Lower bond yields, high crude oil prices: How Russia turmoil can fuel volatility

The fighters of the Wagner private army run by former Putin ally Yevgeny Prigozhin were already most of the way to the capital, having captured the city of Rostov and set off on an 1,100 km (680 mile) race to Moscow. Facing the first serious challenge to his grip on power of his 23-year rule, President Vladimir Putin vowed to crush an armed mutiny he compared to Russia’s Civil War a century ago.

Catch all live updates of the Russia turmoil here

Yevgeny Prigozhin, the boss of the private army called Wagner, released a video stepping up his feud with Russia’s military top brass and for the first time rejects President Vladimir Putin’s core justifications for invading Ukraine.

The mayor of Moscow, Sergei Sobyanin, called on people to refrain as far as possible from making trips around the city, given a counter-terrorism operation had been declared, and said the situation was “difficult.”

Meanwhile, global markets are likely to react to Russia’s internal treason as analysts expect riskier assets to decline and an uptick in commodity basket.

“This is a truly exogenous event that leads to initial shock and a flight to safety. It should awaken VIX from its stupor. First move is likely to be a bump in government bond prices (lower yields) and USD. Riskier assets tend to decline. The question is how much and how lasting the reaction will be, much of which depends upon unknowable developments,” Steve Sosnick, Chief Strategist At Interactive Brokers told news agency Reuters.

“Even with Russian embargoes, they still sell plenty of raw materials to sympathetic nations like China and matter to the global supply. It is reasonable to expect oil and other key commodity prices to rise. If oil prices rise sharply, that will indeed weigh upon equities and reignite stagflation fears. Gold is tough to read. In theory it should benefit from a flight to safety, but in practice a strong dollar can impede it,” added Sosnick.

US and European markets are likely to face direct impacts from the volatility and broader markets will take cues from commodities, according to analysts.

“With Russia largely disconnected from the global economy, few U.S. or European companies will have direct impacts from instability in a country that’s already a pariah. So the broader markets will take their cues from bonds and commodities. Defense-related stocks should catch a bid – the world is not a safer place today – and commodity-linked stocks should also be outperformers for the reasons stated above,” Michael Purves, Ceo At Tallbacken Capital Advisors told Reuters.

Some investors also speculate that if Russian President Putin is removed due to the ongoing civil war -like situation, it would mean bearish Indian stocks as the dividend Russia is receiving from selling cheap oil to India will likely disappear.

“If Putin removed, pure speculation and a hypothetical on my part, troops withdrawn from Ukraine and peace deal agreed, then that would be bullish for Russian-exposed businesses, Eastern Europe stocks, probably Chinese stocks by implication. Bearish energy, resources and defense stocks. 

“Probably bearish Indian stocks too as the dividend they’ve received from cheap Russian oil likely disappears. “On the other hand, civil war, especially if prolonged, in a major nuclear armed nation should make anyone uncomfortable…(though) we don’t really know what’s going on at this point. Civil war may be too long a bow to draw,” said Jamie Halse, who manages an a$500 billion Japan-focused fund at platinum asset management in Sydney.

Earlier in the day, Russian President Putin said that Russia’s very existence was under threat in a televised address from the Kremlin. “We are fighting for the lives and security of our people, for our sovereignty and independence, for the right to remain Russia, a state with a thousand-year history,” he said.

“All those who deliberately stepped on the path of betrayal, who prepared an armed insurrection, who took the path of blackmail and terrorist methods, will suffer inevitable punishment, will answer both to the law and to our people.”

Putin later signed a law tightening rules for breaking martial law in places where it has been imposed, according to RIA news agency.

Updated: 24 Jun 2023, 10:57 PM IST