July 31th, 2026
EIDE Briefings by our diplomatic economist, Oleksandra

Geopolitical Risk, Energy Markets and Central Banks:
The Global Economic Effects of Ukraine’s Intensified Strikes on Russia’s Energy Sector

Oleksandra Moskalenko
Professor of Economics and Political Economy

Doctor of Sciences in Economics

Ukraine’s expanding campaign against Russian energy infrastructure matters for global markets not because it alone determines oil prices, but because its effects operate through refined-product shortages, logistics, sanctions and market expectations. These effects now interact with the larger supply risks created by the US–Iran war and disruption around the Strait of Hormuz, increasing the geopolitical risk premium embedded in energy markets. The result is greater inflation uncertainty, tighter financial conditions and less room for manoeuvre for the Federal Reserve, the European Central Bank and the Bank of Japan. .

1. A World of Overlapping Energy Shocks

Global financial markets increasingly price geopolitical risk as a structural macroeconomic variable rather than a temporary external shock. The Russia–Ukraine war, reinforced by tensions in the Gulf and disruptions to global shipping routes, illustrates how military conflicts influence inflation, monetary policy and asset prices through interconnected transmission mechanisms. Ukraine’s intensified strikes on Russia’s energy infrastructure represent one important component of this broader geopolitical environment.

Global energy markets are therefore increasingly shaped by overlapping geopolitical risks rather than by a single conflict. Ukraine’s strikes coincide with the US–Iran war, attacks on commercial shipping and continued uncertainty surrounding the Strait of Hormuz. Together, these shocks increase the geopolitical risk premium embedded in oil, refined products, freight and insurance costs.

Ukraine’s strikes are economically significant, but they are not the sole driver of global oil prices. Their immediate effects are concentrated in Russian refining capacity, petroleum products and energy logistics. By contrast, disruption around the Strait of Hormuz creates a broader threat to the physical movement of crude oil and liquefied natural gas from several Gulf producers. The analytical distinction is therefore between refining disruption and global supply-route disruption. These shocks arise at different points in the energy value chain, but reinforce one another through expectations, inventories and financial-market pricing.

From a financial-market perspective, the central issue is not whether a particular refinery is damaged, but whether geopolitical uncertainty becomes persistent enough to alter inflation expectations, interest-rate paths and the pricing of financial assets. The duration of these inflationary pressures depends less on individual military operations than on the persistence of geopolitical fragmentation. Energy-price shocks associated with armed conflict are often temporary, but inflationary pressures can remain elevated if geopolitical tensions continue to disrupt supply chains, increase defence expenditure, raise transport and insurance costs, or become embedded in inflation expectations. Under these conditions, central banks may succeed in containing headline inflation, yet geopolitical risk is likely to remain an important source of inflation volatility over the medium term.

The following section explains the principal channels through which strikes on Russia’s energy sector affect international energy markets, financial conditions and macroeconomic outcomes.

2. Why strikes on Russia’s energy sector matter

The immediate economic effect is concentrated in refining and petroleum products rather than in crude oil alone. Damage to refineries can reduce diesel, petrol and aviation-fuel output even when crude production continues. Because Russia remains an important exporter of middle distillates, lower refinery utilisation and restrictions on exports can tighten product markets internationally (Figures 1 and 2). Five channels are especially important:

• Physical disruption: damaged refineries, pipelines, terminals, tankers and storage facilities reduce effective capacity.
• Product scarcity: diesel and other refined products may become scarce more quickly than crude because refining capacity is less easily replaced.
• Logistics and insurance: rerouting, delays and war-risk premia raise freight and financing costs even without a total supply interruption.
• Sanctions and trade fragmentation: enforcement, discounts and longer shipping routes increase transaction costs and reduce transparency.
• Expectations and financial positioning: futures, options and hedging activity can move prices before the full physical loss is known.

These channels explain why investors frequently reprice financial assets before the full physical consequences of supply disruptions become visible.

