Markets reverberated on Monday with the consequences of Russia’s invasion of Ukraine as governments ramped up sanctions and investors switched funds from businesses likely to suffer in the event of a long war.
Stock markets suffered a rollercoaster day after shares slumped in early trading before recovering most of the lost ground later in the day.
The FTSE 100 index of Britain’s top 100 companies dropped 2% before finishing the day back where it started at 7,458 points. Across the continent, most bourses closed lower, with the Paris CAC down 1.4%, though the Amsterdam AEX closed up 0.26%.
Some of the world’s largest companies said they were considering their responses to the war while the UK, US and EU governments said extra sanctions on trade with Russia and restrictions on financial transactions would take effect within days.
Norway’s government ordered its $1.3tn oil fund, the world’s largest sovereign wealth fund, to ditch its $3bn in Russian investments. The Danish container shipping firm AP Møller-Mærsk said it was considering a ban on its ships docking at Russian ports.
HSBC, Europe’s largest bank, was among several high profile finance companies, including France’s Société Générale and South Korean main lenders to say they would be winding down relationships with a host of Russian banks, as they put western sanctions against Russia into practice.
The United States, Britain, Europe and Canada announced new sanctions on Russia on Saturday – including blocking several banks from access to the Swift international payment system following Russia’s invasion of Ukraine.
Speculation that the sanctions would have a negative impact on trade with Russia meant Britain’s banks were among the biggest fallers on the London exchange.
HSBC was joined by NatWest, Barclays and Lloyds in losing more than 3% of their value and were joined by the insurers Prudential and Legal & General as investors shifted their funds to defence manufacturers and firms likely to benefit from the inflationary effects of the invasion.
The value of BAE Systems, which makes weapons for the UK and US military, soared 10% to 719p, while the FTSE 250 tech defence company Chemring was 13% higher at 309p.
France’s Renault, which controls the Russian carmaker Avtovaz, fell 6.9%. The German defence company Rheinmetall’s shares rose 43% after the German chancellor, Olaf Scholz, said on Sunday the country would sharply increase its spending on defence by €100bn (£84bn) to more than 2% of its economic output.
Companies with strong connections to Russia were also among the biggest fallers in London. Evraz, the Russian steel and coal business part-owned by the Chelsea FC owner Roman Abramovich, slumped by 25%. Abramovich owns 29% of the company and received a £1.2bn dividend last year after the company reported a £3.1bn profit in 2021.
Polymetal, the second largest gold producer in Russia, plunged 55% as investors fled for safer havens.
BP, which is the biggest foreign investor in Russia, said on Sunday it was abandoning its stake in the state oil company Rosneft at a cost of up to $25bn (£19bn). The British oil company lost 7% of its value on Monday morning, though analysts said it might have been more if its chief executive, Bernard Looney, had rejected overtures from the business minister, Kwasi Kwarteng, to cut ties with Rosneft.
The European Commission president, Ursula von der Leyen, said a select number of Russian lenders and the central bank would be excluded from using the system. She added: “The European Union and its partners are working to cripple Putin’s ability to finance his war machine.”
Russia’s ruble plunged nearly 30% to a record low at one point, forcing the central bank to raise interest rates to 20%, from 9.5%. Its fall later eased back to 20% down.
Crude oil jumped almost 5%, while gas prices on global markets jumped almost 20% to 268p a therm, more than five times higher than the price in January 2021, though still much lower than the 450p a therm in December last year.
Paul Dales, chief UK economist at the consultancy Capital Economics, said the UK’s position was more secure than most European countries from the spillover effects of war. Trade with Russia was minimal and most British banks had few contacts with counterparts in Moscow.
Inflation from higher energy costs was likely to climb, but without killing off economic growth, he said, leading the Bank of England to maintain its policy of increasing interest rates.
“But it is worth considering the other plausible scenarios, which could prompt the Bank to delay interest rate hikes or even raise interest rates faster,” Dales said.
“It is obviously very uncertain how the Russia/Ukraine conflict will develop, but it feels as though it could be more protracted and have more widespread consequences than appeared likely last week.”
Goldman Sachs forecast European headline inflation to rise sharply to 5% in 2022 and said the crisis could shave off as much as 0.4% of euro area GDP this year.