Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven on the possible economic consequences of an armed conflict in Ukraine. “An investor should not be scared off too quickly by geopolitical risks.”
With the amassing of more than a hundred thousand Russian military troops at the Ukraine border, and the response of the U.S. and NATO, tensions have now risen high. It looks like a Russian invasion, followed by an armed conflict may be imminent. The threat is not without repercussions on financial markets. The gains that the AEX recorded in the past six months (about 12 percent) have now completely evaporated - although concerns about the omicron variant of Covid, high inflation and expected interest rate hikes by the U.S. central bank also played an important role. Russian shares lost as much as a third of their value during this period.
When it comes to the possible economic consequences of a conflict in Ukraine, you cannot ignore Europe’s dependence on Russian gas. Kalshoven: “Our dependence on Russia is very high in that respect (35% of European consumption concerns Russian gas, ed.). If an actual military conflict in Ukraine leads to Putin turning off the gas tap, this will probably mean a sharp rise in the price of gas and electricity. It would be a supply shock, which could lead to a decline in purchasing power and economic stagnation. Because, if there is a shortage of gas, our government would rather shut down factories than literally leave households out in the cold.”
Such a combination of stagnant growth and high inflation doesn’t usually work out well for equities, Kalshoven says. “And the uncertainty that accompanies an actual conflict doesn’t help either. But perhaps there would be one stroke of luck: oil prices don’t have to follow gas prices. When economies slow down a notch, that pushes the price of oil down. As a result, inflation may not be as bad in the end. It is true that Russia is also a major oil producer and can therefore also influence the price by turning off the oil tap just like the gas tap. But waging war is expensive. The question is therefore whether the country can manage without the income from oil in addition to a loss of income from gas.”