Event: in the early morning of February 22, Beijing time, Russian President Vladimir Putin signed a presidential decree recognizing the “people’s Republic of Donetsk” and the “people’s Republic of Lugansk”, and signed a treaty of friendship, cooperation and mutual assistance. Putin said that once Russia signed a mutual assistance agreement with the above-mentioned regions, the Russian army will play a “peacekeeping” role and the conflict between Russia and Ukraine will further escalate. In response, the United States announced sanctions against Russia, and the European Union, Britain and Japan also successively announced sanctions against Russia. On the 24th, Russia launched a special military operation in Donbas, and the military conflict between Russia and Ukraine broke out in an all-round way.
The core contradiction of the conflict between Russia and Ukraine is the eastward expansion of NATO, and the full outbreak of the war has caused market turmoil.
The core contradiction of the conflict between Russia and Ukraine is the continuous eastward expansion of NATO, squeezing Russia’s strategic living space and triggering a strong rebound in Russia. Since the end of 2021, diplomatic means have failed to resolve the tension between Russia and Ukraine, leading to further escalation of the conflict. 1. Since 1999, NATO has carried out five eastward expansion, most of which are former Soviet countries, which has narrowed Russia’s strategic space and triggered a strong rebound. After the Crimean crisis in 2014, the Ukrainian government more actively sought to join the Western camp, and even incorporated NATO into the constitution. After Zelensky was elected, he continued to fall to the west, causing the situation to heat up.
In October 2021, the United States supported Ukraine’s accession to NATO, touching Russia’s bottom line on the Ukrainian issue, and the confrontation between Russia and Ukraine in eastern Ukraine became more tense. In January 2022, Russia and Ukraine accused each other of deploying a large number of soldiers on the border, while the United States and other western countries increased military assistance to Ukraine, escalating the international impact of the incident. Since then, although Russia, Ukraine, Germany, France and other countries have held talks for many times to try to find a peaceful diplomatic solution, the negotiations ended fruitlessly due to major differences in the demands of the two sides.
The rising situation in Russia and Ukraine has led to the rise of crude oil prices and the reduction of risk appetite of international investors, resulting in the rise of the price of safe haven assets and the short-term decline of the global equity market.
\u3000\u30002. After the breakdown of the negotiations, there were many small-scale exchanges of fire on the border. Putin announced on February 21 local time that he recognized eastern Ukraine as an independent republic and signed a treaty of friendship, cooperation and mutual assistance, which means that Russian armed forces may enter the region. Subsequently, the United States, the European Union, the United Kingdom, Canada, Japan and other countries issued sanctions against Russia, but US President Biden said he would not send troops to help Ukraine. Russia also carried out further actions. On the 24th, Russia launched a special military operation in the Donbas region (i.e. Luhansk and Donetsk in eastern Ukraine), and “suggested” that the Ukrainian army still in the region “leave” and said it would “demilitarize” Ukraine. Since then, the situation has fermented rapidly, causing turbulence in the global market.
On the 24th, Russia launched a comprehensive military operation against Ukraine, and the global stock market fell sharply. The Shanghai composite index once fell to 2%, with gold jewelry and military industry sectors rising against the trend; The three major stock indexes of US stocks fell by about 2%, and the European stock market fell to 5%; The Nikkei and hang seng index fell 1.8% and 3.2% respectively. The risk aversion caused by the war led to the rise of precious metals such as gold and silver. As of the 24th, Comex gold reached US $1976 / ounce; Brent crude oil prices exceeded $100 / barrel.
The situation continues to escalate and its impact on the global economy and inflation is expected to be limited.
\u3000\u30001. The impact on the Russian economy may not be significant, and the situation in Russia and Ukraine continues to escalate, which may have a limited impact on the global economy. First, the sanctions are relatively “moderate” and may not have a significant impact on the Russian economy. After the Crimean crisis in 2014, the United States, Europe and other countries adopted long-term sanctions against Russia, covering finance, investment and trade. Among them, investment sanctions have blocked the investment and financing channels of Russian enterprises in the primary market. At the same time, the United States included important Russian energy enterprises in the sanctions list and prohibited its own country from providing technical or project support to them. Under such sanctions, Russia and China fled, and the net inflow of foreign investment decreased significantly. In 2015, Russia’s GDP growth reached – 1.97%.
At the same time, the sharp decline in foreign exchange reserves and the devaluation of the ruble forced Russia to adopt a floating exchange rate system in order to maintain the independence of monetary policy. In contrast, the impact of the sanctions on Russia may not be significant. First of all, after the last round of sanctions, Russia’s dependence on foreign debt has decreased significantly. In recent years, Russia has gradually reduced to use the US dollar as the international settlement currency, and the proportion of Euro settlement has increased. If the United States and Europe impose sanctions on the Russian investment and financing market again, the impact on Russia may be relatively weak. Secondly, the biggest impact of the first round of sanctions is the suspension of the certification and approval of the “Beixi No. 2” natural gas project in Europe. In addition, it has not yet had a major blow to the Russian financial system.
