Macro & Market

Russia-Ukraine Standoff: Our Take on Potential Market Effects

By Patricia Ribeiro

February 1, 2022

Key Takeaways

  • Ongoing tensions between Russia and the West over a possible Russian invasion of Ukraine have worried investors and increased market volatility.
  • Diplomatic efforts to defuse the situation continue, but the U.S. and its NATO allies are considering sanctions if diplomacy fails.
  • Unless the situation escalates, we expect long-term market effects to be limited. We are not currently making large-scale changes to our emerging markets portfolios.

What Russia Wants

Russia has expressed its goal to end North American Treaty Organization (NATO) expansion and remove American nuclear weapons from Europe. The U.S. and its NATO allies have firmly opposed Russia’s demand.

However, each has committed to finding a diplomatic solution. NATO leaders have shown more willingness to discuss other NATO activities, such as missile deployment and military exercises.

Despite efforts to reach a diplomatic solution, recent meetings have failed to bring about compromise.

Possible U.S. Responses

If diplomatic efforts continue to fail, the U.S. is mulling sanctions with financial implications, as detailed in the "Defending Ukraine Sovereignty Act of 2022” bill (S. 3488 ) introduced in the Senate last week. This legislation proposes a range of potential sanctions if Russia escalates militarily against Ukraine.

Key Sanctions to Watch

  • Sanctions against senior government officials and Russian banks.
  • Investigations of President Vladimir Putin’s wealth.
  • Ban on U.S. investment in all newly issued Russian sovereign debt.
  • Sectoral sanctions on Russian extractive industries.

Recent reports also suggest the U.S. administration may block Russian businesses from accessing certain semiconductors built with U.S. tools and software.

The Most Severe Sanction: Disconnecting Russian Banks From SWIFT

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a secure communication platform that connects thousands of financial institutions. Banks, brokerages and other financial institutions use SWIFT to send and receive information, such as instructions to transfer money to an overseas account or settle a securities trade.

Disconnecting Russian banks from SWIFT would likely be imposed only in the most extreme scenarios.1

Removing Russia from SWIFT, which has been characterized as the “nuclear option,” would likely cause significant economic disruption to Russia.

In addition, European countries that rely on Russian exports of oil, natural gas and metals would feel the pain of higher energy prices because of the supply disruption. This disruption—and the uncertainty it would likely bring—may also boost volatility in the broader energy sector.

Potential Scenarios and Market Impacts

  1. Diplomatic solution. Russia does not invade Ukraine. Russia and the U.S. reach a new security accord and a renewed pathway for talks over the status of Eastern Ukraine. Russian troops demobilize. Market impact: This scenario would support Russian assets and the ruble.
  2. Tension remains elevated. Talks yield no firm agreement. Both sides continue to stress their preference for a diplomatic solution, yet the threats of military escalation and other aggression persist (e.g., cyberattacks). Market impact: The risk premium on Russian assets stays elevated.
  3. Conflict escalation. Russia invades. Direct Russian involvement in Ukraine would likely trigger severe punitive sanctions. It’s possible Russia would retaliate by rationing or suspending energy exports. Market impact: A lengthy suspension of oil and gas exports would increase global energy prices, particularly in Europe. It could also damage Russian exports, further undermine Russian efforts to establish long-term gas contracts with Europe, likely weaken the ruble, and push global valuations and stock prices lower.

Investment Response: Hold Steady and Watch Closely

In our view, the likelihood of NATO or U.S. troops confronting Russian soldiers remains low. While we are not currently making changes to our positions, we are monitoring the situation as the U.S. and NATO work through diplomatic channels to address fundamental differences, including NATO’s potential expansion in Europe. The situation remains fluid. We will keep you informed of our thoughts as we continue to assess the situation and its potential impact on our portfolios.

 


1Alan Rappeport, “What a Disconnect from SWIFT Would Mean for Russia,” New York Times, January 31, 2022.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.