Macroscope

Why Russia’s Ukraine invasion is a ‘Lehman moment’ for the global economy

Name: Washington bans Russian oil and gas imports over Moscow’s invasion of Ukraine
Uploaded: 2022-03-10T19:30:30.000Z
Duration: 1 min 53 s
Description: Washington bans Russian oil and gas imports over Moscow’s invasion of Ukraine

Investors were caught off guard both by Russia’s escalation of the conflict and the West’s resolve to punish Moscow with severe financial sanctions

The shock from sanctions against a commodities powerhouse makes the conflict a defining moment for a global economy still recovering from the pandemic

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An apartment building damaged during shelling in Ukraine’s second-biggest city of Kharkiv on March 8. The number of people fleeing the war across Ukraine’s borders to escape towns devastated by shelling and air strikes has passed 2 million, in Europe’s fastest-growing refugee crisis since World War II, according to the United Nations. Photo: AFP

Nicholas Spiro

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 3:30am, 11 Mar 2022Updated: 4:56am, 11 Mar 2022

Financial markets can be forgiven for downplaying geopolitical risks. One loses count of the number of international crises and military flare-ups that have only had a fleeting impact on asset prices. Investors are poorly equipped to assess and price geopolitical threats, and they have long made light of them on the grounds that their economic and financial impact is negligible.

This is one of the reasons the reaction to Russia’s invasion of Ukraine has been so dramatic and disruptive. Not only were investors caught off guard by Russian President Vladimir Putin’s sharp escalation of the conflict, amplifying the fallout in markets, they underestimated the resolve of the West to punish Russia at the expense of their own economies, especially those in Europe.

The war itself is unlikely to be the trigger for a full-blown financial crisis, as the demise of Lehman Brothers was in 2008. Yet, the scale and severity of a geopolitical shock involving one of the world’s largest producers of commodities makes the conflict a “Lehman moment” for a global economy still recovering from the devastation of the Covid-19 pandemic.

To get a sense of the magnitude of the impact of sanctions on Russia – a commodities powerhouse that supplies 40 per cent of Europe’s gas, is one of the world’s largest oil producers and is a major player in the wheat, aluminium and nickel markets – the Bloomberg Commodity Spot Index, which tracks 23 futures contracts, experienced its biggest weekly gain last week since at least 1960.

The ferocity of the price moves is staggering. Brent crude, the international oil benchmark, is up about 20 per cent since February 18 to its highest level since 2014. Fears over Russian supplies caused the price of nickel to double on Tuesday, forcing the Shanghai Futures Exchange to suspend trading in some of its most active nickel contracts.

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Washington bans Russian oil and gas imports over Moscow’s invasion of Ukraine

European natural gas prices, which have hit record highs, are gyrating wildly, and the price of wheat has surged to levels last seen during the 2007-08 food crisis, which sparked political unrest worldwide. Many investors have only just grasped the fact that Russia and Ukraine together account for almost a third of the world’s wheat exports, almost a fifth of its corn trade and 80 per cent of sunflower oil production.