The market and the war

The impact of the war in Ukraine on the markets will depend on the duration and extent of the conflict, but also on the possible extension of sanctions. Indeed, History shows that if local conflicts have a limited effect on stock markets, this is no longer the case when they impact energy and commodity prices.

For investors, three key variables will determine the market trend.

  • First, how long the armed conflict lasts
  • Then a possible extension of the conflict
  • Finally, the extension of sanctions imposed by the Western world (linked to the two points above), possibly going as far as an embargo on all Russian exports

In the words of Machiavelli “Wars begin when you will, but they do not end when you please”. At what point does a war end? When one camp admits defeat and/or negotiates with the enemy. At this juncture, Ukraine is not admitting defeat and Russia seems to only negotiate on its own terms.

As a result, the most likely event that will happen is that the war will continue. But time is against Putin to some extent. He must go fast and subdue Ukraine as quickly as possible, before economic sanctions start to fuel the Russian people’s doubts and frustration. The scenario of a lightning war on Kyiv failed as soon as the conflict started. As a result, the nightmare of a Syria-like scenario (Aleppo) and Chechen-like one (Grozny) is nearing Ukraine’s biggest cities (siege, blockage, bombing, terror operations, etc.).

For the West, the best option to hope for is to bring this tragedy to an end is, paradoxically, to help Ukraine materially, in order to convince Russia that this aggression would be too costly to pursue until the end. Then, even admitting the ultimate defeat of Ukraine as the power balance is indisputable, the outcome of this war is highly uncertain. When a state is decapitated, there is no one left with whom to negotiate. The Kremlin could appoint a puppet government. But such a government would be considered as illegitimate by the majority of the population.

The war could then continue in the same way as in Iraq, with guerrilla warfare and a partition of Ukraine. The conflict could then last for years. The Kremlin, slowed down by the resistance of Ukraine, has gradually shifted its attack from a war limited in time and space to a protracted, total war. Regarding the extension of the conflict, Putin may well rush headlong. He shares with Napoleon Bonaparte the same apocalyptic vision of history, based on a narcissistic injury. The sentiment of strategic and personal isolation, coupled with pride in an assumed military and strategic genius, could lead to extreme scenarios. But without going so far as a nuclear intervention or attacking other East European countries (Balkans, Caucasus, Baltic states), we would expect a multiplication of intimidation, misinformation, and particularly hacking operations, against the West.

It is often said that local armed conflicts have a limited and temporary market impact. We will reiterate that this is true of conflicts unless they have an impact on the oil price (or commodity prices) via supply shocks (Kippur war, Iran-Iraq war, Gulf war, second civil war in Libya). This is a crucial issue (see table infra).