Stock markets plunge and oil prices soar on Russia’s invasion of Ukraine

Posted on : 2022-02-25 17:24 KST Modified on : 2022-02-25 17:24 KST
The Korean government has said there will not be any setbacks raw materials supply in the short term, but experts say Korea should prepare for the situation to become drawn out
Smoke billows out of a military airport in Chuhuiv near Ukraine’s second-largest city of Kharkiv on Feb. 24, 2022. (AFP/Yonhap News)
Smoke billows out of a military airport in Chuhuiv near Ukraine’s second-largest city of Kharkiv on Feb. 24, 2022. (AFP/Yonhap News)

Stock markets around the world have been taking a big hit after Russia began its assault on Ukraine. For the first time in eight years, oil prices rose above US$100 per barrel.

Concerns are mounting that the crisis in Ukraine could further exacerbate inflation and negatively impact Korea's economy, which is highly dependent on foreign countries. Given this vulnerability, the government is paying close attention to how long the situation in Ukraine will continue.

Financial markets shocked, oil prices soar above US$100 a barrel

On Thursday, the KOSPI plummeted below 2,700 points while the won’s value also dropped as the exchange rate exceeded 1,200 won to the dollar. The KOSPI plunged by 2.6% to 2,648.80 points — the lowest level since Jan. 27, when it dropped to 2,614.49 points. All of the top 10 stocks by market cap, including Samsung Electronics — which saw a 2.05% decrease — took a tumble.

The KOSDAQ experienced an even bigger shock, with the index falling by 3.32%. In the Seoul foreign exchange market, the won to dollar exchange rate soared by 8.8 won to close at 1202.4 won. This marked the first time in 13 trading days, or Feb. 7, that the 1,200-won line was crossed.

Other Asian stock markets were also whipsawing, with the Taiwan Stock Exchange dropping 2.55% and Japan’s Nikkei down 1.81%. Immediately after opening on Thursday, major European stock markets such as the UK (FTSE 100), France (CAC 40) and Germany (DAX 30) were showing sharp declines of 3%-4% compared to the previous trading day.

International oil prices leaped above the US$100 mark. According to reporting by Reuters, Brent crude prices surged 3% right after Russia's announcement that it would be starting military operations in Ukraine, breaking the US$100 per barrel mark during the day for the first time since 2014.

In the US, CNBC reported that the price of Brent crude soared to US$108.93, and natural gas prices rose nearly 5%. On the other hand, gold, considered a safe asset, rose by more than 1%.

Meanwhile, the raw material market is fluctuating due to supply concerns. This is evident in the prices of grains and energy futures being lower than their spots, a phenomenon referred to as backwardation — a market condition where the price of a commodity's futures contract is trading below the expected spot price. This means that buyers are paying a premium on the spot price in order to secure an immediate supply as fears grow due to the escalating conflict.

Some predict that the price of crude oil could soar as high as US$120 a barrel. Marko Kolanovic, co-head of global research at US investment bank JPMorgan Chase, noted that the conflict in Ukraine would have a big impact on the market, saying that it is “critically tied to oil, gas and global energy security.”

Government says energy supply stable, but impact on real economy still unclear

The real economy is also facing deep uncertainty. Inflationary pressure will increase due to the immediate rise in raw material prices, which may lead to a contraction in investment and consumption.

“Not only will prices rise due to cost burdens, but if the situation is prolonged, uncertainties will increase and companies' investment will shrink,” Jung Kyu-chul, who heads the Korea Development Institute’s economic outlook department, told the Hankyoreh.

Jeong Min-hyeon, an associate research fellow at the Korea Institute for International Economic Policy, said that “manufacturing industries that are highly dependent on fossil fuels could be hit hard.”

"If the situation continues for a long time, [government] subsidy support may be needed for [manufacturing companies that produce] products that require significant amounts of fossil fuels or rely on exports,” Jeong added.

For now, the government is focusing on taking care of the supply of raw materials. The Ministry of Economy and Finance convened an emergency response task force to the conflict in Ukraine Thursday and announced that the short-term supply and demand of domestic energy, raw materials, and grains were stable and there were no signs of abnormalities such as export disruptions.

“We are working to expand our inventory of raw materials that are highly dependent on Russia and Ukraine, and we have secured seven months of wheat for animal feed and 6 months for corn, so the short-term impact will be limited,” the ministry said.

By Han Gwang-deok, finance correspondent

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