic, Poland and Hungary joined an enlarged EU, with many also joining Nato.

Domestic politics in Russia, which under President Vladimir Putin has been seeking to assert its power and reverse its perceived humiliation since the chaotic transition of the early 1990s, has meant a short-term era of co-operation between Russia and Nato has long passed.

French President Emmanuel Macron visited Putin this week, an intervention that seems to have done little to ease tensions. In remarks that were immediately denied by the Kremlin, Macron claimed to have got reassurances from Putin that any escalation of the conflict would not come from the Russian side. 

Russia, which annexed part of Ukraine when it went into Crimea in 2014, denies that it is now planning a full invasion of the whole country. But looking at its moves in the region, including stationing more than 100,000 troops along the border with Ukraine and holding military exercises in Belarus, has many in the West thinking otherwise.

Other than a calculation that divided western countries bruised by failed military adventures against ostensibly weaker opponents in places such as Iraq and Afghanistan might not have the stomach for a conflict, it’s hard to see a rationale for Russia starting a war that would be costly for itself in many ways.

Looking at financial markets would indicate that investors are relatively sanguine.

The Russian rouble is hardly changed for 2022 so far and is actually the best performing emerging-market currency against the dollar over the past week, posting a gain of almost 2%, according to Bloomberg data. There’s not much panic seen in other markets either, with the worst performer in the period, the Chilean peso, down just less than 2%.

There’s a similar picture in stock markets. While the S&P 500 in the US is down 5.1% since the end of December, the JSE all share index is up almost 4%. The former’s decline speaks more to the outlook for inflation and interest rates in developed markets, as well as a sharp reversal in technology stocks, rather than any geopolitical concerns.

An escalation will have consequences for SA, not least a sharp increase in the price of oil which, especially if it coincides with a substantial weakening in the rand, could cloud the inflation outlook. Russia and Ukraine accounted for just under 30% of wheat exports globally in 2020, according to Wandile Sihlobo, chief economist at the Agricultural Business Chamber of SA. So a conflict that disrupts production could have major implications for food prices.

But for now, markets seem to have taken the view that Russia’s mobilisation of troops near Ukraine is not a prelude to an actual invasion, and may be a form of psychological warfare to push Ukraine to drop any intentions of joining Nato, while bolstering Putin’s image at home.

For the rand and other emerging-market assets, the thing to watch is major central banks and their own domestic policy choices rather than a war in Ukraine.

At least we hope that is the case.