The main link between the Ukraine crisis and the rest of the world is its impact on commodities prices and the risk of tightening economic sanctions as the conflict drags on and/or expands.

“Given that there seem to be an uncertain prospect of diplomatic de-escalation of the conflict, there are few upside scenarios for credit, except for sectors such as oil & gas, the OPEC group of oil-producing countries and other exporters of raw materials whose prices are rising fast,” says Dierk Brandenburg, head of credit and ESG research at Scope and lead author of Scope’s latest outlook for global credit conditions.

Watch Scope’s webinar on “War, sanctions, energy crisis – assessing the impacts on Europe” 

Higher-for-longer inflation represents a headwind for global growth that central banks will find hard to respond to because it piles more pressure on them to at least normalise their policy to pre-Covid settings.

Policy rates are headed higher, but there may be less political pressure to contain inflation because higher energy prices erode household spending power and weigh on business sentiment. This will allow the ECB to move more slowly and alleviates some prior concerns that more hawkish central banks such as the Federal Reserve or the Bank of England raise rates too fast and too far. Nevertheless, central banks are faced with high and volatile inflation rates for the foreseeable future and therefore the risk of policy mismanagement remains elevated.

“While the global economy has shown growth momentum so far this year, providing a buffer for economic confidence, risks to the outlook remain skewed to the downside,” says Dennis Shen, director at Scope. “We began 2022 with a baseline of uneven but robust economic recovery, with downside risk to expectations of growth slowing or normalising across most economies due in part to risk of Russia escalating conflict in Ukraine,” he says.

Overriding geopolitical concerns could further damage market confidence and therefore access to credit. Already, the Russian leadership has hinted at the use of nuclear weapons and attacked a nuclear power station in Ukraine. Western countries continuing weapons shipments to Ukraine are faced with Ukrainian demands for a no-fly zone over the country. Belarus could join the conflict on the Russian side.

“Risks of escalation abound without any encouraging signs thus far of tangible de-escalation,” says Brandenburg.