International Communique No. 327 – 1st of March 2022


It was a particularly turbulent week for financial markets after the Russian army stormed into Ukraine. The Russian stock market set a new record when its index plunged by 45% in a single session. People are witnessing a rerun of history 60 years ago. Back in 1961, the Americans tried to overthrow Fidel Castro’s regime in Cuba, unhappy with the idea of having Russian missile bases within 200 kilometres of Florida.

The atmosphere in the markets can be split into two distinct phases: the surprise invasion and the uncertain reaction of the Western countries which initially weighed down the equities. But when the first sanctions were announced, and these were generally less severe than expected, the market turned the corner and rallied by more than 6.5% from the recent lows. With Western capitals ruling out military intervention, the content of the sanctions became the only gauge of the severity that this conflict would inflict on the global economy.

Despite it not being easy to forecast events in this kind of geopolitical conflict, there are reasons for not seeing everything as bleak. Rhetoric from countries taking a stance is one thing, but that is different from their interests.

That is where market Key Performance Indicators (KPIs) are useful. Note that long-term yields in both the US and Europe have hardly budged. Neither has high-yield corporate debt. On the foreign exchange market, euro fluctuations against the US dollar remain within the ranges seen in recent months. Only volatility in equity markets has increased, which is normal in such circumstances. Western countries have tried as much as possible not to harm themselves with the sanctions. Russian oil and gas exports have not yet been targeted.

The impact of the sanctions on the Russian financial system and the restrictions placed on the Russian central bank are where the measures bite hardest. The Russian central bank could be partially hindered in defending the local banking system, which would in turn erode the value of Russian savings. Recently, the Russian central bank hoisted its benchmark policy rate from 9.5% to 20% to counter the nosedive in the rouble and forestall a potential run on banks.

All in all, looking at key market indicators, namely government bond yields of Western Countries, there aren’t any particular signs of stress at this stage. The potential effects of the sanctions, which ultimately penalise both sides, will encourage the parties to return to the negotiating table. As Charles de Gaulle said, “No nation has friends, only interests”.

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