How The Current Geopolitical Tensions Could Affect The Markets

Julie Gillespie, Head of Market Research, TipRanks

The last few years have shown us that society and the world at large can unravel at an astonishing rate. Just as the COVID-19 pandemic seemed to be winding down and a return to normalcy returning, a reality check has reared its ugly head. 

After so many had hoped it would not occur, and that it would not persist the way it has, Russia’s invasion of Ukraine does not seem to have an end in sight. The war has reached its 15th day, and with each passing moment more innocent civilians lose their livelihoods, or worse. Geopolitically, economically, and of course, mentally, this war will never be forgotten. The post-Cold War world order has shifted, with two powerful sides arming and posturing against one another. 

In response, Western allies have levied punishing sanctions against Russian industry and its benefactors. Oil, gas, and energy prices continued to soar with each passing ban. Russia is the world’s second largest crude oil producer in regard to value exported, and now European nations, notably Germany and Italy, are scrambling to figure out how to wane dependencies. Meanwhile, the Kremlin relies overwhelmingly on export funds brought in from this energy source, and Russia’s economy and GDP is expected to shrivel up without its most vital money maker.

Until yesterday’s dramatic decline, the spot price of the commodity had continued to rise this past week, as global supply quickly dried up. 

In his recent State of the Union address, President Biden announced a possible release of 30 million barrels of oil from a strategic reserve in order to obstruct the runaway prices. While this is a nice gesture, prices have again risen on Wednesday, as the war rages on. Additionally, he had attempted to reach out to oil rich nations Saudi Arabia and the United Arab Emirates, although he was rebuffed for not supporting them in Yemen’s civil war. 

Inflation has been on investors’ minds for over a year now, and increased oil prices cause even more costs to rise. Nearly every segment of a supply chain relies somehow on oil, and if producers’ spending rises, those costs are typically passed onto the consumer. 

Additionally, factories, ships, trains, trucks, and last-mile delivery methods usually work with thin margins, and it is not unexpected that delivery charges will rise in tandem with oil prices. 

The economic outcomes of the war will also affect cybersecurity, the necessity of which has been compounded firstly by the digital transformation that took over business throughout the pandemic, and secondly by the threat from Russian organizations. Daniel Ives of Wedbush Securities recently published a report on the matter, writing that he expects a surge of attacks “could change the game for US/ European enterprises and governments over the coming months.” While unfortunate, this possible trend would serve as a boon for cybersecurity stocks. 

The cybersecurity industry was already anticipated by Ives to expand 20% year-over-year, and the fallout from Putin’s war should boost spending even higher. Many cybersecurity stocks have already seen their valuations spike in response to the growing threat and demand for their services. 

In addition to the Western-imposed sanctions on Russia’s oil and gas sector, several Russian banks have more recently been banned from the SWIFT messaging system, effectively cutting them off from sending and receiving funds abroad. This, coupled with a freezing of Russia’s massive Foreign Reserve assets, has sent the Russian Ruble tumbling for the last two weeks. With a rapidly falling currency, Russian civilians have begun a run on their banks, with lines stretching for hours in some cities as people scramble to withdraw their cash. 

The global order between the West and Russia cannot be shifted without also causing prolonged macroeconomic consequences on the world’s most important industries. Ukrainian and Russian officials are said to be in talks for a possible cease-fire, again, but as the siege of Ukraine continues and intensifies, the future will be unclear until the dust fully settles.