Second, the impact of energy on the global economy is still limited. Russia currently accounts for less than 2% of the global economy, with a low proportion. The impact on its major exports of energy and Shenzhen Agricultural Products Group Co.Ltd(000061) may not be too great. Most of these commodities are facing a supply gap at this stage, and probably will not be subject to sanctions. In the short term, the transportation of relevant products may be affected, but in the long run, we expect that the negative impact on the global economy may be limited.
\u3000\u30002. The escalation of conflict may have a short-term pulse on energy prices, but its impact on global inflation is controllable. At present, the energy situation in Europe, America and other countries is tense, and the current sanctions do not involve Russia’s energy export and other links. Therefore, the escalation of the conflict between Russia and Ukraine may have a short-term pulse on energy prices, but its impact on global inflation is controllable.
Since 2021, the energy situation in Europe and the United States and other countries has been grim, with a huge gap between supply and demand, leading to the soaring price of energy such as crude oil and natural gas, which has driven China’s inflation to record highs and brought great pressure to China’s people’s livelihood and the formulation and implementation of economic policies. Russia is an important energy producing and exporting country in the world, with its oil and natural gas production accounting for 11.4% and 16.6% respectively. Especially for the EU, Russia’s energy supply is crucial. 60% of Russia’s crude oil exports go to Europe, and natural gas also accounts for 20% of Europe’s imports. If the energy supply is interrupted, the inflation level in Europe will soar out of control. For the United States, although its energy supply will not be affected, high energy prices may lead to the risk of runaway inflation, which is already high. Therefore, European and American countries did not involve the existing operating energy transport channels in the first round of sanctions. In the short term, due to the escalation of the conflict between Russia and Ukraine, energy prices are dominated by geopolitical factors and will rise in pulses. However, after the conflict cools down, due to Russia’s important position in global energy supply, European and American countries will not completely cut off their economic and trade relations with Russia, and the existing energy supply will remain unchanged. In addition, the escalation of the crisis will also promote the United States to promote the negotiation process of the Iranian nuclear agreement as soon as possible, and promote Iranian oil to enter the global market, so as to stabilize the crude oil price in the global market. At present, the United States is already the largest supplier of liquefied natural gas (LNG) to Europe. The crisis is bound to accelerate the export of the United States to Europe and promote the stabilization of natural gas prices. Therefore, the impact of the crisis on global inflation may be controllable.
Is this shock a short-term disturbance or a long-term impact on the capital market?
\u3000\u30001. The stock bond market is dominated by short-term disturbance, with weak medium and long-term impact.
Taking stock of the local geopolitical conflicts that have occurred in the world since the 20th century – the war in Afghanistan in 2001, the war in Iraq in 2003, the war in Russia and Georgia in 2008, the civil war in Syria in 2011 and the conflict between Russia and Ukraine in 2014, we can see that the impact of geopolitical conflicts on the equity market is mainly short-term emotional. Within three days of the conflict, the world’s major stock indexes showed a downward trend, with a large average decline. However, during the war, the rise and fall of the stock market gradually narrowed and the downward trend slowed down. Moreover, the duration of these local wars is short, and the stock market shock will weaken and rebound in about a month. Therefore, we believe that the medium and long-term impact of local geographical conflicts on the stock market is weak. The impact of the war on the bond yields of major countries in the world is shown as a decline in the short term, a shock rise or a continuous decline in the medium and long term. The yield of long-term treasury bonds more reflects the domestic economic expectations, and the medium and long-term bond markets of countries not affected by the war are limited.
It can be seen that the sharp decline of the global stock market after the outbreak of the crisis confirms the historical law, and the interest rate of China’s treasury bonds also fell slightly. However, the medium and long-term stock and bond markets will gradually return to the original trend, and the rebound range of emerging markets may be relatively stronger. 2. Safe haven assets do not necessarily rise after the outbreak of the war, which will boost the price of crude oil in the short term. The performance of gold prices after previous wars is not completely consistent. After the outbreak of the war in Iraq, the civil war in Syria and the conflict between Russia and Ukraine in 2014, the price of gold rose significantly, ranging from 10 days to 1 month. The outbreak of the war in Afghanistan and the war in Russia and Georgia brought down the price of gold. It can be seen that the outbreak of local wars in history does not necessarily promote the rise of gold prices in the short term. The sharp rise in gold prices before and after the outbreak of this conflict has verified the strong global risk aversion. We expect that if the situation escalates again, the gold price will still rise in the short term, but it is difficult to maintain the upward trend in the medium and long term.
Since the new century, most of the geopolitical conflicts have centered on countries in the Middle East or crude oil producing countries such as Russia, commodity prices are vulnerable to war. The prices of crude oil and natural gas generally rose during the outbreak of the war. Crude oil prices rose sharply during the wars in Syria, Iraq and Ukraine. The outbreak of the war boosted oil prices in terms of supply and market expectations. The rise lasted for about 20 days at most, but then returned to its fundamentals. Back now, we expect that the short-term conflict between Russia and Ukraine will push oil and gas prices up again. However, as mentioned above, oil prices are expected to return to stability after the conflict cools down.
To sum up, we expect that the impact of this geopolitical conflict on the equity market is still mainly short-term, good for commodities in the short term, and limited in the medium and long term.
Risk tips
The degree of conflict between Russia and Ukraine exceeded expectations, and the geopolitical risk exceeded expectations.
