War in Ukraine would trigger a financial crisis on par with 2008

‘Either Russia cuts off energy supplies itself or sanctions will be imposed to stop imports’

It could just be a bluff. The troops might simply be on exercises. And a few phone calls between presidents may well defuse the tension. And yet, there can be no question that a serious conflict is brewing on Europe’s Eastern frontier along the border between Russia and Ukraine. The US has already warned its allies an invasion is possible, and that can hardly be ruled out.

If the worst happens, that will of course mainly be a political, military and strategic crisis as the West decides on the scale of its response. And yet, it will also trigger a financial crisis, and one for which the markets are dangerously unprepared. If the conflict turns into a shooting war, then energy prices will soar, as oil and gas supplies are cut off; the euro will suffer a catastrophic loss of confidence as Europe’s leadership is exposed as hopelessly complacent; and there will be a surge in inflation as supply chains are devastated and central banks print even more money to pay for armies to be re-equipped.

An invasion would be a huge shock to the global economy, rippling through every country and crashing markets everywhere.

It remains to be seen whether the conflict between Russia and its neighbours intensifies. There can, however, be no mistaking the way tension has increased. Gas prices have soared amid speculation the Russian president Vladimir Putin is holding back supplies to put pressure on the West. Migrants have been weaponised along the border between Poland and Belarus. And now Russian troops are massing on the Ukrainian border.

American officials have already started to brief its allies that an invasion is possible, with Russia intent on repeating its 2014 annexation of Crimea on a far wider scale. Ukraine is not a member of Nato, and there would be no formal treaty requirement to come to its aid. And yet, aggression on that scale could hardly be ignored. Just as with a possible Chinese invasion of Taiwan (which could easily happen while everyone is distracted by Eastern Europe) the markets are dangerously complacent.

As well as sparking a military crisis, that would be a financial crisis as well, and one that would be every bit as serious as the crash of 2008 and 2009. What would that look like? Here are three places to start.

First, and most obviously, it would create an energy crisis. Russia is a major exporter of both oil and gas. Most of Europe has allowed itself to become dangerously dependent on Russia’s energy exports, and even more so with the new Nord Stream 2 gas pipeline that bypasses Ukraine. If the war does turn hot, then it will be impossible for that to continue. Either Russia cuts off supplies itself or else sanctions will have to be imposed to stop imports. And yet, 60pc of Germany’s energy comes from Russia. In a tight global market, it will be impossible to source that from Qatar and elsewhere. There simply isn’t enough oil and gas available.

The result? Prices will soar four or five fold in a desperate scramble for supplies, and even then there will have to be widespread factory and office closures across Europe to conserve energy through the winter.

Next, expect a huge fall in the euro. An invasion of Ukraine would be a global crisis but most of all it would be a European one. Poland, Slovakia and Romania, all inside the EU, would be right on the frontline of the conflict.

The Continent’s political establishment – and a German elite that has been cosying up to Russia for years – would be exposed as recklessly complacent and hopelessly unprepared. It’s hard to imagine that many of its leaders would be able to survive the humiliation. The currency would quite rightly take most of the punishment as the markets realised that leaders in Berlin, Paris and Brussels were simply not fit to stand up to Russian aggression, even if it is unlikely the hapless Biden administration would prove itself much better.

Finally, expect a surge in inflation. Supply chains crossing Russia will be disrupted at a time when they are already thinly stretched. Air space will be closed. Raw materials will be in short supply as sanctions bite and demand surges.

On top of all that, Western nations will have to re-arm, which will cost money. Germany won’t be able to carry on spending a miserable 1.5pc of GDP on defence. The EU will need more than a pitiful 5,000 soldiers in its planned rapid reaction force. The only way to pay for all that will be for central banks to print even more money than they already have done in the last couple of years. Indeed, a Russian invasion of Ukraine could easily be the event that finally turns a worrying level of price rises into a 1970s-style inflationary spiral.

There would be other consequences of course. The Moscow stock market, which has been hitting all-time highs on the strength of surging energy prices, would get hammered. The rouble would be toast, and so would the currencies of surrounding countries. Debts would be called in, and banks with loans to Russia would be in trouble.

True, it is still relatively unlikely to happen. Putin may simply be staging a show of strength, testing European resolve and preparing to extract yet more concessions. And yet, add up the movement of troops, and the chaos on the border between Belarus and Poland, and it is clear some form of conflict is brewing. And as that starts to escalate one point is absolutely clear.

The markets have not yet even begun to take it into account and will be blindsided by the wild swings in prices if it gets worse.