04 Mar 2022
The Russia-Ukraine crisis is progressing at a rapid pace, and recent developments suggest that a military conflict is increasingly likely. Needless to say, there is a large degree of uncertainty about what form this would take.
To be clear, a diplomatic solution is still possible. Russian President Vladimir Putin’s decision to order troops to cross the border may just be a very credible military threat designed to extract greater concessions from Ukraine and the West in future negotiations. However, the chances of diplomacy are fading.
As such, military escalation scenarios are looking increasingly realistic. We think the following two scenarios are most plausible:
Another Crimea. This form of military escalation would involve Russia formally occupying more territory in the eastern Donbas region than is currently held by separatists.
Another Georgia. In the spirit of Russia’s invasion of Georgia in 2008, this scenario would involve a partial invasion of Ukraine that spreads beyond the east of the country but stops short of occupying the entire country and its capital city, Kyiv.
"The range of plausible scenarios is very wide, and military options are a very realistic prospect"
While the degree of uncertainty remains very high, we’ve compiled a detailed overview of the full spectrum of possible outcomes (see Table 1) that is also featured in our latest research note on the crisis.
Even before the recent escalation, we thought that military escalation scenarios were a real risk. Recent events have arguably made these even more likely. Of course, there may be a dramatic shift back towards diplomacy, although this may not endure.
A further military escalation from here would likely have global macroeconomic implications. European natural gas prices could rise back towards their December 2021 peak, given that gas stocks are already very low. Oil prices may rise over the short term, although any increase might not last because Saudi Arabia, the world’s largest producer, has the ability to boost supply to restore price stability. Meanwhile, the prices of some metals (e.g. aluminium) and agricultural commodities (e.g. wheat) may also rise given that Russia and Ukraine are major producers.
One consequence of higher commodity prices would be more upwards pressure on global inflation which, in turn, could provide yet more ammunition for central banks to raise interest rates.
Regardless of how exactly the current crisis plays out, there could be long-term consequences. The crisis may hasten the decoupling – a reduction in economic and trade links – between Russia and the US. The EU is likely to face intense pressure to reduce its energy dependence on, and cooperation with, Moscow.
There may also be implications for the speed of decoupling between the US and China, given that relations between Beijing and Moscow appear to be closer than ever.
A more fragmented world would, no doubt, experience more flare-ups of geopolitical tensions, potentially leading to greater market volatility.
RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.
