Russia-Ukraine: What’s next?

By Charles-Henry Monchau, CIO at Syz Bank

The war between Russia and Ukraine will soon enter a third week. In our latest Focus, we consider four scenarios to examine the potential implications for the global economy and financial markets. These scenarios have different geopolitical narratives.

  • In the first scenario (medium to high probability), a Russian military victory leads to an unstable Ukraine and to Cold War II.
  • The second scenario (medium to high probability) involves a negotiated deal between Russia and Ukraine.
  • The third scenario (medium to low probability) is the scariest one: a Russia- NATO armed conflict including the use of tactical nuclear weapons.
  • The fourth scenario (a coup against Putin) has the lowest probability to take place but still has merit.


Below we detail the consequences of each scenario on growth, inflation, monetary policy as well as on the performance of the main asset classes.

Scenario 01 — A Russian military victory leading to an unstable Ukraine and Cold War II

This scenario is a devastating one from a humanitarian perspective as it would probably imply heavy human casualties – including civilians – on both sides. In such a scenario, Putin is likely to stay a pariah on the international stage while the Russian economy and financial markets would be unlikely to reestablish their links with the West.

Macro impact

Under this scenario, we expect a slowdown of US GDP growth and a mild recession in Europe, i.e no stagflation but not too far from it. As Russian energy supplies are likely to stay limited, oil and natural gas prices are likely to stay high and should keep inflation higher for longer. Supply chain disruptions are expected to be significant and probably the longest since WWII in several industries.

On the monetary policy front, the Fed is likely to hike rates but probably less than what the current Fed dots imply. The ECB is unlikely to hike rates despite energy prices keeping inflation much higher than the ECB target.

Market impact

This scenario is not the most bullish one for risk assets. However, as it does not involve a material deterioration from where we currently stand, we expect further equity and credit market downside to be limited. Earnings growth should be revised downward by around 10% while equity valuation should not deteriorate further. Global equities could decline by another 5% to 10% while Equity volatility is expected to stay high. In this context, investors are likely to favor defensive quality growth stocks with strong business models, robust balance sheet, high free cash flow generation and pricing power. US equities are likely to outperform the rest of the word.

With global growth slowing down, government bonds are expected to perform decently although bond yields are unlikely to decline much from current levels given the high inflation level.

Under this scenario, the commodities bull market is likely to keep running as supply stays constrained while global GDP growth is likely to be strong enough to avoid demand destruction.

The dollar is expected to stay strong as a safe haven.

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