IS UKRAINE NOW FULLY DISCOUNTED BY MARKETS?

31.01.2022 The Ukraine crisis has certainly contributed to selling pressure in equity markets in recent days. Below we look at whether it is now fully discounted by markets.

The Russian military build-up on the border with Ukraine (not a NATO member), and the associated threat of invasion, has rattled markets in recent days. Furthermore, a diplomatic solution as Russian demands for a permanent exclusion of NATO from Ukraine and a NATO withdrawal from Eastern Europe are unacceptable to the Western allies, seems a long way off.

So, the focus moves to whether Russian military action against Ukraine would destabilise the whole region. What markets will be keen to avoid is the sense that Russia could subsequently threaten other countries in Eastern Europe.

One form of deterrence that has been discussed are comprehensive economic sanctions against Russia in the event of a military conflict with Ukraine. However, Germany has been reluctant to take part in this initiative as it is very dependent on Russian gas for its energy supplies. An alternative would be to bolster NATO’s forces in Eastern Europe. After a slow start, Western European countries are starting to send military hardware and resources to the region. There are also discussions taking place about boosting NATO troop deployments in Eastern Europe. However, such a move would require the approval of the thirty NATO members.

At present markets have discounted some of the uncertainty over Ukraine. However, a Russian invasion would be a further negative. How much of a negative would depend on the credibility and coherence of the NATO response to the heightened security threat posed to its Eastern European members.

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This post was written by Robin