War in Ukraine Has Investors Thinking About a Second Cold War

Since the fall of the Soviet Union, investors have enjoyed decades of global economic stability in which military conflicts and foreign diplomacy played a diminished role in the movements of markets.

But Russia’s invasion of Ukraine is the most overt sign of a recent change in that dynamic as increased jostling among powerful nations will have sweeping consequences for investors.

The largest military conflict in Europe since World War II — combined with simmering tensions between the United States and China — has investors watching shifts in international power dynamics more closely than they have in a long time.

“There has been more global geopolitical tension now for the last several years — frictions between China and the rest of the world, China and the U.S. in particular, are not going away,” said Daniel J. Ivascyn, the chief investment officer at PIMCO, a fund manager that oversees $2.2 trillion in assets. “This Russia situation further complicates some of these broad global relationships, and it absolutely is an increased topic of conversation with our investors.”

Financial markets have long been sensitive to geopolitical events — elections, supply disruptions and trade tensions — that can move prices. And in just a few days, the invasion of Ukraine has prompted a series of economic maneuvers that can quickly transform the way countries raise money, where they buy raw materials and with whom they do business.

The United States and its European allies said they would freeze any Russian Central Bank assets held by U.S. financial institutions, making it harder for the central bank to support the ruble. Fresh sanctions have essentially barred some Russian banks from international transactions. The British oil giant BP said it would “exit” its almost 20 percent stake in Rosneft, the Russian state-controlled oil company, which was valued at $14 billion last year. And Norway’s sovereign wealth fund, the world’s largest, said it would divest itself of its Russian investments.

These moves — along with Russia’s status as the world’s third-largest oil producer, behind the United States and Saudi Arabia — have shaken up markets around the world. Commodities traders are figuring out how to reroute the global flow of oil, natural gas, metals and grains. And stock traders who already faced uncertainty as governments and central banks grappled with the fallout from the pandemic now must deal with an armed conflict that could hamper any business that relies on those materials.

The S&P 500 fell for a second consecutive month in February, including rapid swings in recent days as fighting raged and financial sanctions had an immediate impact on Russia’s economy. The ruble plunged to a record low against the dollar and oil futures have pushed up to more than $100 a barrel.

Jason Schenker, president of Prestige Economics, a forecaster in Austin, Texas, described the revival of tensions between Western nations and Russia as a second Cold War.

“There’s this competition for global influence and global power, but now the stakes have been raised,” Mr. Schenker said. “We might be in for a protracted battle of sanctions and soft-power diplomacy. And we could see cascading risks of further military action.”

That risk was clear on Tuesday, when former Prime Minister Dmitri Medvedev of Russia warned that economic wars “quite often turned into real ones,” prompting the French finance minister, Bruno Le Maire, to backpedal from an earlier statement that Europe was ready for “total economic and financial war against Russia.” Mr. Le Maire said his use of the word “war” had been inappropriate.

Although the incursion into Ukraine is a tangible and overt example of the way geopolitical events are increasingly affecting markets, the shift was already well underway.

Tensions have been escalating between the United States and China, its largest trading partner, for years, most notably with the trade war during President Donald J. Trump’s administration, which included tariffs on a broad swath of Chinese products in 2018. But the jockeying has continued since then: Beijing has moved to rein in companies that list their shares in the United States while also giving Wall Street banks a freer hand to operate within its borders, meaning that business that investors conduct there is on Chinese terms.

Russia’s attack on Ukraine and the moves to isolate it could push Russia even closer to China, which has been more circumspect thank other countries about the offensive. It has also prompted increased unease about China’s relationship with Taiwan, the self-governed island that is claimed by Beijing. Although there is no sign that an invasion of the island is imminent, China regularly sends warplanes toward Taiwan, and analysts have said Beijing is making it clear that it would not rule out military action to absorb the island.

Taiwan plays a crucial role in the global supply chain for semiconductor chips that power things as diverse as iPhones and cars, and it is an important trading partner to the United States, which imports billions of dollars in electrical machinery from the island.

Any military move on Taiwan would cause a seismic shift for the global economy, and investors and businesses are closely watching the global economic effects of the sanctions on Russia as a test case, said Karl Schamotta, chief market strategist at Corpay, a global payments company.

The sanctions against Russia resemble old-school capital controls, signaling a renewed willingness by governments to use economic tools to achieve foreign policy aims, said Mr. Schamotta, who is based in Toronto. That may come as a shock to companies and traders who have become accustomed to moving hundreds of millions of dollars across borders quickly and easily.

“There’s going to be sand put into the gears of the global economic machine, on purpose,” he said. “Governments are going to try to slow how things move across borders and how much money can move from one place to the next, and that’s a completely different world if you’re a large multinational corporation — it makes business much more difficult.”

Fighting, by itself, has not impeded the growth of financial markets. After the Sept. 11 attacks, for example, the stock market stayed closed for four days and reopened to a sharp sell-off. But the effect was temporary, and equity markets marched steadily higher even as the United States waged wars in Iraq and Afghanistan in the decades that followed. The most severe interruption was a financial, not military, crisis in 2008.

After analyzing the performance of the S&P 500 since 1945, UBS Global Wealth Management found that markets usually fell during the first week of key military conflicts. But in 14 of 18 cases, they rose within three months.

“Valuations have dropped, so some of the risks have already been priced in,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note. “We continue to expect above-trend global growth as countries lift Covid-19-related restrictions.”

Kristina Hooper, the chief global market strategist at Invesco, which manages $1.6 trillion for clients including pension funds, insurance companies and individual investors, said the fighting in Ukraine was more concerning because of its human toll. She expected small gains for the U.S. stock market this year, but for those gains to come with increased volatility; geopolitical considerations are only adding to the cloudy conditions already facing investors as the Federal Reserve plans interest rate increases to tamp down inflation.

“There’s an awful lot of uncertainty out there,” she said.

In the short term, Mr. Schamotta said, investors will probably continue to buy safe-haven assets like the U.S. dollar or Japanese yen and shun risky assets like stocks as Russian forces continue to press into Ukraine. But even if there is a quick and peaceful resolution, the conflict will have lasting effects, he said.

“In the long run, investors are not going to forget about this episode,” he said. “It’s very, very clear that economic warfare is underway, and as such, I think investors are going to tread more carefully for years to come.”