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The Russia-Ukraine crisis is unfolding at a rapid pace. After months of denying an attack, Russia's president Vladimir Putin on Thursday announced a “special military operation” aimed at “demilitarisation” and “denazification” of Ukraine, and protection for pro-Russian Ukrainian separatists. As the conflict escalates, analysis turns to the scale of Russia’s ambition, both within Ukraine and, potentially, the wider region. There continues to be huge uncertainty about what form the conflict might take. From here, the range of plausible scenarios is still wide. Here, Edward Glossop, Emerging Markets Economist at abrdn, looks at some possible outcomes.

Hopes for a diplomatic solution dashed

With Russia’s military escalation, a diplomatic solution looks unachievable – for the time being at least. Western leaders are now directing their efforts towards helping Ukraine defend itself by providing weaponry and financial support. The West is also imposing further punitive sanctions against Russia, although these have so far proved ineffectual in deterring President Putin.

The eyes of the world are now on the unfolding situation. We are all concerned about the huge humanitarian impacts of the situation and potential repercussions. We are also aware there may be interest in the possible impacts on investment markets over coming weeks and months, and we’re summarising some high level views below.

What does this mean for my investments?

Russia’s attack on Ukraine has implications for the global economy. Russia is a major supplier of oil and natural gas, to Europe in particular. European natural gas prices could rise back towards their December 2021 peak, given gas stocks are already very low. And, in the hours since the invasion, oil prices have jumped to over US$100. However, the increase may not last if other large oil producers decide to increase supply.

Meanwhile, the prices of some metals (like aluminium) and agricultural commodities (like wheat) could also rise, as Russia and Ukraine are major producers.

One consequence of higher commodity prices would be even greater pressure on global inflation, which is already a concern for many countries and clients. That in turn could put even more pressure on central banks to raise interest rates aggressively.

Longer-term consequences

Regardless of how exactly the current crisis plays out, there may be long-term consequences. The crisis may hasten ‘decoupling’ (that is, a reduction in economic and trade links) between Russia and the US. At the same time, the European Union is likely to face intense pressure to reduce its energy dependence on - and cooperation with - Moscow.

There may also be implications for the speed of decoupling between the US and China, given relations between Beijing and Moscow appear to be closer than ever.

A more fragmented world would, no doubt, experience more flare-ups of geopolitical tensions, potentially making markets more turbulent.

Do I need to take action to safeguard my investments?

The coming weeks could see continuing volatility in worldwide markets. It can be painful watching the prices of your investments dip, or sometimes fall significantly. So you may be tempted to take action to avoid further losses. But history shows that sitting tight and looking to the long term nearly always proves better for investment returns than making knee-jerk reactions to newsflow. Past crises (such as the ‘dot-com’ bubble, the 2008 financial crisis and the market slump at the start of the 2020 pandemic) show that share prices tend to recover given time.

And, at the moment, no one has a clear idea of how the Russia-Ukraine conflict will pan out.

If you have any questions or concerns about your investments, please don’t hesitate to contact your abrdn financial planner, who will be happy to help.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding as at 25 February 2022.