Ukraine crisis: What would a new Cold War mean for the economy?

Investors are rightly worried about the global impact of the Ukraine crisis

The prospect of a full-scale Russian invasion of Ukraine has prompted pessimistic talk of a new Cold War.

But what impact could a resurrected East-West stand-off have on the world economy? Global stock markets sold off heavily yesterday, implying investors believe the impact could be highly adverse.

America’s S&P 500 retreated by 1 per cent. The FTSE 100 shed 1.49 per cent. Stock markets in Asia also fell. But the biggest shock was on Russia’s RTS index of shares, which shed 12 per cent. If shareholders are correct, Russia will suffer most from this escalation.

Energy is a key sector. The region accounts for a quarter of the world’s natural gas reserves. Conflict could halt exploration in Ukraine, which has ambitions to be an exporter by 2020. Chevron has a $400m (£240m) contract to tap Ukraine’s Oleska shale gas fields. The company said yesterday it had stepped up security in response to the arrival of Russian troops in Crimea at the weekend.

Western energy firms are operating in Russia itself. Exxon and Shell have operations in the country which could be vulnerable if East-West relations collapse. They were both marked down on the US stock market yesterday. Shares in BP, which saw the value of its investment in the giant Russian oil producer Rosneft drop by $1bn yesterday, were also penalised.

Read more: A chilling ultimatum - surrender by four, or else...
This is Europe’s biggest crisis in the 21st century, warns Hague
Ukraine appeals to Moscow: ‘This is a crime and you will answer for it’
Russia dismisses '3am ultimatum' as 'total nonsense
Latest: Ukraine 'on the brink of disaster' as Russian troop movements prompt stand-off
Ukraine crisis: Nato ‘betrayal’ and Brussels rhetoric pushing Vladimir Putin to act
Ukraine crisis: UK ministers to boycott Paralympics in response to Russia’s ‘declaration of war’

Russia’s own gas exports, which account for a fifth of the country’s overseas sales, could also be interrupted if Moscow is hit by Western sanctions. Yet this is a sword that would cut both ways. Europe is heavily dependent on Russian energy supplies. Gazprom, as well as sponsoring the Uefa Champions League football tournament, provides an estimated 30 per cent of the Continent’s natural gas; 40 per cent of Germany’s consumption; and 27 per cent of Italy’s. Europe also consumes a third of the 4.2 million barrels of crude oil pumped daily by Rosneft. A significant portion of those supplies arrive via pipelines that pass through the Ukraine.

This dependency probably explains why there seems to be reticence among European politicians – who are meeting to determine the EU’s response – to discuss targeting Russian energy exports directly.

To say Russia has Europe over a barrel would be an exaggeration. But it would be difficult for Europe to source new supplies in a hurry if deliveries from the East were disrupted.

Energy is by no means the whole economic story. Since the collapse of the Soviet Union other Western firms have penetrated the markets of the former Communist territory. The German engineer Siemens had sales of $3bn in Russia in 2013. McDonald’s has 350 restaurants in Russia and around 80 in Ukraine. Pepsi has $4.9bn of sales in Russia. Firms with exposure to the region were heavily beaten in the markets yesterday. Carlsberg, which owns Russia’s biggest brewer, Baltika, fell 5.2 per cent. Stada Arzneimittel, Germany’s largest generic drug maker, has a fifth of its sales in Russia. Stada’s shares fell 5 per cent. Europe could impose sanctions on Russian financial institutions, although that too could backfire by hitting the Continent’s banks. Analysts were poring over European banks’ exposure to Ukraine and Russia yesterday. Hungary’s OTP, Austria’s Raiffeisen and France’s Société Générale all have chunks of their assets in Russia.

Despite the uncertainty over the likelihood or the target of Western sanctions, currency markets are already reeling. Ukraine’s hryvnia fell by around 12 per cent against the euro yesterday. The rouble has also dropped sharply since Russian troops entered the Crimean peninsula, falling to 36.5 against the dollar, its weakest on record. The Central Bank of Russia was forced to lift its benchmark interest rate by 1.5 percentage points to 7 per cent yesterday, to bolster confidence. It is rumoured to have sold more than $10bn of its dollar reserves to prop up the currency.

Commodities markets are also pricing in the threat of disruption to energy and agricultural supplies from the region. Commodity prices rose to the highest level in six month yesterday. Brent crude oil hit $111 a barrel, its highest level this year. Corn and wheat prices also jumped. Ukraine is a major grain exporter, ranking only behind the US in annual output by some estimates.

If conflict does break out, consumer prices around the world could be pushed up, delivering another unwelcome inflationary shock to a global economy that, in the eyes of many, had finally turned the page on the turmoil of the financial crisis.

Arts and Entertainment
arts + entsWith one of the best comic roles around, it's no wonder she rarely bothers with films
News
people
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
PROMOTED VIDEO
News
i100
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Life and Style
A small bag of the drug Ecstasy
Health
Life and Style
Floral-print swim shorts, £26, by Topman, topman.com; sunglasses, £215, by Paul Smith, mpaulsmith.co.uk
FashionBag yourself the perfect pair
News
news
News
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

Hunters protect Russia's rare Amur tiger

In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
Transfers: How has your club fared in summer sales?

How has your club fared in summer sales?

Who have bagged the bargain buys and who have landed the giant turkeys
Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

'I'm a realist; I know how hard this business is'

Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

The best swim shorts for men

Bag yourself the perfect pair and make a splash this summer
Has Ukip’s Glastonbury branch really been possessed by the devil?

Has Ukip’s Glastonbury branch really been possessed by the devil?

Meet the couple blamed for bringing Lucifer into local politics
Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup