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Russian assets lead global volatility as Putin sends forces into eastern Ukraine

A child is seen inside a bus arranged to evacuate local residents, in the rebel-controlled city of Donetsk, Ukraine February 18, 2022.
Alexander Ermochenko | Reuters

LONDON — Russian assets led a global pullback on Tuesday after Russian President Vladimir Putin ordered troops into two breakaway regions of eastern Ukraine.

The Russian ruble slid below 80 to the dollar following Putin’s announcement, its lowest for two years. The Ukranian hryvnia dropped further however, shedding 0.8% against the ruble. Russia’s MOEX stock index plunged 6% by late morning in Moscow to its lowest point since mid-2020. The RTS Index was last seen down around 6.6%.

Neil Shearing, group chief economist at Capital Economics, said in a note Tuesday that the impact on Russia’s economy will depend in large part on the response of Western governments.

“Its balance sheet is stronger than at the time of the 2014 Crimea crisis – external debt is lower, and financial linkages with other major advanced economies are smaller,” Shearing said.

“The imposition of sanctions will still have an impact on the economy, but all other things being equal this is likely to be smaller than in 2014-15 (when GDP fell by ~2.5% and the country experienced a financial crisis).”

European markets opened sharply lower on Tuesday morning but retraced some losses about an hour into trading. Shares in Asia-Pacific also pulled back and U.S. stock futures pointed to steep losses on Wall Street later in the day.

Meanwhile oil prices surged, with U.S. crude jumping 5.4% to $96 per barrel and international benchmark Brent crude climbing 3.4% to almost $99 per barrel.

Sanctions expected

It comes after Putin announced Monday evening that he would recognize the independence of Donetsk and Luhansk and signed a decree calling for forces to enter the two enclaves of the Donbas partially held by Moscow-backed separatists.

Russian President Vladimir Putin delivers a video address to the nation, following the initiative of the country’s lower house of parliament and security council to recognise two Russian-backed breakaway regions in eastern Ukraine as independent entities, in Moscow, Russia, in this picture released February 21, 2022.
Alexey Nikolsky | Sputnik | via Reuters

The United Nations Security Council held an emergency meeting in New York on Monday night as the long-simmering conflict entered a new phase. U.S. President Joe Biden signed an executive order prohibiting new investment, trade and financing from the U.S. to the two breakaway regions.

Ukraine President Volodymyr Zelenskyy said in a televised address early on Tuesday that Kyiv is committed to diplomacy but is “not afraid of anyone.”

Broader economic sanctions are expected to be announced by the White House on Tuesday and European foreign affairs ministers are gathering in Brussels to discuss the EU’s next steps.

U.K. Health Minister Sajid Javid told Sky News on Tuesday morning that “the invasion of Ukraine has begun.”

Berenberg Chief Economist Holger Schmieding said the big uncertainty remains as to whether Putin will move Russian troops further into the Donbas — beyond areas held by pro-Russia groups — encroaching on Kyiv-held free Ukraine.

“If he stops there, sanctions would weaken the Russian economy over time with very limited impact on the advanced world. Markets would return to normal after a while,” Schmieding said.

Will Putin’s troops stop in eastern Ukraine? The world waits for Russia’s next move

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