Market Commentary: Russia / Ukraine Crisis

The current geopolitical crisis between Ukraine and Russia, and its potential effects on financial markets is the current hot topic of conversation and debate. At Activ8 we derive research from a number of sources and we found this editorial opinion piece from Bank Julius Baer to be most helpful.


  • The Ukraine crisis is dominating the news and has investors shivering due to geopolitical uncertainties. We still believe that the risk of a full-blown military escalation is low.

Somehow, a glance at financial markets via a computer monitor feels similar to a peek out of the office window. Stormy weather is battering the windows here in Zurich, just like the Ukraine crisis is clouding financial markets with geopolitical noise and uncertainty. Noise is a faithful companion and cutting through it is the everyday challenge of investors.

However, when geopolitics heats up and the media almost becomes live tickers of military troop movements and megaphones for politics influencing diplomacy, things become slightly more difficult than normal. We all know that the economic effects of a full-blown military conflict in the midst of Europe would be disastrous. However, rationality is not the strongest guide in a situation where many wild cards are at play in the hands of less emotionally tempered players.

  • Diplomatic stand-off (base case, 85% probability): The crisis remains limited to a stand-off, skirmishes, or a partial invasion of eastern Ukraine. Russian actions are a show of force to tilt negotiations. Diplomacy prevails, involving both a temporary gradual escalation and tit-for-tat de-escalation. The credible threat of maximum sanctions keeps negotiations going. Geopolitical uncertainty and related noise keep capital markets on their toes. The sentiment shock fuels asset price volatility in the near term.
  • Military escalation (bear case, 5% probability): The crisis escalates into war. Vast parts of Ukraine witness a forceful invasion by foreign troops. The West resorts to severe economic sanctions in the oil & gas and financial sectors as a last resort. Given the high global economic toll, policymakers respond with monetary and fiscal stimulus. Capital markets have to digest a sentiment and fundamental shock, which limits a global asset recovery. Russian assets see lasting damage.
  • Swift de-escalation (bull case, 10% probability): The crisis de-escalates, and military threats recede. Diplomacy succeeds and Russia’s show of force works in its favour, in part because such an outcome allows the United States to focus on its rivalry with China. Geopolitical uncertainties ease, the sentiment shock disappears. Depending on the return to the bi-polar world, Russian assets rerate swifter than other parts of the capital market.

Nevertheless, we still believe that a diplomatic stand-off is the most likely scenario for the Ukraine crisis going forward. Russia, for its part, seems to be mastering the tactics of ‘escalate to negotiate’. A look at Russian credit default swaps, crude oil, and natural gas prices also implies that, at least currently, financial markets hear the war drums at more of a distance than the media. A comparison with earlier outbursts of geopolitical tensions shows that such episodes were usually shorter lived than initially feared.

As we enjoy a return to office life, lively personal exchanges with our peers, and mask-free lunches, the winding down of the pandemic somehow does not decrease the challenging market environment. With the global economy close to inherent capacity limits, structural trends such as China’s demographics at full force, and geopolitics adding more spice than needed, investors face more challenges than they could wish for.

Conclusion: We encourage clients not to pursue a knee jerk reaction and reduce current equity exposure to cash. Those clients who are fortunate enough to have cash reserves should view the next few weeks as buying opportunities.