Europe’s risk managers brace for financial fallout from Ukraine invasion

European risk managers must brace for a significant negative economic and financial impact from Russia’s invasion of the Ukraine, just as they help their companies tentatively steer out of the Covid-19 crisis and related supply chain and credit risk problems.

“Moscow’s bullying tactics have turned into a full-scale assault, with Ukraine’s worst fears materialised as Russian forces have begun a major attack on the country. This is a devastating turn of events for citizens in Ukraine who had waited in vain for a diplomatic resolution,” said Susannah Streeter, senior investment and markets analyst at asset management firm Hargreaves Lansdown, in London.

The analyst pointed out that already the invasion has caused shockwaves across the world’s financial markets as cities in Ukraine come under fire.

The UK FTSE 100 dropped by 2.6% on the open, and France’s CAC 40 and Germany’s DAX were down 4%, following Asian markets deep into the red. Streeter said the threat of war had already been hanging over investors, and the shock of the invasion sent the price of oil hurtling up by more than 7%, way above $100 a barrel, reaching more than $103 before falling back a notch.

“Oil and gas prices are likely to stay highly elevated, with hard-hitting sanctions set to be imposed by the international community. Market volatility has increased since the beginning of the year, stoked by rising interest rates, and today’s news has added fuel to the market turbulence,” added the analyst.

The knock-on effect will be heavily felt by exposed sectors such as travel and those mining the metals, said Streeter.

“With Ukrainian airspace shut and fears that renewed optimism of the travelling public will be severely dented with war underway, that’s led to a big slide in airlines and travel-sector stocks. International Consolidated Airlines Group, the owner of British Airways, has dropped by around 5%, while Wizz Air with its extensive operations across eastern Europe in particular nosedived by around 8% in early trade. Rolls Royce, so highly reliant on commercial air travel, was among the biggest fallers on the FTSE,” she noted.

“Russia-exposed stocks like Evraz, the mining and metals company that [Chelsea FC owner] Roman Abramovich owns a stake in has plunged by around 18%, and Polymetal International with mining operations across Russia has also dropped by 7%. With tough incoming sanctions expected, their businesses are likely to take a major hit, with little respite in sight given the seriousness of the situation,” continued Streeter.

“Stocks with Russian exposure also include BP, via a 19.75% shareholding in Rosneft, which also fell on the open, despite the higher oil price that helped push up Shell’s share price. The risers in the FTSE 100 were few and far between, with Bae Systems among them [due to] expectations that defence budgets may be boosted in the face of Russian aggression,” she added.

Streeter added that this “rocket flare” in international tensions had accelerated the rush towards safe havens, and already the US dollar, Japanese yen and Swiss franc have been in demand, while the Russian rouble has tumbled to a new record low.

“Bonds are generally seen as the most reliable assets in a time of emergency, even though this war is also set to fan the flames of inflation. Goldminer Fresnilllo jumped 4%, with expectations there will be further demand for the precious metal, given the intense nervousness on the markets,” added Streeter.

The analyst also noted that there will be pressure on banking stocks, particularly banks in France and Austria as they have the largest exposure to Russian loans. Lloyds and Barclays were about 5% lower in early trading, with nervousness rising about the impact on their lending businesses.

“Investors are likely to be seeking out more defensive positions in healthcare and pharmaceutical stocks to shelter from market turbulence. However, investors also need to keep their nerve and have an eye on the longer horizon. The shock of conflict is devastating but history does point to relatively shortlived volatility in financial markets,” concluded Streeter.