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Why war in Ukraine increases volatility, unpredictability, and nervousness of world markets

Stock markets in the U.S., Europe, and Asia are now in free fall. The war in Ukraine is an important, but far from the only factor in this. It simply amplifies the cocktail of other risks, according to Vladyslav Rashkovan, Alternate Executive Director for Ukraine at the International Monetary Fund.

He highlights 14 components in this cocktail:

  1. Growing inflation in the U.S. and Europe, driven mainly by rising food and fuel prices. In the U.S., inflation is the highest since 1981, it is now the number one problem (risk) for the Biden administration.
  2. Changes in the policy of central banks. As a result of inflation — the growth of rates and the end of the "cheap money" period in the world that lasted for almost 20 years. Central banks "were asleep at the switch" of the need to raise rates two years ago. Now the impact of the rate hike will be much more painful.
  3. Potential debt crisis. Higher rates raise the issue of debt, both in developed countries and in poor and developing countries.
  4. Changes in the capital movement. Rising central bank rates and changing risk-reward ratios will shift capital flows out of developing countries into safer havens — it’s just not yet clear where they are and how safe they are. This could exacerbate the debt problems of many countries.
  5. Famine risk. Rising food prices greatly increase the risk of famine in poor countries (potential impact on 400 million people) and the risk of increased poverty for 100 million+ people.
  6. A new flow of refugees. New humanitarian issues may arise after resolving the issues of 7 million Ukrainians forced to leave their country. For Europe, this will be a new heavy blow, including a political one.
  7. Possibility of a recession in Europe and the USA that will negatively affect the political processes in these regions.
  8. Potential social protests. It is very likely that populists and far-right politicians will try to draw greater attention to humanitarian and economic problems in developed and developing countries. Therefore, we can expect more social protests and tensions in different parts of the world. Russia will almost certainly sponsor them.
  9. Growing Influence of autocracy. Now it looks like autocrats in many countries are staying in power or returning to it. Russia, China, India, Brazil, Turkey, Belarus, Venezuela, North Korea, Indonesia, and Hungary. After the next crisis, the list of countries where democracy and liberal ideas will be "out of step with the time" may only expand.
  10. The Covid pandemic has not gone away. The virus still kills and still has a significant negative impact on the disruption of value chains, which greatly increases the supply risks, and again increases prices — on the part of the supply side. This is pushing international businesses to change the model from "just in time" to "just in case", which will increase the demand for working capital (loans-debt) to increase stocks in warehouses. And the world is also concerned about opinions that the global health system is not ready for the next pandemic.
  11. Chinese economic slowdown. Until recently, China was the only country that still implemented a "zero Covid" policy — the authorities maintained very tight lockdowns to stop the spread of the virus. This had negative impact on the economy. If China now abandons this policy, it will improve the prospects for its economy, but at the same time increase the demand for energy resources, the price of which will rise again.
  12. New Cold War? Russia's attack on Ukraine raised the question of whose side China would take. Markets believe that by being neutral, China is helping Russia more. With the same position supported by Indonesia, India, Saudi Arabia, South Africa, Brazil, and Mexico, markets and political scientists began to talk more about a new global confrontation in the world and a potential new Cold War.
  13. The future of globalization is vague (this stems from the threat of a new Cold War).
  14. Climate risks are increasing.

Rashkovan believes that all this together significantly increases the volatility, unpredictability, and nervousness of the markets. That's why they are collapsing.

"The world should be interested in ending the war in Ukraine – for the well-being of everyone in the world. Ukraine’s victory in the war will increase the likelihood of developing ideas of humanism, democracy, liberalism, tolerance, inclusiveness, and multiculturalism — those values that have permeated the Western world in the last 50 years and that have been built after the terrible World War II," Rashkovan concludes.

What feeds inflation in the U.S.

Analysts at Moody's recently assessed the impact of various factors to the growth of consumer inflation in the U.S. that now stands at 8.5% in annual terms.

They believe that the main contribution was made by the war in Ukraine — 3.5 percentage points of that 8.5% — in the form of direct and indirect impact on prices. The Covid pandemic ranks second — 2.0 points.


In the comments under the post on social media with this information, users from Ukraine were skeptical about such estimates, writing that so far the impact of the war in Ukraine on the U.S. economy amounts to tens of billions of dollars. Throwing money from a helicopter during a covid epidemic amounts to trillions.

The following assumption was also made: "The previous culprit — Covid — is virtual, you cannot challenge it. And in the case of Ukraine, there is someone to stab a finger at. Now the campaign for deflecting the blame will begin. Like, it’s not the Russians who are bad because they attacked a sovereign state, but the Ukrainians are bad because they don’t want to surrender."

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