Damaged buildings in Siversk, Ukraine, on Oct. 23. At the start of the war in Ukraine, the market went into a near panic.TYLER HICKS/The New York Times News Service
When Russia launched its full-scale invasion of Ukraine more than 2½ years ago, just as the pandemic was ebbing, the markets went into a near panic. The S&P 500 spiralled down, and oil rose 50 per cent to US$120 a barrel. Wheat and other grains soared, too.
The markets regained their composure by late summer of 2022. Commodity prices fell across the board as investors took the view that the war would not bleed into the rest of Europe – or go nuclear. The investors who made fortunes that year were the ones who shorted oil, betting the price would fall – it did, big time – and those who figured out that the euro was oversold against the dollar.
What is the Ukraine bet today? The war is about to enter its third year, and Ukrainian and Russian casualties continue to rise relentlessly, so you would think investors would have some sort of money-making, directional view on the conflict, especially in the commodities markets – after all, Ukraine is an agricultural powerhouse and is cluttered with natural gas pipelines.
But investors don’t, apparently. As far as they’re concerned, the war is frozen and no longer presents an existential threat to Ukraine. Nor will it trigger a sudden shortage of key commodities, since supply lines have proven remarkably resilient. For them, the bigger risk is in the Middle East, where Israel and Iran seem on the verge of going to war with one another.
A new report by Montreal’s BCA Research said “the war in Ukraine ended – as far as the market is concerned – sometime in late 2022.” That’s a fair point.
At the start of the invasion, the Russian military juggernaut seemed poised to roll into Kyiv, fulfilling Russian President Vladimir Putin’s apparent dream of piecing together the shattered Soviet empire. His plan did not work – far from it. Ukraine put up an astonishingly vigorous defence despite a shortage of Western weapons and regained much of the territory that had been captured by Russia, especially in the northeast.
Since then, both sides have mounted offensives and counteroffensives to scant success. Compare a map of the front lines from late 2022 with one from today and you won’t spot much difference. Neither side has a compelling advantage – it’s a stalemate, has been for the better part of two years. Yes, Russia has air superiority, but Ukraine has anti-tank Javelin missiles and ever-more-deadly drones. There is little sign that Kamala Harris, should she win the November U.S. election, would frog march Ukrainian President Volodymyr Zelensky into peace negotiations with Mr. Putin. Donald Trump has vowed to end the war “in 24 hours” if he gets elected. Good luck with that. The stalemate could last another year or longer.
In the meantime, investors have moved on, since there appears to be little to gamble on. Ukraine has proved adept at exporting as much wheat today as it did before the war, as BCA Research noted. Russia, meanwhile, has used its vast fleet of shadow tanker ships to keep oil exports largely intact despite the barrage of sanctions and embargoes imposed by the West. As for Europe, it is now importing scads of liquefied natural gas, much of it from the United States, to replace Russian gas, allowing it to keep its most energy-intensive factories open.
If there is a bet on the war in Ukraine, it might be on Europe’s industrial sector, BCA said. Automakers, petrochemical producers and machinery companies suffered valuation beatings after the onset of the war, as gas, oil and electricity prices climbed. Despite the plunge in energy prices since then, these companies tend to trade cheaply compared with their U.S. counterparts. The European banks that are exposed to those manufacturers may also get a bounce. But generally speaking, the great Ukrainian-Russian war trade – energy and grains – seems to be done.
The Middle East is a different story. More than a year after Hamas’s deadly assault on southern Israel, the war in the Middle East is expanding. Israeli air strikes continue to shatter Gaza. In Lebanon, Israel is engaged in all-out war with the Iranian-backed Hezbollah paramilitary force. Iran and Israel have exchanged fairly restrained attacks and counterattacks.
A full war between Iran and Israel, while far from inevitable, is not out of the question. Iran, a member of OPEC, could see its oil production and exports plummet in that scenario, sending prices way up (Iran supplies about 2 per cent of global oil demand). But would prices go to, say, US$120 from today’s US$75? Possible, but not likely, since non-OPEC production is surging and China’s demand for energy is weakening as its growth rates fall. In fact, oil prices have dipped in the past month and are down 15 per cent over 12 months.
The Ukraine war, which is still bigger than the Middle East wars, is no longer of much relevance to investors. May it stay that way. If Israel and Iran ratchet up their missile volleys, economic risk will certainly rise. But those risks could dissipate fairly quickly if the Ukraine-Russia war is any indication.