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The View | Ukraine invasion: risk of nuclear conflict rises, but markets don’t seem to care
- Following Russia’s invasion of Ukraine, a nuclear conflict between global powers seems more likely now than it has since the Cold War
- The financial world seems to barely notice, though, with a lack of any meaningful negative response in asset markets
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Financial markets do not seem to be pricing in the full risks of Russia’s invasion of Ukraine. The absence of any meaningful negative response in equity, corporate debt and sovereign debt markets in Europe, the United States, Canada and Japan would barely make sense even if there was no chance of the situation escalating into an open conflict between Nato and Russia.
But that is not the only real risk. There is also the threat of the conflict going nuclear.
Outside Ukraine and Russia, the likely short-term economic and financial effects of Russian President Vladimir Putin’s war are material but manageable, provided the conflict does not spread. The damage of a negative supply shock would be inflicted mainly through higher commodity prices, notably those of oil and gas, wheat, aluminium and strategic raw materials such as palladium and neon gas.
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Even in this “contained conventional conflict” scenario, the scarcity of fossil fuels, the loss of export markets and occasional cyberattacks will add to the stagflationary impact of the spike in commodity prices in Europe. Globally, medium- and long-term potential output will suffer, owing to the new bifurcation between a China- and Russia-centred trading and financial system and one with the US, Europe and Japan as its hubs.
Moreover, risk-averse defensive reallocations of investment and other resources will further depress potential output as governments and corporations pursue greater supply chain resilience.
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Washington bans Russian oil and gas imports over Moscow’s invasion of Ukraine
Washington bans Russian oil and gas imports over Moscow’s invasion of Ukraine
Global asset markets have not even priced in this least-bad scenario. But if the war in Ukraine escalated to become a war between Russia and Nato, there would be a serious risk of nuclear conflict. One sure way to achieve such an escalation would be for the transatlantic alliance to establish a no-fly zone over Ukraine, as the Ukrainian government has urged.
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