China is no match for Russia when it comes to political shock to markets
- If China’s regulatory crackdown had markets worried, it is nothing compared to the impact of Russia’s war in Ukraine
- Hardest hit is Russia itself, where harsh sanctions have sent the rouble into free fall, but central banks everywhere will have to confront the risk of stagflation
Long-standing concerns about the regulatory and governance system in China have become more acute, amplified by the government’s deleveraging campaign in the property industry, which continues to pose a severe threat to China’s economy and markets.
Not only does Putin’s renewed aggression towards Ukraine pose the gravest threat to the post-1945 international order, it presents an acute challenge to global policymakers in their efforts to quell the post-pandemic surge in inflation without damaging the recovery.
The worldwide repercussions of a large-scale military conflict involving a major energy exporter – Russia is Europe’s main supplier of gas, one of the world’s biggest oil producers and a dominant player in the wheat, aluminium and palladium markets – are just beginning to be felt on trading floors.
The immediate, and most devastating, impact is in Russia itself. While investors were taken aback by the dramatic declines in the shares of Chinese companies listed in the US last year, the turmoil pales in comparison to the scale of the damage to Russia’s economy and markets caused by the West’s swingeing retaliatory sanctions.
The rouble has plummeted 46 per cent against the US dollar since February 16, capital controls have been introduced, Russian stocks and bonds face being kicked out of global indices and markets are signalling a 65 per cent chance of default within five years, data from Bloomberg shows.
In China, the issue of investability continues to split opinion. In Russia, there is no longer a debate. The country’s markets have not only become entirely uninvestable, the sanctions themselves pose a major threat to the global economy.
Although the penalties do not yet target Russia’s vast energy sector, demand for Russian oil has collapsed as many large consumers boycott the market. On Wednesday, Brent crude, the international benchmark, surged to an eight-year high, while the prices of other commodities, notably wheat, hit their highest levels in at least a decade.
For the world’s leading central banks, the fallout from Russia’s invasion of Ukraine is much more dangerous than the collateral damage caused by the regulatory and economic uncertainty in China. The war has sparked renewed fears about the outcome policymakers are most eager to avert: persistently high inflation and weaker growth.
While the Federal Reserve faces an acute dilemma over how aggressively it should tighten policy amid increasing economic uncertainty, the European Central Bank is in an even bigger bind. Although inflation is likely to keep rising, the risk of a growth shock is much greater in Europe.
No corner of the global economy and markets has been left untouched by Russia’s attack on Ukraine. Even other geopolitical flashpoints are now seen through the prism of the war. Investors have turned more bearish on Taiwanese stocks because of concerns over increased tensions between Taipei and Beijing. When it comes to geopolitical shocks, Russia is in a league of its own.
Nicholas Spiro is a partner at Lauressa Advisory