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Something that many thought could not happen in our lifetime occurred on the 24th of February, when Russian troops crossed the Ukrainian border. It started a first war of invasion in the European soil since 1945.

The economic impacts of this conflict are dramatic and are being felt now. Inflation has risen dramatically from the already elevated levels. Shortages of goods and factors of production are emerging. Summer crops are under threat due to, e.g., lack of fertilizers and risen petrol costs across the globe.

In the first Q-Review of the year, we sketched the economic end-scenarios for the war. In this blog, we shortly summarize them.

The good scenario (a quick peace and retreat)

In the “good” scenario we assume that Russia and Ukraine reach a lasting ceasefire quickly (within weeks). We also assume that Russia begins to withdraw its forces from all of Ukraine (excluding the Eastern “rogue” states and the Crimean Peninsula).

Tensions in the commodity, energy and metal markets start to ease immediately. This leads to rally in the financial markets. Stock markets rise and credit spreads ease. Russia scales back all of its export restrictions and the West replies with similar de-escalating measures. The world economy takes a hit with inflation peaking during the summer. The world economy then enjoys a period of increased optimism, which carries through the year-end.

However, while inflation eases, inflation pressures remain elevated, which forces central banks to continue to raise rates. This pushes the world economy into a recession early next year.

The ‘consensus’ scenario

In this scenario, we consider the mostly likely, we assume that even in the case of a ceasefire, we would not see a rapid and complete retreat of Russian forces. This is because, as mentioned above, it has been a goal of President Putin to establish a land corridor to the Crimean Peninsula. He’s unlikely to yield on that. What this means that we would probably be facing a prolonged crisis between the two nations.

This means that, first of all, many sanctions would probably remain in place for some time however the conflict results. We would likely see upward pressure on prices across several asset classes, which could become broad and persistent. This would probably lead to a faster hiking cycle by central banks. The economy and the financial markets would eventually be unable to cope with a combination of rising rates and receding levels of artificial central bank liquidity as a result of tapering and balance sheet run-off by central banks.

We would thus see economies falling into recession later in the year. Asset and credit markets would turn very volatile. Banking problems would emerge due to rising rates and likely Russian defaults. We would head into an equity and credit market crash in the U.S. and to a banking and sovereign debt crises in the Eurozone.

The bad scenario (escalation)

In this scenario, the war drags on and eventually mutates into a very destructive guerrilla war which may include other nations as well.

If the war drags on, it would have serious effects on global food and energy prices, supply chains and naturally on the financial system. Wheat and other food exports from Ukraine would cease entirely, which would send global food prices skyrocketing. Disruptions in the production and exports of, e.g., semi-finished iron, potash, nickel and neon-gas would wreak havoc in the global manufacturing and agricultural sectors.

Other commodity prices would also rise, and supply chain issues would return—with a vengeance (there are already indications of this). Inflation pressures would start to build, dramatically, and inflation would reach double digits in 2-3 months and stay there. This would force central banks to implement emergency rate rises and to halt all bond purchase programs. Uncertainty and volatility in the financial markets could increase significantly.

A banking crisis would engulf Europe and a sovereign debt crisis would re-emerge in a massive way. Italy would fall into a political crisis, almost certainly default and leave the euro. Greece, Portugal and Spain would follow—and then the eurozone finally fragments. And as the euro unravels, the world faces a currency crisis of epic proportions.

The banking crisis would spread to the U.S. Fire sales in the junk bond markets would commence and spread to credit markets more broadly. There would be a corporate debt crisis, and the U.S. would, most likely, enter a deep economic recession or a depression.


Current situation “on the ground” in Ukraine hints that we are likely heading into a combination of ‘consensus’ and ‘bad’ scenarios. This is naturally very unfortunate, but that’s the direction things are heading.

This would mean that inflation will not come down any time soon, and that the ‘hawkish’ language of the Fed will, most likely, translate into action. This is very understandable as now there’s a clear risk that the inflation expectations will get anchored to a higher level leading to persistently fast inflation.

Thus, we are fast approaching the point we have been warning for a while. When inflation accelerates, it will become practically (not totally, though) impossible for the central banks to enact the market bailout -operations, they have been (aggressively) conducting for the past four years. Higher interest rates will also crush the global ‘zombified’ corporate sector and push the eurozone to yet another debt crisis.

The ‘perfect storm’, we have been warning since 2017, is approaching, fast.

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