Stocks have not been affected by Russia’s threats against Ukraine because they are unpredictable. But if Russia were to move its troops across the border, it could cause a major risk-off event — sending equities lower and commodity prices even higher.

U.S. Plans on stinging sanctionsIf Russia moved into Ukraine. Russia has said it doesn’t intend to invade. However, Russia could bring pain to the rest the world by its stronghold on key commodities.

The markets don’t yet price such an event, although oil prices will rise and European gas prices may soar if Russia invades Ukraine. Russian assets and oil prices, as well as other commodities, have seen a premium already.

If there was an invasion, the dollar could strengthen, U.S. bond yields would likely move lower and commodities — wheat and palladium — would rally.

There is another round in the U.S.-Russian negotiations. Marc Chandler of Bannockburn Global Forex said, “As long as negotiations are ongoing, it’s difficult to imagine Russia going to war.” With a 4.1% increase in value over the previous five days, the Russian ruble (off 2.2% for this year) outperformed all other emerging market currencies.

Chandler explained that the market doesn’t have any need to be concerned about what they’re saying because it’s still being talked at. “Markets don’t worry about it nearly as much as politicians,” Chandler said.

It’s high stakes

Helima Croft, RBC global commodities strategist, stated that there are more chances for an invasion than most people think. She stated that even if the invasion is at half of its potential, it still represents a high level of risk given all the stakes.

Many analysts think Russia will not invade Ukraine but instead create problems such as economic disruptions or cyber warfare for the country. The U.S., U.K., and others have pledged swift retaliation against Russia if it invades. These sanctions will be in the form economic sanctions for President Vladimir Putin and Russian oligarchs, as well as financial and industry regulations.

Croft stated, “What I know is that if these tanks cross the border oil will rise above $100 per barrel.” We’ll definitely feel it in the European gas market. It’ll be there on the wheat markets. You’ll sense it on many markets. Russia is not an isolated country.

Croft claimed that Russia is the biggest exporter of wheat worldwide, along with Ukraine. They account for around 29% global wheat market.

They are more than just a station. They are a superstore for commodities. They’re an enormous metal producer. Croft stated that food and energy prices are the most painful. He also said it could lead to more inflation in an already high-inflation environment.

She said, “If they don’t stop short of an invasion, we aren’t talking about major disruptions of commodities.”

Bart Melek, global commodities strategist at TD Securities said that he believes the chances of an invasion are less than half a percent. But if there is one, he said that commodity prices would spike — and so would inflation.

He said that it all depends on the strength of sanctions. He asked, “Is it direct or are they targeting the men who fund the stuff?” Are they insurers or direct? There are markets like aluminum that, according to us, will be facing a shortage of 2.3 million tonnes. They could touch the tops even if you take out Russian supply and palladium.

Melek stated that Russia is also an important producer of nickel, and that fertilizers are another byproduct from its natural gas production. Melek said that Russia exports potash and that if Russia withholds any, it could lead to higher food prices as crop yields may drop.

John Kilduff from Again Capital stated that Russian media claimed the country would prohibit exports of fertilizer ammonium nitrogen nitrate over the next two-months. It will soon become planting season in northern hemisphere, he said. “Now, they’re using foods as a weapon,” said he.

Paul Christopher, Wells Fargo Investment Institute global market strategist, doesn’t see an invasion as a possibility. Christopher stated that Russia’s biggest trade partner would face friction if there were one. Putin opposed the idea of Ukraine joining the North Atlantic Treaty Organization.

Putin may invade because he wants to end NATO’s standoff and the markets might start thinking of a new Cold War. There will still be huge holes in Russia’s economy. Christopher explained that Russia must export its goods to the West.

Use energy as a weapon

Russia is the biggest energy producer country on earth, exporting approximately 5 million barrels of crude oil per day. Russia has also provided Europe with approximately a third its natural gas. The U.S. long opposed Europe’s dependence on Russia’s resources to ensure their security.

