What will happen if Russia-Ukraine conflict ends?

A third round of peace talks between Ukraine and Russia reportedly ended without much progress made.Maxim Guchek/BelTA Pool Photo via AP.

It is clearly hard to say whether peace negotiations between Russia and Ukraine will yield results although it seems to be the case that optimism has increased recently. Investors might want to think about the consequences should a rapid cessation occur. Undoubtedly there would be a sharp knee-jerk response with many of the moves we saw during the conflict reversing. Stocks would soar, oil prices and other commodities would fall, the dollar would decline and credit and EM spreads narrow significantly.

But that’s the short-term knee-jerk reaction. What happens after this? In Mr. Steve Barrow, Head of Standard Bank G10 Strategy’s view, it is not as if an end to the conflict would be like flicking a light switch. The darkness of the war would not be replaced by an optimistic light as many as the impediments to asset price strength created by the war would persist. The first thing to bear in mind is that pre-war trends were not good to start off with. Equities have had a poor start to the year, spreads were tending to widen, yields rise because of central bank tightening and more. Hence, even if the market could forget about the war (and it clearly can’t), a return to these pre-war trends would still suggest asset price weakness.

Things are likely to be worse than this for a number of reasons. One reason is that the US and Europe have to figure out a way to transition away from Russian energy in a world where creating extra capacity is not easy. This is likely to mean uncertain supply, volatile prices and hence a greater risk of policy mistakes from central banks that are already trying to grapple with the stagflationary threats from the conflict. These banks won’t be in a better position post the war to ease policy quickly if economic and/or financial frailty arises; in fact, their position is likely to be worse, and that’s likely to keep investors on edge.

For while many might look at the post-Covid surge in stocks from the spring of 2020 as a template for what could happen, we have to remember that this only came after huge monetary- and fiscal- easing from policymakers; something that is not available now. Another issue of concern for investors is the West’s attitude towards China. The coming together of Russian President Putin and China’s Xi in February has been portrayed by some as emboldening the Russian president to make the incursion into Ukraine, while the post-invasion equivocation of Beijing may not sit well with Western governments either.

Any risk that this could rebound on China and so elevate global supply-chain difficulties will only serve to undermine riskier assets. Yet another issue is that the ending of the war won’t mean that external investors get their money back from Russia, or at least not the vast bulk of their cash. There could be contagion effects from these losses irrespective of whether the conflict ends soon or not. Russia would presumably be put under pressure for reparations with the West arguably in a strong position given the sanctioning of the central bank which has stripped the bank of its ability to access around a half of its USD640bn in reserves. Ukraine clearly wants Russia to pay and if the West presses Russia on this issue it could heighten tensions and, don’t forget, Russia still has the ability to withdraw energy supply to Europe, even if it is very reticent to do so.

On balance, Mr. Steve Barrow believes that Russia-Ukraine conflict has created sufficient longer-term difficulties that asset prices will most likely resume their downtrend once any post-war knee-jerk rally comes to an end. There could, of course, be some longer-term beneficial consequences as well, such as a move away from dollar hegemony should other countries grow wary that similar sanctions to those faced by Russia could deny their access to the greenback. But the positives are outweighed by the negatives as far as asset prices are concerned even if, the war ends sooner rather than later.