A leading German economist on Monday urged investors not to exaggerate financial risks around a possible Russian invasion of Ukraine, saying an invasion would merely lead to a “temporary setback” while underlining the need to put the Russia risk into perspective.
“All in all, we would expect the European economy and markets to rebound shortly afterwards from a temporary setback which a Russian attack on the Ukraine would probably cause,” said Holger Schmieding, Chief economist at German private bank Berenberg. “Let’s hope it does not come to that.”
Russia now constructive?
Financial markets on Monday were shaken again as they considered Russia’s actions towards Ukraine amid ongoing uncertainty over how the ECB and the Federal Reserve are going to deal with rising inflation. Russia’s defence minister on Monday morning said some of its manoeuvres near the border with Ukraine were nearing their end, while its foreign minister signalled willingness to continue diplomatic negotiations.
James Bullard, President of the St. Louis Federal Reserve, said on CNBC that he supports a rise of 100 basis points in US interest rates by July in order to quell inflation. ECB President Christian Lagarde is due to speak at the European Parliament later on Monday.
Spike in energy prices could add to inflation
At 16 CET, the yield on the 10-year US Treasury bond stood at 1.98 percent, up from a low of 1.91 percent after rising above 2 percent on Friday. Leading European equity indices were up from their lows but still down between 1.7 to 2.6 percent amid inflation fears.
Schmieding, a former advisor to the International Monetary Fund who has been recognised for the accuracy of his forecasts, said a Russian incursion of Ukraine could trigger a further spike in energy prices in Europe, “adding even more to inflation for a while”. A worst case scenario could lead to “a prolonged interruption in the flow of oil and gas” that “could cause temporary energy shortages in parts of Europe”.
ECB would ‘look through’ supply shock
However, that risk needs to be put into perspective, Schmieding wrote in a note to investors, because more than half of the cold season in Europe now is over. This means that EU countries now will be able “to alleviate the pain” of a potential shortfall in supplies of natural gas from Russia.
“A prolonged and full interruption of energy supplies to Europe would likely not be in Russia’s interest,” he noted.
Such a further rise in energy prices would not push the ECB of its course. “A further spike in energy prices in the next few months would be the kind of temporary supply shock that the ECB would look through. It would not bring ECB rate hikes any closer, in our view.”
No major market for Europe
What’s more, Russia’s “badly managed economy is no major market for Europe,” he said, noting that Germany sells just 1.9 percent of its goods to Russia, compared to 5.6 percent to Poland. Economic sentiment in Europe however would likely be more shaken more this time around compared to the first half of 2014, when Russia first moved against Ukraine. At the time, eurozone sentiment barely wobbled, Schmieding said.