The Impact of the Russia-Ukraine Conflict on Global Financial Markets

Since the outbreak of the Russia-Ukraine war, the global capital markets had experienced the initial plunge on February 24, and then stabilized and rebounded in the second trading day on February 25. The three major U.S. stock indexes closed up collectively, with the Dow Jones industrial average, the S&P 500, and the Nasdaq up 2.51%, 2.24%, and 1.64% respectively. European stocks also rallied, with Russia’s RTS index up 26.12% after tumbling more than 50% during the previous session, while the UK’s FTSE 100, France’s CAC 40, and Germany’s DAX all rose more than 3%. The prices of gold, crude oil, and other safe-haven commodities all fell sharply and gave up their sharp gains from the first trading day. Taken as a whole, this implies that the impact of the Russia-Ukraine conflict on global capital markets is relatively limited for now.

Judging from the reflection of the capital market, the initial impact of the Russia-Ukraine crisis on the financial market was not too drastic. This may have something to do with the intensity of the war, as well as the influence of the countries involved in the capital markets. If the war is limited in scale, it will not cause a systemic crisis like the COVID-19 pandemic. However, in terms of its long-term development, researchers at ANBOUND believe that the evolution of geopolitical conflict patterns brought about by the Russia-Ukraine crisis will inevitably affect global investment decisions and capital flows. These effects will be gradual and profound, indicating that global financial markets will evolve with geopolitical changes.

Russia, which started the war, will be hit hardest. On the one hand, the war itself, as an escalation of the Russia-Ukraine crisis, will not end soon. On the other hand, even if Russia wins an overwhelming military victory, there will still be a long period of instability in Ukraine, a situation that investors would not want to see. Moreover, as the crisis escalated, both the United States and the European Union have imposed economic and financial sanctions against Russia. The latest information shows that Europe and the U.S. have decided to exclude some Russian financial institutions from the SWIFT system. SWIFT sanctions will have a significant negative impact on Russia’s economy, foreign trade, and various financial transactions. The U.S. and Europe also threatening sanctions on Russia’s central bank’s USD 600 billion-worth of foreign reserves. The expulsion of most Russian banks from the SWIFT system has left Russia isolated in international financial markets, meaning it will pay a huge price for this, regardless of whether it wins in the conflict or not.

For the EU, since it is not at the heart of the conflict, its direct losses are small. However, the financial markets in Europe will be in a state of instability due to the geopolitical impact of the war that is geographically near the region, which will not only hit the financial markets in Europe, but will also drag down the euro. Europe, which has close economic ties with Russia, will also suffer from the sanctions against Russia. European banks are heavily exposed to Russian corporate and financial debt, and any rise in risk could destabilize the global financial system.

The U.S. has little to lose from relevant geopolitical conflicts, and the fact that much of the capital withdrawn from Europe is expected to flow back to the U.S. is undoubtedly beneficial to the relatively stable U.S. capital markets. The continued rise in energy prices will likewise further push up the level of inflation in the U.S., posing long-term risks for its financial market. This will further increase the difficulty of the Federal Reserve’s monetary policy implementation, and the policy risk of the Fed’s “hindsight” will further intensify, bringing instability to the U.S. capital market.

In terms of the impact on China, ANBOUND noted that the USD/RMB exchange rate rose again recently. On February 26, both the onshore and offshore USD/RMB exchange rate traded around the 6.30 mark. Data showed the RMB’s correlation with global market volatility fell to a three-year low early last week, underscoring the currency’s safe-haven ability. In fact, this means that international capital is seeking new safe-haven, bringing incremental international capital to China’s domestic capital market, making China’s financial market one of the beneficiaries of the crisis. However, China’s ability to maintain the stability of its surrounding environment remains a major consideration for international capital flows in the face of growing geopolitical competition and conflict.

However, the war between Russia and Ukraine will have an impact on energy prices such as oil and natural gas, as well as food and commodity prices. The economic and financial sanctions imposed by the U.S. and Europe will also exacerbate Russia’s recession. Nonetheless, Russia can still utilize its energy resources for its geopolitical interest. Russia is said to have substantially raised natural gas prices. European natural gas prices have soared 41%. In addition, nearly 35% of palladium, an important element used in the U.S. semiconductor industry, was imported from Russia. Once Russia stops supplying palladium to the United States, the shortage of chips in the U.S. will be exacerbated. At the same time, 90% of neon, another element used in the U.S. semiconductor industry, was imported from Ukraine. A sharp increase in the price of neon as a result of the war could also have some impact on the U.S. semiconductor industry. Some market institutions have analyzed that crude oil prices may once again exceed the USD 140 mark, which will benefit Russia, a major energy exporter, enough to compensate for the losses caused by rising financial settlement costs. Changes in supply and demand in areas such as energy and commodities will undoubtedly exacerbate global inflationary pressures.

Financial markets have conventionally been one of the most globalized areas, and as geopolitical conflict intensifies, this change will have implications for the long-term evolution of global financial capital markets. In particular, Europe and the United States, which have advantages in the financial field, have imposed financial sanctions on Russia, exposing the global financial market to geopolitical hazard, as well as increasing financial transaction costs and risks. These policy and market changes arising from the Russia-Ukraine conflict will indicate an increase in risk for global capital.

ANBOUND Research Center (Malaysia) is an independent think tank situated in Kuala Lumpur, registered (1006190-U) with laws and regulations of Malaysia. The think tank also provides advisory service related to regional economic development and policy solution. For any feedback, please contact: malaysia[at]