Shared with the permission of Goldman Sachs research:
The Russia-Ukraine situation remains in flux, with recent escalations as Russia recognized two eastern territories in the Ukraine as independent states and authorized military forces in the regions. The main questions remain how far and how quickly into Ukraine these Russian troops will go, and what the macroeconomic and market impacts may be. We recognize that there are significant uncertainties, but can identify some constructive trends from historical data.
What does Russia want?
Among other interests, Russia does not want NATO to expand east or deploy strike weapons near Russian borders, and they want to take NATO’s military potential and European infrastructure back to its 1997 configuration.
Possible Western response?
Economic and financial sanctions (e.g., sanction state-owned entities, banks, and individuals, or prohibit transactions in sovereign debt, etc.), embargo on imports of US-made or designed technology, and a halt of Nord Stream 2 (the second gas pipeline project connecting Germany directly to Russia) are all on the table.
What are the investment implications?
The direct impact on global growth from weakness in Russia or Ukraine would likely be limited. For context, Russia accounts for around 3% of global GDP, while Ukraine accounts for 0.4% of global growth. However, there may be material indirect economic and financial market repercussions. European markets would likely experience the greatest impact from rising tensions through (1) trade with the region, (2) tighter financial conditions, and (3) interdependent gas supplies.
Trade spillovers are likely to be contained as European exports to Russia and Ukraine are fairly small, though a broader conflict that involves additional Eastern European countries could be more harmful.
The impact on financial conditions in the Euro area has been fairly limited during past episodes (e.g. Crimea in 2014) as most markets are only modestly exposed to Russia. We therefore expect a similar outcome this time.
Consequences on the energy market would be more significant as Europe depends heavily on Russia for its gas consumption (around 40% of European gas consumption comes from Russia). Further escalation could deepen the current energy crisis and lead to higher inflation in Europe.