What fears of a Russian invasion of Ukraine could mean for the UK economy

By Robyn Evans

More than 100,000 Russian troops have amassed at Ukraine’s border and whilst Russia continues to deny it has any intention of invading, warnings from Washington and London continue to intensify. Notwithstanding the human cost of a potential invasion, the crisis is already having a significant impact. US and European stocks fell in volatile trading on Monday amid rising fears of an imminent Russian attack on Ukraine. 

These tensions are already being felt by the UK economy, with the FTSE 100 going down almost two percent yesterday morning and oil prices hitting a seven-year high on the back of fears of invasion. The standoff has exacerbated what was already a poor start to the year for stock markets and the UK already faces strong economic headwinds, with record inflation and efforts to handle Covid recovery leading to a spiralling cost of living crisis.  

Western governments, including the UK, have promised massive sanctions if Russia invades Ukraine. However, Russia’s pain threshold is likely to be more robust than western countries where economic penalties are concerned. So, in the event of western sanctions against Russia, what could the implications be for the UK’s economy? 

Global supply chains are already facing significant disruption due to Covid, leaving all major commodity markets vulnerable to even the most minor of shocks. A Russian attack on Ukraine would likely hit global markets, particularly European stocks, and lead to an increase in the price of gas, electricity, and oil.  

A major concern is the impact that such a conflict would have on the UK’s energy market. As western Europe’s biggest single supplier of gas, providing 40 per cent of its needs, there is a very real threat that Russia could use a gas cut-off as retaliation against Western sanctions. Whilst the UK’s reliance is far smaller, standing at three percent, gas prices could still be significantly affected in the event of conflict.  

The UK has already seen a number of energy companies go bust in recent months and customers now face an increase of up to almost £700 a year from this April, with the current situation only adding to the price pressure. The chief executive of energy regulator Ofgem warned MPs last week that if Russia does limit its supply of gas to Europe, wholesale energy prices could climb even higher, which would ultimately feed through to customers. 

Further to this, the jump in oil price has pushed UK petrol prices to a record high of 148p per litre. The RAC has warned that UK drivers could be in for “an even worse ride as pump prices look certain to go up even more” – the current geopolitical crisis seen as a key driver of this.  

The situation remains fragile, with Western leaders currently engaged in diplomatic efforts aimed at de-escalating a potential crisis. It is impossible to predict what will happen next. We could see the brinkmanship and bluffing continue for months. This uncertainty and the damage it poses to the stock market is concerning, particularly given the bleak economic period that the UK is currently facing.