US President Joe Biden and Russian President Vladimir Putin arrive to meet at the Villa la Grange in June 2021. Photo / AP
US President Joe Biden and Russian President Vladimir Putin arrive to meet at the Villa la Grange in June 2021. Photo / AP
Opinion
OPINION:
Few things are more guaranteed to set stock prices tumbling than wars, so why is the now very real prospect of war in Europe not doing more damage than it is? We've admittedly had a number of fairly recent conflicts in Europe that haven't left much of a mark on markets either – most notably the Yugoslav wars of the 1990s.
But these were essentially just localised insurgencies, wars of independence, and ethnic conflicts. They attracted a lot of media attention, but they barely scratched the surface of even the economies bordering them, let alone the wider European and global economies.
What's threatened in the stand-off with Ukraine is much more serious – potentially the worst inter-regional conflict since the cold war, with far reaching consequences for both geopolitical and economic stability.
Already the Russian stock market is about 20pc off the 10-year highs it was trading at last October, but there appears to be zero overall impact on European and US markets.
That's in part explained by an abiding truth about stock market behaviour, which is that since nobody can tell you how events might pan out, there is no point in reacting until the feared catastrophe actually happens.
The most striking example of this mentality was in the events leading up to the First World War, when even after the assassination of Archduke Franz Ferdinand, markets sailed blithely on regardless; few could believe the major powers would be stupid enough to go to war with each other. It wasn't until they actually started mobilising the troops that panic set in.
This time around, there is a wider reason beyond mere inertia for why investors are largely sanguine about developments. In part it is indeed because they have convinced themselves that when push comes to shove, Putin won't invade, or not beyond eastern fringes in any case. But there is also a view that even if he does, it may not be as consequential as the bellicose noises suggest.
Whether this calculation is justified depends on the answers to two, interconnected questions; what does Putin have in mind and what will be the Western response to it?
Russian tanks T-72B3 take part in drills at the Kadamovskiy firing range in the Rostov region in southern Russia. Photo / AP
For the moment the continued jaw-jaw of diplomatic engagement suggests this is more a game of chess than Russian roulette. Putin has set out his list of demands, which essentially amount to the recreation of greater Russia in its old Soviet era and imperial form, or at least the sphere of influence Russia then enjoyed.
The demands include a ban on Ukraine entering Nato and a limit to the deployment of troops and weapons to Nato's eastern flank, in effect returning Nato forces to where they were stationed in 1997, before their eastward expansion.
Joe Biden has pretty much ruled out full scale military retaliation, but warned Putin of "sanctions like he's never seen" should his troops attack Ukraine. In the event, the sanctions so far proposed are rather less scary than those promised. In any case, the list of potential sanctions detailed in the draft submitted by Democrats to the US Senate, and apparently commanding the support of the White House, are not going to much bother Putin.
Certainly, they would make life difficult for Russia, and in the harshest form suggested, are likely to spark a destructive flight of capital. But they are not existential.
"Russia has quite a high pain threshold", says Charlie Robertson, chief economist at Renaissance Capital, a London based emerging markets fund manager. "A robust external and fiscal position, abundant reserves, de-dollarisation and a well stocked counter-sanctions toolkit, make Russia a tough nut to crack".
Supporters of Ukraine carry a large Ukrainian flag on the medieval Charles Bridge in Prague, Czech Republic. Photo / AP
To have real impact, the West would have to do the same as it did with Iran, banning its exports of oil and gas, and removing Russia from the Swift international payments system. Neither of these actions looks realistic.
Now self-sufficient in energy, the US could possibly weather the storm, but the costs to the global economy in terms of higher, already stretched, international energy prices would be crippling. The pain would be most acutely felt in Germany, which is reliant on Russia for about 60pc of its natural gas. That dependency is being made worse by the imminent closure of Germany's remaining nuclear power stations.
Small wonder that the German chancellery is incapable of deciding where it stands. It's not just its dependence on Russian gas. Many Germans have a sense of affinity with Russia, "Russlandversteher" as it is called, which is deeply and culturally ingrained and at least as great as that felt for the West. More so than any other European country, Germany looks both ways.
Ukrainian servicemen greet each other as they patrol a street in Verkhnotoretske village in Yasynuvata district, Donetsk region, eastern Ukraine. Photo / AP
This makes it virtually impossible for Western democracies to present a united front to Putin. The US has one view, the UK another; Emmanuel Macron struts his moment on the stage, but Olaf Scholz just wishes for the whole ghastly mess to go away; he knows not which way to run, on Nordstream 2 or anything else.
Putin meanwhile sees the Western disunity, and awaits his moment. There is no appetite in the West for a war with Russia over Ukraine, and Putin knows it. When Joe Biden last week suggested that a "minor incursion" by Russia would elicit a lesser response than a full-scale invasion, it was widely seen as an appalling gaffe that gave the green light to Putin to in some way proceed with his land grab.
But it also rather gave the game away. Isn't that precisely what the continued talks with the Kremlin are eventually going to agree? The "minor incursion" Biden talks of might for instance take the form of the Donbas region of Eastern Ukraine, whose two main cities – Donetsk and Luhansk – are essentially already Russian, declaring itself an independent republic and then inviting Russian troops in for security.
US President Joe Biden and Russian President Vladimir Putin arrive to meet at the Villa la Grange in June 2021. Photo / AP
The whole thing is eerily reminiscent of Lloyd George poring over maps of Belgium trying to find some way of sanctioning a Prussian incursion in a way that would allow Britain to wriggle out of its obligation to defend Belgium neutrality. He failed, and there followed the Armageddon of World War I.
As for using Swift to come down hard on Russia, that's not really in Biden's gift, and would only really work if accompanied by a parallel export ban on Russian oil and gas. As long as those supplies flow freely, it is essential that Swift is there to facilitate payment. No surprise, then, that the threat to remove Russia from Swift has reportedly been quietly removed from the table.
The grim truth is that Putin has got the increasingly shambolic Western world over a barrel, quite literally so. Markets have concluded, probably correctly, that nobody is about to die in a ditch over Ukraine. At some stage, a stand will have to be taken. Sadly for this aspiring little democracy, that moment does not appear to be now.
