Russia-Ukraine Conflict: Three Scenarios & Potential Outcomes

By the Loomis Sayles Macro Strategies Team

Rising tensions between Russia, Ukraine and NATO[i] have the world on edge, and many investors appear to be concerned. A major geopolitical event can send shockwaves through financial markets. However, predicting the behavior of global leaders can be difficult for even the most seasoned foreign policy experts. Here, we look at three scenarios and how those potential outcomes could impact financial markets.

A frozen conflict

Russia, Ukraine and NATO could stay in a frozen conflict, with no party making a move that would significantly escalate the situation. We think this scenario would maintain the status quo, with no additional impact to financial markets or changes in government or central bank policy.

A partial invasion

In our view, a partial invasion would involve Russia making a land grab in Ukraine and/or initiating an aggressive cyberattack against the country or its allies. In this scenario, we think the US will likely apply some sanctions to Russia. The potential European response is less clear, since many European countries have economic interests in Russia and desire for constructive relations with the country.

We believe markets would have a strong risk-off reaction and then normalize quickly once it’s clear a full invasion is not underway. We would expect a short-lived rally in US Treasurys and the US dollar. In our view, the euro might take a modest hit on risk sentiment, but the currency’s fundamentals should support it longer term. Energy prices would likely spike, with a further rise if energy is included in sanctions. In this scenario, we believe the Federal Reserve and the European Central Bank would stay on course, cautiously removing financial accommodation.

A full invasion

If Russia launches a full invasion of Ukraine, we expect more severe sanctions from the US and NATO. In the US, we think Congress would likely move away from the Build Back Better budget in favor of a bipartisan agreement that would raise spending on military and cybersecurity, including a possible tax hike.