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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

Orthorexia nervosa

How becoming obsessed with healthy eating can lead to malnutrition
Lady Chatterley is not obscene, says TV director

Lady Chatterley’s Lover

Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
Farmers in tropical forests are training ants to kill off bigger pests

Set a pest to catch a pest

Farmers in tropical forests are training ants to kill off bigger pests
Mexico: A culture that celebrates darkness as an essential part of life

The dark side of Mexico

A culture that celebrates darkness as an essential part of life
Being sexually assaulted was not your fault, Chrissie Hynde. Don't tell other victims it was theirs

Being sexually assaulted was not your fault, Chrissie Hynde

Please don't tell other victims it was theirs
A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border