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Macro Insights: This is not 1998 contagion

CONTAGION: The channels by which the surging conflict with Russia impacts global markets are limited. This is highlighted by comparison with the 1998 Russia financial crisis, the last time Russia had a big impact on global markets. Contagion is focused now on 1) global risk aversion which likely eases over time and 2) higher commodities that slows not derails the inflation decline outlook. We think global fundamentals are secure.

NOW: Russia’s economy is small and its equity market tiny (see table). Global banks have little loan exposure and few own Russia’ relatively small amount of debt. The main contagion channels are 1) heightened risk aversion, stoking volatility and pressuring valuations. These were already under pressure from a hawkish Fed. S&P 500 P/E is down 20% to its 5-year average. 2) Commodities where Russia is a bigger oil producer today, and prices and global inflation much higher. This explains the sanctions carve outs so far.

NOT 1998: Russia in 1998 saw the world’s then largest sovereign debt default and a big currency devaluation off a fixed peg. Oil prices and its FX reserves were very low. The Asian financial crisis was already raging. The Russian economy was more relevant, and global banks were significantly exposed. This saw Bankers Trust pushed into the arms of Deutsche Bank, and a $3.6 billion bail-out of Long-Term Capital Management (LTCM).

All data, figures & charts are valid as of 28/02/2022

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