Your Updated Guide To The Russia-Ukraine Crisis

Carl Hazeley

3 months ago4:15 mins

Your Updated Guide To The Russia-Ukraine Crisis

It’s been six weeks since Russia invaded Ukraine, upending lives and putting geopolitical risk top of mind for investors. With no immediate end in sight for the conflict, investment manager abrdn is out with an analysis on how the crisis is likely to play out.

Most likely scenarios

Over the next 12 to 18 months, abrdn sees a 30-40% probability of either an ongoing conflict or an effective split of Ukraine. Both scenarios spell persistent turmoil, leading to continued Western sanctions and risk in markets and the economy.

If Russia and Ukraine don’t back down or make significant headway and negotiations remain gridlocked, the conflict will continue. And the longer the war drags on, the higher the cost for both sides, which abrdn argues raises the likelihood of either an escalation or de-escalation from one of the sides.

A partition or effective split of Ukraine would be similar to Russia-Georgia in 2008. In that event, abrdn sees Russia taking the east of Ukraine (where pro-Russia support is greatest), but leaving Kyiv and Western Ukraine under its current leadership. There’s a risk of escalation here too, the economists warn, since Western Ukraine would likely become even closer to the European Union and NATO.

The longer the conflict goes on, the greater the risk to the global economy too. Energy and other commodity prices would remain elevated, and higher prices of goods and services would continue to nudge major central banks to hike interest rates as a way to cool demand and bring down inflation. But if rates rise too much too soon, they could strangle the economy and bring about a recession.

Less likely scenarios

abrdn’s economists see a 20-30% probability of some form of deal, in which Ukraine promises not to join NATO and Russia gives Ukraine security guarantees – and potentially leaves some regions of the country – in exchange for an easing of sanctions from the West. They note that those sanctions have been more severe than many – including Vladimir Putin – had foreseen.

If there is a deal, expect Russian and Ukrainian assets to rally: abrdn argued in February that Russian stocks – then down for the year by about as much as they are now – might jump 10-15%, while prices of oil and gas – which have risen in lockstep with the tensions – would probably take a well-earned breather.

Slightly less likely, with a 10-20% probability, is an East-West Ukraine split in which Russia takes control of Kyiv, ousting the government of Volodymyr Zelenskyy. The West would likely respond with even tougher energy sanctions, sending oil and gas prices higher and putting a damper on investors’ appetite for risk. In that scenario, investors may plump for “safe havens” like the US dollar, Japanese yen, and Swiss franc, as well as those countries’ government bonds.

Wildcard scenarios

The analysis highlights a few scenarios with probabilities of less than 10%: probably not on the cards, but worth being aware of.

One such scenario is a Russian U-turn that could come from a coup or revolt against Putin, or from the collapse of the Russian military. That’d end hostilities and potentially lead to the lifting of Russian sanctions, which would send energy prices back down and growth-linked assets, like stocks, up.

Other unlikely scenarios envision an escalation of the conflict. In one, Russia would install a puppet government in Ukraine and occupy the country, leading to yet more sanctions. And China could get roped into things too, facing sanctions for continuing to buy Russian oil.

In another, NATO members would be drawn directly into the conflict, increasing the level of sanctions as high as they can possibly go and pushing the risk of nuclear or biological weapons escalation firmly higher too. That’d likely make safe-haven assets all the more attractive and so-called “risk assets” like stocks all the more unattractive.

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