The highly unpredictable nature of Russia’s threat against Ukraine has rippled across financial markets without much impact on stocks. But if Russia were to move its troops across the border, it could cause a major risk-off event — sending equities lower and commodity prices even higher.

The U.S. plans on stinging sanctions if Russia were to move into Ukraine. Russia, which says it has no intention to invade, could inflict pain on the rest of the world through its strong hold on some key commodities.

For now, the markets are not pricing any such calamity, but oil prices would spike and European gas prices could surge even more than they already have if Russian troops enter Ukraine. Oil and some other commodity prices have already built in some premium, and Russian assets have been hit.

If there was an invasion, the dollar could strengthen, U.S. bond yields would likely move lower and commodities — including wheat and palladium — would rally.

“There’s another round of U.S.-Russian talks. As long as talks are going on, it’s hard to imagine Russia would go to war,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. He noted that the Russian ruble, off 2.2% for the year, outperformed other emerging market currencies in the past five days with a 4.1% gain.

“Because they’re still talking, the market knows it doesn’t have to worry about it right now,” Chandler said. “Markets aren’t as concerned about it as maybe as much as the politicians.”

High stakes

However, RBC head of global commodities strategy Helima Croft said the odds of an invasion may be higher than some in the markets expect. “Even if it’s at 50%, that is a really high risk, given the stakes involved,” she said.

Some analysts believe Russia will choose not to invade and instead cause other problems for Ukraine, like cyber warfare or other economic disruptions. But if Russia does invade, the U.S. and the U.K. have promised swift retaliation in the form of economic sanctions on President Vladimir Putin, Russian oligarchs and other individuals, its financial system and industries.

“What I do know is if those tanks cross the border, oil will go above $100 dollars a barrel,” Croft said. “We’ll certainly feel it on the European gas market. We’ll feel it on the wheat market. We’ll feel it across a variety of markets. Russia is not a one trick pony.”

Croft said Russia is the world’s largest wheat exporter, and together with Ukraine, they account for roughly 29% of the global wheat export market.

“They’re not just a gas station. They’re a commodity superstore. They’re a massive metal producer. Where we think it gets painful is food and energy prices,” Croft said, adding that it would cause more inflation in an already inflationary environment.

“If they stop short of an invasion, we’re not talking about a major disruption of commodities,” she said.

TD Securities head of global commodities strategy Bart Melek said he sees the odds of an invasion at less than 50%. But if there is one, he said that commodity prices would spike — and so would inflation.

“Much depends on how robust the sanctions are,” he said. “Are they direct or going after the guys who finance the stuff? Or insurers? The risk is there are certain markets, like aluminum, that we think is going to be in a deficit already by 2.3 million tons. If you exclude Russian supply out of that and palladium as well, we could certainly see them touch the highs.”

Melek said Russia is also a large nickel producer, and fertilizers are a byproduct of its natural gas production. He said Russia also exports potash, and if it withheld any supply, that could trigger higher food prices, as crop yields could drop.

Russian media reported the country would ban export of the fertilizer ammonium nitrate for the next two months, said John Kilduff of Again Capital. He noted it will soon be planting season in the northern hemisphere. “Now they’re using food as a weapon,” he said.

Paul Christopher, Wells Fargo Investment Institute head of global market strategy, does not see a high probability of an invasion. If there is one, however, Christopher said the risk to Russia would be friction with its biggest trading partner. Putin has objected to the plan for Ukraine to join the North Atlantic Treaty Organization.

“If Putin does invade it’s because he really wants a standoff with NATO and markets could find themselves thinking about a new cold war. It’s still going to be a big hole in the Russian economy. They need to sell stuff to the west,” Christopher said.

Energy as a weapon

Russia is one of the world’s largest energy producing countries, exporting about 5 million barrels of oil a day. Russia also has provided Europe with about a third of its natural gas, and the U.S. has long objected to Europe’s reliance on Russia’s energy resources for security reasons.

“A rising food price puts governments under pressure. Russia is a big player in the quality of life commodity market,” RBC’s Croft said. “They already reduced [gas] flows out of Ukraine.”

Russian gas flows into Europe through a Nordstream I pipeline but also pipelines going through Ukraine. Croft said if Ukraine were involved in a conventional war, energy flows would be halted and there would be concerns of infrastructure damage.

“But it’s a broader question. Does Russia start talking about scaling back oil exports? There’s a question about what is the ultimate game plan” in the event their banks are sanctioned and they are locked out of financial transactions, Croft said.

Oil has been moving higher on the tensions but also on tight supply, which has been made even tighter as natural gas customers switch over to crude.

Natural gas prices in Europe this winter have skyrocketed. Natural gas was at $25 per million BTU in Europe on Wednesday, more than five times the U.S. price. It has risen on a shortfall in supply and concerns that tensions will limit imports of Russian gas. However, earlier this winter the price was more than double.

Kilduff said there’s been a change of tone in the European gas market this week, even as the tensions continue to flare. “The siege mentality is rapidly easing,” he said, noting Russia released more gas to Europe earlier today.

Since the fall, Russia has been sending less gas than normal to Europe. The continent began the winter with too little supply in storage, then cold weather and other issues resulted in price spikes.

According to IHS Markit, efforts to bring more liquified natural gas to the region from the U.S. seems to be making a difference.

Michael Stoppard, chief strategist for global gas at IHS Markit, said U.S. liquified natural gas shipments to Europe set a record this January at about 250 million cubic meters a day, up 80% from last year. Stoppard said cargos were diverted from Asia and Brazil.

At the same time, he said that less has been coming from Russia into Europe, and Russian imports of gas are down about 45% in January.

“The amount that came through from Russian pipelines in January was about the same as that from U.S. ships,” said Stoppard. He said Qatar is also a large supplier, sending 55MMcm/day in LNG to Europe, and the middle eastern country has the capacity to increase that by about 35 MMcm/day.

“Europe is able to cope with a disruption of gas through the Ukraine corridor but LNG would be not able to cover for a full loss of Russian gas,” Stoppard said. If Europe were to see supply cut this winter, it could draw on its storage to get through but not longer term.

“We wouldn’t expect U.S. sanctions to stop Russian gas. The bigger risk but also considered unlikely is whether Russia would stop selling gas as retaliation for sanctions in other areas,” he added.

West Texas Intermediate crude futures were trading just under $88 a barrel Wednesday after OPEC+, which includes Russia, agreed to continue to increase production. But OPEC+ but did not raise it any more than the 400,000 barrels a day that were expected, despite requests from the U.S.

Russian assets

Russian assets have felt the pinch of worries over Ukraine and a new stiffer round of sanctions on Moscow.

Barclays points out that Russia credit spreads have widened materially over the past few weeks, as the
tensions have escalated.

“Russia credit tends to underperform broader markets as geopolitical tensions build up and around sanction announcements. However, at least from a sovereign credit perspective, periods of
underperformance have often been followed by a relatively swift rebound,” the Barclays analysts wrote in a note.

Russian ETFs have also been weaker. The iShares MSCI Russia ETF is down 7.7% year to date. It’s also off 21.9% over the past three months.

But many are not convinced the standoff will result in war, and it has barely impacted U.S. equities.

“Ukraine is a risk, but we don’t think it’s what’s driving the markets primarily or even secondarily,” said Wells Fargo Investment Institute’s Christopher. “Ukraine wasn’t an issue until people started to get worried about the Fed and its abrupt policy reversal. I think that’s the real issue. The confusion about the Fed. I think Ukraine is going to go away once people stop worrying about the Fed.”