What is the impact of the crisis in Ukraine?

The sharp escalation of the Ukraine crisis has reverberated across the markets:

◼ The immediate impact has been felt on energy commodities, which have priced in a significant geopolitical risk premium as the risk of disruption to Russian oil and natural gas flows grows.

◼ We have upped our base case TTF forecast to €78.8/MWh and Brent to $89.8/bbl for 2022. In our high case scenario with transit via Ukraine disrupted, TTF is expected to average €100/MWh with Brent at $106/bbl.

◼ The rise in energy prices will have significant impact on the global economy. In Europe, the negative income shock for households along with higher costs for companies are expected to shave 0.5% off our prior Euro Area growth forecast.

◼ Emerging Markets impact differs between oil importers and exporters. Poland, Hungary, Czech Republic and Turkey are particularly badly hit, given net energy importer status and exposure to the Russian economy. In Asia, although less direct exposure to Russia, India and the Philippines are most affected by higher commodity costs, while Indonesia and Malaysia more resilient.

◼ What about Russia? Surging revenue from oil and gas sales through 2021 has left Central Bank reserves in a healthy position, whilst Moscow has diversified away from dollar-denominated assets in recent years. We may see a pivot towards China, although not all trade with the west is substitutable. This is especially the case for natural gas exports.

◼ We also find potential impacts on the metals markets and for European banks.