Governments are under increasing pressure due to rising food prices. Croft from RBC stated that Russia is an important player in the market for quality life commodities. “They have already decreased [gas]Ukraine: The flow of money.”

Russian gas is transported to Europe via the Nordstream I pipeline, but there are also pipelines that pass through Ukraine. Croft stated that if Ukraine was involved in a war conventional, the energy flow would stop and infrastructure damage would be possible.

“But it’s a broader question. Is Russia ready to talk about reducing oil exports? Croft stated that there is a concern about the “ultimate game plan” for Russia in case their banks get sanctioned or they are barred from financial transactions.

As natural gas customers shift to crude, oil has moved higher due to tensions.

The European natural gas market has seen a dramatic rise in prices this winter. On Wednesday natural gas prices in Europe were at 25 cents per million BTU, which is more than five-times the U.S. average. Due to a shortage in supplies and fears that Russia will restrict imports, the gas price has increased. The price of Russian gas was nearly doubled earlier in the winter.

Kilduff claimed that the European gas market has seen a shift in tone this week. However, tensions remain high. Kilduff stated that “the siege mentality has rapidly eased”, noting Russia had released more gas earlier in the day.

Russia is sending Europe less gas since the fall. The winter began with too much gas in storage. Cold weather, and other problems caused prices to spike.

IHS Markit says that the U.S. is making an effort to provide more natural gas liquified to the region.

Michael Stoppard of IHS Markit is chief strategist for global natural gas. He said that U.S. liquified gas shipments to Europe reached a new record in January with approximately 250 million cubic meters per day. This was up 80% over last year. Stoppard stated that cargoes had been diverted from Asia, Brazil and other countries.

He said, however, that Russia is importing less into Europe than it used to. Russian gas imports fell by 45% between January and February.

Stoppard stated that the amount of Russian gas coming through Russian pipelines was similar to that that which came from U.S. ships in January. Stoppard said that Qatar was also a major supplier of LNG, with 55MMcm/day going to Europe in LNG. The middle east country is capable to double this amount by 35MMcm/day.

Stoppard explained that Europe can handle disruptions of natural gas via the Ukraine corridor, but not enough LNG to replace Russian gas. Europe could use its stored gas to make it through if there was a shortage of supply this winter. However, that is not a long-term solution.

“We don’t think U.S. sanction would stop Russian gas.” He said that Russia could stop selling gas in retaliation to sanctions placed on other countries is a bigger threat, but it was also unlikely.

West Texas Intermediate crude futuresAfter OPEC+ (which includes Russia) agreed to keep increasing production, crude oil prices were just below $88 per barrel on Wednesday. Despite U.S. demands, OPEC+ didn’t increase it beyond the 400,000 barrels per hour that were anticipated.

Russian assets

Russian assets are feeling the strain of fears over Ukraine, and new tougher sanctions on Moscow.

Barclays points to the fact that Russia’s credit spreads have increased materially in the last few weeks as a result of the
Tensions have risen.

Russia credit has a tendency to outperform other markets when geopolitical tensions increase and around sanctions announcements. From a sovereign credit perspective however, the periods of
“Underperformance are often followed by a fairly quick rebound,” Barclays analysts noted in a note.

Russian ETFs were also less strong. There are iShares MSCI Russia ETFIt is currently down 7.7% over the past year. Also, it’s down 21.9% for the past three month.

However, many people aren’t sure that this standoff will end in war. It has also barely affected U.S. Equities.

Christopher, Wells Fargo Investment Institute’s Christopher said that Ukraine is an issue. However, we do not believe it to be driving the market primarily or secondarily. “Ukraine didn’t become an issue when people became concerned about the Fed abruptly changing its policy. That’s what I believe is the problem. It’s the confusion surrounding Fed. Ukraine’s problems will be solved if everyone stops worrying about it.”