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Seven questions and answers about the situation in Ukraine

The financial markets are reacting negatively to the risk of an escalating conflict between Russia and Ukraine. We have asked three of SEB's experts about their views on the conflict and what economic consequences we can expect if a Russian invasion of Ukraine becomes a reality.

Tensions are rising along the border with Ukraine. Russia has mobilised large forces and not least the United States believes that an invasion may be imminent. Intensive diplomatic efforts are being made to find a peaceful solution to the situation, but the results so far have been slim and uncertainty remains high.

1. Per Hammarlund, responsible for SEB's analysis of emerging markets, what is the cause of the conflict?

Per: The underlying causes of the Ukraine crisis are diametrically opposing views of threats and the security order in Europe. Russia's political leadership, led by President Vladimir Putin, sees NATO's expansion to the east as an existential threat, while NATO believes that Russia has no reason to fear an attack by NATO. The issue has come to the fore due to increased Russian troop presence around Ukraine's borders and a written demand from Russia that NATO not be allowed to expand.

2. How do you see the situation?

Per: The situation is extremely serious. An accurate assessment of the likelihood of an attack on Ukraine is impossible, but the risk has increased in the past week as attempts at talks have only resulted in both sides locking their positions on new NATO members. There is no doubt that Russia is prepared to pay a high price for not only keeping Ukraine out of NATO but also NATO (and its weapons) outside Ukraine. There is currently an information war in which Russia claims that it has no intention of attacking Ukraine while increasing its military activities around the country, both at sea and on land.

The United States has issued warnings about Russian sham manoeuvres and about false allegations of Ukrainian attacks on Russian troops or Russian minority groups in Ukraine. Both Russian and American personnel have been evacuated from the embassies in Kiev.

3. What are the options?

Per: There are only two options. Either a negotiated solution is reached, e.g., by Ukraine giving up its ambition of a future NATO membership, or Russia attacking Ukraine militarily.

If Russia chooses to act militarily, it can carry out limited attacks on military targets in Ukraine or carry out a major invasion with the aim of establishing a new pro-Moscow government in Kiev. In the event of an attack, the Western countries (mainly the United States and the European Union) have made it clear that they will not intervene militarily in Ukraine's defence. Instead extensive economic sanctions will be imposed on Russia.

4. Jens Magnusson, SEB's Chief Economist, how does the conflict affect the world economy?

Jens: There are clear signs of concern. The stock and commodity markets are volatile, but questions are also being raised about the prospects for the on-going recovery after the pandemic. We already see oil prices between 90 and 100 dollars per barrel and the corresponding prices for natural gas are even higher. Continued concern about Ukraine keeps prices high.

If the conflict develops into an invasion of Ukraine, with extensive economic sanctions from the EU and the US as a result, the already high energy prices could rise further. This is especially true for Europe, where 40 per cent of all gas used comes from Russia. The United States is more self-sufficient in energy and is thus less affected. High energy prices mean that companies will see rising costs, and their products will become more expensive. Household purchasing power will decrease, which has a negative effect on growth.

Admittedly, the US and the EU have indicated that trade (including energy) with Russia should not be affected by the sanctions, but this may prove difficult because e.g., Russia's banks are likely to be affected. In the event of an extensive attack, use of the new Nord Stream 2 gas pipeline can also be postponed or shut down for good. This would further contribute to continued high energy prices in Europe.

5. How is Sweden affected?

Jens: Sweden is not a major consumer of natural gas but has nevertheless felt the high energy prices. Prices at petrol stations are record high and winter electricity bills have dug holes in many household budgets. Further rising energy prices would also push up Swedish electricity and fuel prices even more, which reduces households' purchasing power and poses a risk to growth. It is likely that the pressure on the government to implement more compensatory measures for households will increase.

In addition to energy prices, it is likely that some trade relations may be disrupted. Russia is not one of Sweden's largest trading partners (number 15 in 2021), but for some companies and sectors, broken or hampered trade relations would still be felt.

Furthermore, an invasion would probably have a negative effect on the Swedish krona because increased uncertainty usually drives investors to the large “safe” currencies (e.g. US dollar and euro), rather than to the small ones. How a conflict will affect the Swedish economy in a longer perspective depends on how long and severe it will be, how extensive sanctions we will see and whether there is a risk that a more general sense of risk will be created in our part of the world.

6. Fredrik Öberg, Chief Investment Officer at SEB Private Banking, how do you see the current stock market decline?

Fredrik: We were already in an uncertain environment from an investment perspective as we are in the process of moving from a recovery phase after the pandemic. Central banks are switching from a very stimulating monetary policy to an environment where they first stop pushing the gas pedal and then gradually slow down through increased policy rates.

In the next step, balance sheets will also be reduced. This is done partly to slow down the high inflation rate, and partly because support from monetary policy is no longer needed. This creates volatility and uncertainty even though the economic base is solid. In this situation, a potential conflict between Russia and Ukraine creates extra concern and reinforces the weakness of the market. Therefore, the stock markets fall on news that the situation is deteriorating.

7. What will be the advice to investors and savers?

Fredrik: We advise to broaden the investment horizon and look long-term. It is appropriate to review your portfolio’s level of risk and ensure that it is in line with your established strategy. At the same time, you should not overreact and make major changes due to the current situation.

History shows that war unrest usually lasts for a while and creates volatility in the market. But then the anxiety subsides, and investors focus on other things. With the results in hand, the market reactions in retrospect are usually exaggerated.