Erste Asset Management

The crisis in Ukraine

The crisis in Ukraine
The crisis in Ukraine
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The risk of an escalation of the geopolitical conflict between Russia, Ukraine and NATO has risen further in recent days.

Meanwhile, the conflict has replaced rate hike expectations as the dominant factor driving price movements. Risk premiums have risen, as can be seen from the price losses in risk assets such as equities, the weakening of the Russian ruble and the rise in yield premiums for Russian government bonds denominated in US dollars.


The motivation of the parties is not hidden, but communicated clearly and credibly. In principle, it is that Russia wants to keep Ukraine in its sphere of influence. In any case, Ukraine should not become a member of NATO, not even in the long term. Obviously, Russia wants to maintain the buffer zone between itself and NATO, which shrank with the expansion of NATO to include some Eastern European countries. After all, five NATO members already border Russia (Estonia, Latvia, Lithuania, Poland and Norway).

If Ukraine were to leave, only Belarus would remain. Ukraine, in turn, is in favor of a rapprochement with NATO. After the seizure of the Crimean peninsula and the smoldering conflict in eastern Ukraine, the desire has probably become even greater. The West’s position is also clear. A sovereign state should decide for itself on its geopolitical status (alliance, non-aligned, neutral).

Credible threat

The fronts are hardened. In general, goals are more likely to be achieved if credible competence is conveyed. Russia has reportedly deployed 130,000 troops. However, capabilities go beyond that. The buzzword is “hybrid warfare.”

The conflict can be fought on many levels (cyberspace, attacks, disinformation). Ukraine seems to have little to credibly strengthen its own position. The West has threatened sharp and severe non-military consequences.

Public opinion

Whether the threatening gestures will be translated into action, and in what form, also depends heavily on public opinion. According to reports, the majority of the populations of Russia, Ukraine and the West reject escalation. An essential question is which state can nevertheless more easily force an escalation (Russia with invasion, the West with sanctions). Here, an authoritarian state has an advantage.

Transparent weighing

In principle, then, the question now is whether for Russia the benefits of a buffer zone outweigh the cost of (perhaps not quite so dire and temporary) sanctions. The West would have to signal very substantial sanctions just to somehow credibly support its own position. That certainly happens in the various diplomatic meetings. For both sides (Russia and NATO) the threatening gestures are credible, perhaps those of Russia weigh a little more.

Critically, both sides (Russia and NATO) should be clear about the respective costs (high on both sides) and benefits (buffer zone vs. sovereignty). This transparency increases the likelihood of a negotiated settlement. Ultimately, all three parties – including Ukraine – would have to share this assessment. The pressure from both sides (Russia and NATO) on Ukraine is likely to be very great at present to propose something like freedom from alliance (without conditions) itself.

Oil price shock

The situation is similar to a poker game. The signals must be credible. This is also reflected in the falling prices of risk assets due to the increased likelihood of an escalation in Ukraine. We can only hope that a negotiated solution will eventually be reached. In the meantime, the development of the oil price is (also) at the center of the driving factors.

The price of a barrel of crude oil (Brent) has climbed to almost USD 94. In the past, oil price shocks (rapid and sharp price increases) have been (partly) responsible for triggering a recession on several occasions.

Legal note:
Prognoses are no reliable indicator for future performance.



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