Intensified Russia-Ukraine tensions reinforce international markets underweight 

Eylem Senyuz 

Senior Global Macro Strategist

Truist Advisory Services, Inc.

What happened

As we highlighted in our 2022 annual outlook, a major geopolitical event is brewing on the border of Ukraine, with over 100,000 Russian troops ready to invade. The U.S. and its partners in Europe are in talks with Russian counterparts to avoid military intervention. The increased geopolitical risk is weighing on markets. 

Our take

As long as the parties continue to talk, a full-scale invasion is avoidable

Even before negotiations started, Russia amassed thousands of troops on the Ukrainian border in the event talks do not go as planned. The Europeans are renowned for having endless negotiations with incremental outcomes in the end, like the Brexit-related talks that lasted many years. This time much more is at stake, and it looks like Russia has no intentions of being dragged into fruitless talks. Similar to the Georgia invasion in 2008 or Crimea in 2014, if Russia was fully intent on invading a part of Ukraine, it would have already done so. Russia working with western counterparts to find a diplomatic solution shows its willingness to negotiate.

More troops are needed for a full-scale invasion, and Russia might not have the appetite to control all of Ukraine

Geographically, Ukraine is not a small country; it is approximately the same size as Texas. The consensus among military analysts is that Russia needs many more troops than the current buildup for a full-scale invasion and to maintain control. Russia might not face any opposition in pro-Russian regions of Ukraine like Donetsk and Luhansk, which is relatively small and borders Russia. However, the rest of the country might fight against a full invasion.

If negotiations fail, surgical strikes or a small-scale incursion are possible

Russia may choose to use surgical strikes with high precision weaponry or airstrikes upon strategic targets. Paramilitary and cyberattacks could continue in this scenario with some amount of damage to the existing military and government infrastructure of Ukraine. In this scenario, even though it would be considered a major geopolitical event, similar to the annexation of Crimea, a longer-term solution could still be achieved via further negotiations and concessions from both sides.  

Europe’s proximity and economic interconnectedness with Russia, means it has much more to lose

Europe imports almost half of its natural gas from Russia and more than a quarter of its crude oil. Titanium and aluminum used in Airbus planes (same as titanium for Boeing) are mostly sourced from Russia. Any significant sanctions on Russian trade could hurt European economies disproportionately. Prolonged conflict could force international airliners to travel to Europe by avoiding Ukrainian and Russian airspace and adding cost and time to Asia-bound flights. Russian tourists could curb their travels to Mediterranean summer destinations, leading to a drop in tourism revenues in southern Europe.

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