The Russia - Ukraine Scenario

Background of Russia Ukraine War: Since the Soviet Union broke into many small countries in 1991, the relations between Ukraine & Russia have been filled with tensions. Both countries have been involved in several conflicts on the issue of Ukraine trying to become a member of NATO.

The latest dispute broke out in February 2022 after Russia issued a series of warnings to Ukraine to reduce its involvement with NATO.

What is the Current Situation & Potential Threats?

The consequences of a war are destruction and loss of lives. Although this affects only those directly involved in the conflict, a full-scale war can impact the world economy. Disruptions in the global supply chains and the rise in inflation are key economic threats. Not to forget the adverse effects of weapons on the environment.

Additionally, the threat of tactical and high-end weapons is also genuine. Most of Europe depends on Russia for its oil and natural gas supplies. So, the threat of a gas outage is also prevalent in European countries. On the other hand, increased inflation has rendered several developing nations like Sri Lanka bankrupt.

As the war has already extended over five months, the best way out for the world is a peace deal between Russia & Ukraine. If a logical conclusion is not reached, things can escalate quickly, and we might be on the brink of a potential World War.

Effects of the War on the World Economy

As soon as Russia declared war on Ukraine, the US and NATO started hitting it with massive trade sanctions. What have the sanctions led to? An enormous rise in prices of Oil and Natural Gas. Ukraine is also known as the world's bread basket, and a war on its territory has caused a wide-scale shortage of wheat across the globe.

As a result, Crude prices have spiked, fueling higher inflation. Many advanced economies like the US and UK are facing the highest consumer inflation in decades. To curb this, various Central Banks around the globe are increasing interest rates.

Future Financial Outlook and Effect on Stock Markets

Increasing interest rates on fixed investments and higher risk of uncertainty lead investors to sell off their holdings in the stock markets aggressively. Consumers avoid purchasing luxury items or high-risk investments, causing their prices to decline. Resultantly, the global equity markets and cryptocurrencies have plunged.

The FIIs have sold investments worth INR 209,000 Crores in the Indian Markets since the War broke out in February 2022. The Indian Stock Markets have lost more than 10% due to this selling pressure. Also, the increased cost of imports and high demand caused the INR to depreciate by over 6% against the US Dollar during the last five months.

The Russia-Ukraine War has caused unavoidable circumstances for the world economy. Given the threats and financial outlook, investing fresh money without proper research can be a double-edged sword.

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