How will the Russia-Ukraine War affect the financial markets and you?

 

On 24 February 2022, Vladimir Putin declared a ‘special military operation’ in Ukraine. The assault followed weeks of tensions that already sent shivers through the world economy by surging energy prices. The COVID-19 pandemic has left the global economy with two critical points of vulnerability — high inflation and jittery financial markets. Aftershocks from the invasion could quickly worsen both. How will this affect the markets and you?

 

The financial markets have entered their second week of volatile conditions as geopolitical tensions escalated. Most economies recovered the losses from last week on Monday. On Friday, the UK FTSE100 was down 3.03%, and the S&P500 was down 4.07%. Investors are reacting to live updates of the events happening in Ukraine and to the sanctions being imposed on Russia by governments worldwide. The trend seems to be that the markets open lower and have a highly volatile trading day. 

 

Investors seem to be moving towards sovereign bonds and gold as they are regarded as safe havens during times of crisis. The US 10-year treasury note is at 1.873%, lower than last week amid high demand. The price of gold jumped roughly 5%, which is the highest price in more than a year. The war has also hit the local economy as the JSE top 40 index dropped approximately 4% last week before erasing losses on Monday. The Russian bank has increased its key interest rate from 9.5% to 20%. The Ruble plunged 30% against the US dollar. The price of 1 Russian Ruble rose from $80.42 on 21 February 2022 to $104,27 on 28 February 2022. 

 

 

So, what does Russia have as leverage over the rest of the world? Energy and commoditites, specifically oil, natural gas and wheat. Russia ranks third in oil production, accounting for 11 per cent of total world production. Meanwhile, Russia ranks second in the world in natural gas production. This will cause significant disruptions and increase commodity prices if Russia decides to pull their supply to the rest of the world. Oil prices have been reacting enthusiastically to this news. Oil prices surged to over $100 per barrel for the first time in seven years. 

 

The impact of the war will significantly affect the African regions in the near term due to the global agriculture commodity prices channel. African countries imported agricultural products worth US$4 billion from Russia, and Ukraine exported US$2.9 billion worth in 2020. 90% of Russia’s export to Africa is wheat, and 6% are sunflower oil. While 48% of Ukraine’s export to Africa is wheat, 31% maize, and the rest included sunflower oil, barley, and soybeans. These main supply channels blocked may benefit African farmers as the commodity prices will increase. On Tuesday, the cost of wheat rocketed by 5%. This will, in turn, cause financial strain on consumers who have been experiencing food price rises over the past few years. 

 

How will this affect South Africa? Economists predict that interest rates will increase and affect economic growth due to less trade. As reported, it will affect fuel prices and potentially increase the cost to unfathomable levels. The price of flour, animal produce, and other wheat-related produce will increase significantly. This is where South Africans will feel the pinch. Analysts predict that there will be commodity price hikes in the near term rather than a shortage. This may put a significant financial strain on developing economies that the pandemic has already crippled.

 

The next few weeks will be filled with volatile markets and uncertainty. Investors will be watching the events unfold in Ukraine closely. On Monday, the markets responded positively to the meeting of Russian and Ukrainian nationals in Belarus. Based on past wars, the markets have bounced back between 5% and 15%, six months after the war has ended. Most African regions receive wheat (which is a primary food source) from Russia, which means some African countries could suffer from a food shortage.

 

Whatever the outcome, it is imperative that Putin stops the war or else he could destabilize the world supply chain and economy.

 

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