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Geopolitical and economic balances in Russia and Ukraine tension

by hukuknews

Indicator of risk perception… While the crisis between Russia and Ukraine creates a risk by gaining deep strategic meanings; It is seen that general uncertainties and concerns also create some problems in the economy and market approach. From an economic perspective, the uncontrollable inflation effect, and from an investment perspective, whether the falling valuations present a risk or an opportunity from the optimal bottom cost in a volatile market are on the radar. And at this stage, our indicator is the perception of whether the crisis has already reached its peak or not.

 

The phenomenon of energy and inflation… Europe is dependent on Russia for about a third of its natural gas and a quarter of its oil imports. There is a risk that if Russia invades Ukraine, there will be significant disruptions to Europe’s oil and gas supply. Russia’s strategy of cutting off oil and gas flows for political gain will encourage Europe to find alternative energy suppliers. As Nord Stream 2 has not yet been released, the suspension of certification in Germany and Biden’s statements normally do not create a new supply shortage. However, Moscow seems to increase the price of natural gas it gives to Europe through its existing pipelines. This will mean that oil and natural gas prices will rise in case of developments such as sanctions or conflicts that will increase energy flow and contract prices. Increasing the prices of these fuel sources will of course bring with it inflation problems, which are more difficult to manage in many countries.

 

Policy creation in central banks… Although the macroeconomic environment reveals certain risks, the center of gravity seems to be focused on inflation. In the US, which has experienced the highest inflation in the last 40 years, the fact that the Fed has entered a rapid tightening cycle is priced in. At a point where supply bottlenecks continue to push inflation, the impact of new-dimensional energy pricing stemming from the geopolitical crisis has the potential to add to the event. Slow policy transitions or financial support may be needed to offset the risk of a hard landing. The fact that the developments that will trigger the crisis phenomenon remain alive reveals the need for new case studies in scenario analysis. In other words, if the political dynamics do not improve, a worst-case scenario stress test should be tried on the axis of what will happen if the interest rates are increased in this environment.

 

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Gold, oil and wheat price comparison… Source: Bloomberg

 

Conclusion? Even if the tightening cycle progresses rapidly, price increases may remain high for a while, as central banks will not be able to affect especially supply-related and geopolitical-related problems. Also, if we consider whether there is a risk of a slowdown in inflation; yes, there is a risk of cyclical slowdown as weakening in the production network will pull down industrial activity and the decreasing production demand will pull it down after a while. So, at the risk of supply chain problems, do increases in financing costs that can cause demand shocks primarily control inflation or slow growth? Therefore, it is important not to add to the risks of economic growth in policy making. If we evaluate the current geopolitical risk phenomenon through the global supply and production network, we will face such a dilemma.

Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı

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