Ukraine-Russia crisis: What to know about the potential fallout for global financial markets

February 22, 2022
Written By:
Jeff Karoub

Flags of Russia and Ukraine. Image credit: iStock

Paolo Pasquariello

Paolo Pasquariello

When it comes to the Russian invasion of Ukraine and global financial markets, there are many unknowns. And “markets don’t thrive in such uncertainty,” according to Paolo Pasquariello, a finance professor at the University of Michigan’s Ross School of Business.

Pasquariello, whose research interests include international finance and information economics, shares his insights, which can be summed up with two words: “investors beware.”

“Global financial markets are likely going to be preoccupied with the Ukraine crisis for quite a while, now that it has escalated into a full-blown invasion of the eastern European country by Russian forces,” he said.

Short-term concerns

Among the most obvious potential consequences: The disruption to the European natural gas supply (which may cripple not only households but also local industries as they recover from two years of pandemic); the effect of economic sanctions not only on Russia but also on its main economic partners (mostly European, whose exports and economic activities in the region will undoubtedly suffer); and any decision Russia may take within OPEC Plus to affect the worldwide supply of oil.

Long-term concerns

Less obvious are the long-term consequences of a protracted conflict for global markets. To begin with, financial markets do not like uncertainty, especially when stemming from fragility in the global order. One thing is for market participants to bet on volatile firms and countries within a well-understood global economic infrastructure.

Another thing altogether is for these market participants to face protracted uncertainty about what this infrastructure may look like as the conflict in Ukraine expands and leads to more severe sanctions. Add to this that markets are already on edge, as many central banks prepare to unwind years of quantitative easing to combat rising inflation and inflation expectations.

This uncertainty may lead investors to seek refuge not only in gold but also in other safe havens, like (U.S. or German) government bonds. This increased demand will push those bond yields downward exactly at a time when central banks are trying to push them upward.

Flight to safety, as the phenomenon is known, will also affect stock markets already reeling from the expected increase in interest rates and accompanying economic slowdown, as well as countries with greater indebtedness or more fragile economies to begin with.

Finally, any serious economic sanctions on Russia are also likely to affect many of the financial institutions that supply liquidity to financial markets. Any widespread concern about the viability of those liquidity providers may set in motion domino effects that will resemble those taking place around the time of the financial crisis of 2008-09.