EFG International : Ukraine Update

• The overall impact of sanctions on the Russian economy is still hard to estimate. Sanctions are not new, but the speed with which they have been imposed and the incremental impact they will have the longer they stay in place, suggests there will be a large negative effect on Russia GDP. Analysts' projections anticipate a contraction of Russian GDP of between 7% and 15% in 2022. For comparison, the Russian debt crisis in 1998 triggered a decline of 5.3% in GDP.
• President Putin compared sanctions to an act of war. Moscow reacted by issuing a list of countries taking "unfriendly actions" against Russia, its companies and citizens.¹
• Meanwhile, diplomatic efforts continue to try find an agreement that would stop the war. On 10 March, the Foreign Ministers of Ukraine and Russia met in Turkey. Although there was no progress made on a ceasefire, both parties said that they are ready to meet again if there is the genuine prospect of reaching an agreement. Before the meeting, Ukrainian President Zelensky indicated that he is open to the possibility of a compromise on Crimea (annexed by Russia in 2014) and the separatist region of Dombas. Russia for its part has said that it does not intend to "overthrow" the Ukrainian government.
• China has engaged in diplomatic efforts, offering support for a negotiated solution. While calling for a ceasefire, China has avoided criticising Russia and instead blamed NATO actions for the conflict between Russia and Ukraine. China also criticised the imposition of Western sanctions against Russia expressing concern about their negative impact on the economy.
• It is increasingly clear that higher energy and food prices and further disruptions to the global supply chain will take their toll on GDP growth and push inflation higher than previously anticipated. According to a preliminary assessment from the ECB, the crisis in Ukraine will reduce 2022 eurozone GDP growth by about 0.8% while inflation will be almost 2% higher.
• At the moment, the impact on the outlook for central banks has been limited to a minor downgrade to rate expectations. However, the longer the crisis lasts the greater the negative economic shock. That would be expected to encourage central banks to move more slowly on policy normalisation than previously anticipated.
• Reflecting a high degree of risk aversion, equity markets remain close to recent lows, with more stress in European markets and in growth stocks. We are continuing to assess the situation and adjusting our investment views accordingly.

¹ The list of countries includes Albania, Andorra, Anguilla, Australia, British Virgin Islands, Canada, European Union member states, Gibraltar, Great Britain (including Jersey), Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, San Marino, Singapore, South Korea, Switzerland, Taiwan, Ukraine and United States.