War in Ukraine brings fears of second Cold War to investors

Since the fall of the Soviet Union, investors have enjoyed decades of global economic stability, during which military conflicts and international diplomacy have seen their roles reduced in the movement of markets.

But Russia’s invasion of Ukraine is the most overt sign of a recent shift in that dynamic, and more frequent disputes between powerful nations will have far-reaching consequences for investors.

Europe’s biggest military conflict since World War II — combined with simmering tensions between the United States and China — prompts investors to watch shifts in international power dynamics far more closely than they have for a long time. .

“There has been more international geopolitical tension for a few years now — frictions between China and the rest of the world, especially between China and the United States, will not go away,” said Daniel Ivascyn, vice president of investment at the fund manager. PIMCO, which manages more than US$ 2 trillion (R$ 10 trillion) in assets. “This Russian situation further complicates some of these broader global relationships, and it has certainly become a more frequent topic of conversation with our investors.”

Financial markets have long been sensitive to certain geopolitical events — elections, supply disruptions and trade tensions — and that can drive prices up. And in just a few days, the invasion of Ukraine has resulted in a series of economic maneuvers that could quickly transform the way countries raise money, where they buy raw materials and who they do business with.

The United States and its European allies announced that they would freeze any Russian central bank assets held in American financial institutions, which would make it more difficult for the Russian government to sustain the ruble. New sanctions have also banned some Russian banks from transacting internationally. British oil giant BP announced that it would “let go” of its nearly 20% equity stake in Rosneft, a Russian state oil company, which was valued at $14 billion last year. And Norway’s national investment fund, the largest on the planet, announced that it would sell its stakes in Russian companies.

These and other measures – along with Russia’s position as the world’s third-largest oil producer, behind the United States and Saudi Arabia – have shaken markets around the world. Commodity traders are trying to figure out how to redirect the world’s flow of oil, natural gas, metals and grains. And stock traders who were already facing uncertainty amid efforts by governments and central banks to deal with the fallout from the pandemic are now faced with an armed conflict that could cripple any business that depends on these commodities.

On Tuesday, the S&P 500 index tumbled 1.6%, the latest in a series of rapid swings, and recorded a dip to start March after two straight months of lows. Oil prices rose sharply, with standard Brent crude trading at more than $106 a barrel. More than two dozen countries have announced plans to release their emergency oil reserves.

Jason Schenker, president of consultancy Prestige Economics in Austin, Texas, described the resurgence of tensions between Western countries and Russia as a second Cold War.

“There is competition for world influence and world power, but now there is much more at stake,” he said. “We could be facing a protracted battle of sanctions and soft power diplomacy. And we could see an escalation in the risks of military action.”

The risk became clear on Tuesday when former Russian Prime Minister Dmitry Medvedev warned that economic wars “too often become real wars”, prompting French Finance Minister Bruno Le Maire to backtrack from an earlier statement of that Europe was ready “for an all-out economic and financial war against Russia”. Le Maire declared that his use of the word “war” had been inappropriate.

The Russian attack on Ukraine and moves to isolate the country could bring Russia even closer to China, which has been more circumspect than other countries about the offensive. The situation has also sparked renewed unease about the relationship between China and Taiwan, the self-governing island Beijing claims. While there are no signs that an invasion of the island is imminent, China regularly sends fighter jets on missions towards Taiwan, and analysts say Beijing is making it clear that it is not ruling out military action to absorb the island.

Taiwan plays a crucial role in the global supply chain of semiconductors used to power things as diverse as iPhones and cars, and is a key trading partner for the United States, which imports billions of dollars of electrical machinery from the island.

Any military action against Taiwan could cause a seismic shake to the world economy, and investors and companies are closely monitoring the international effects of sanctions on China as a test, said Karl Schamotta, chief market strategist at Corpay, an international payments company.

The sanctions on Russia resemble old-fashioned capital controls and signal a renewed willingness by governments to turn to economic tools to achieve foreign policy goals, said Schamotta, who works in Toronto. This can come as a shock to companies and operators who are used to moving hundreds of millions of dollars from country to country quickly and easily.

“This will put sand in the gears of the world economic machine, and purposefully,” he said. “Governments are going to try to slow down the movement of things across borders and the amount of money that can be transferred from one place to another, and this is a completely different world for large multinational corporations. It makes business a lot more difficult.”

Fighting alone was not enough to prevent the growth of financial markets. After the 9/11 attacks, for example, stock markets were closed for four days and reopened with a strong wave of selling. But the effect was temporary and stock markets soared higher and higher, even as the United States was embroiled in wars in Iraq and Afghanistan for decades to come. The most severe disruption was not military but financial: the 2008 crisis.

Kristina Hooper, chief global market strategist at Invesco, which manages $1.6 trillion in investments for clients such as pension funds, insurers and individual investors, said the fighting in Ukraine is more worrisome because of their human cost. She anticipates a modest rally in the US stock market this year, but expects this advance to be accompanied by more volatility; geopolitical considerations only serve to exacerbate the difficult conditions that investors already face in the face of the Fed’s plans to raise interest rates to fight inflation.

“There’s a lot of uncertainty out there,” she said.

The New York Times, translated by Paulo Migliacci