3. The Geoeconomic Transmission of Russia's War

Russia's war against Ukraine remains the fundamental source of geopolitical disruption in global energy markets. Ukraine's intensified strikes on Russia's energy sector represent one transmission mechanism within that broader conflict, primarily affecting refining capacity, petroleum products and market expectations. At the same time, the US–Iran war and insecurity around the Strait of Hormuz create additional risks to global crude oil and liquefied natural gas supply. The relevant distinction is therefore not between conflicts, but between different transmission channels:

• Russian refinery disruption: Ukraine's strikes reduce refining capacity, tightening diesel, petrol and aviation-fuel markets while increasing refining margins.
• Gulf and Hormuz disruption: military escalation threatens the physical movement of crude oil and liquefied natural gas from several producers simultaneously.
• Red Sea insecurity: rerouting, higher insurance costs and maritime risk increase transport costs and delivery times.
• Cumulative geopolitical risk premium: financial markets price the combined effect of these interconnected risks rather than individual military events.

Figure 1. Brent Crude Oil Continuous Contract (BRN00), June–July 2026

Note: Selected prices following major geopolitical developments. Annotations indicate contemporaneous market context rather than single-cause attribution.

Source: The Wall Street Journal Markets, Brent Crude Oil Continuous Contract (BRN00, U.K. ICE Futures Europe); author's presentation.

By late July, reports of renewed diplomatic efforts between the United States and Iran temporarily reduced Brent prices, illustrating how rapidly the geopolitical risk premium can adjust when markets perceive a higher probability of de-escalation. Nevertheless, prices remained well above their early-July lows, indicating that investors continued to price significant geopolitical uncertainty.

Figure 2. Brent Crude Oil, January 21–17 July 2026. Source: tradingeconomics.com.

From financial market perspective, geopolitical risk should no longer be regarded as an episodic event. It has become a structural factor influencing inflation, interest-rate expectations, portfolio allocation and asset valuation across global financial markets.

4. From energy markets to inflation

The macroeconomic effect depends on duration and persistence. Persistent energy inflation changes not only consumer prices but also expected real interest rates, inflation-risk premia and portfolio allocation. A short-lived rise in energy prices mainly increases headline inflation and reduces real household income. A persistent shock is more dangerous because firms reset prices, workers seek compensation and expectations adjust. The transmission can be summarised in four steps:

1. Headline-price effect: higher oil and gas prices raise household energy and transport costs.
2. Input-cost effect: logistics, chemicals, agriculture and manufacturing become more expensive.
3. Real-income effect: household purchasing power falls, weakening consumption and growth.
4. Persistence effect: wages, services prices and expectations may respond if the shock continues.

Eurostat’s final June 2026 data showed euro-area Harmonised Index of Consumer Prices (HICP) inflation at 2.8 per cent, down from 3.2 per cent in May. Energy inflation remained 8.5 per cent and contributed 0.77 percentage points to headline inflation (Figure 3). The central policy question is therefore whether imported energy inflation remains temporary or becomes embedded in wages and services.

5. Central banks: one shock, three different constraints

Central banks do not respond to military events directly. They respond when geopolitical shocks threaten to broaden inflation, weaken expectations or destabilise financial conditions. The same energy shock therefore produces different policy dilemmas across the major central banks (Figure 4):

Figure 3. Euro-area headline HICP inflation and energy inflation. 
Source: Eurostat; author’s presentation.

1. Federal Reserve

Higher oil prices reduce households' real purchasing power while increasing inflationary pressures, making the Federal Reserve more cautious about easing monetary policy and requiring a careful balance between price stability and economic activity.  “The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve's dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.” (Federal Reserve Board, 2026, June 17).

The challenge for the Federal Reserve extends beyond energy prices. The US economy increasingly exhibits features of a K-shaped economy, in which asset-owning households continue to benefit from rising equity valuations, while lower-income households remain more vulnerable to higher living costs. Because equity ownership is highly concentrated among wealthier households, continued advances in artificial intelligence and technology sectors support aggregate wealth effects despite tighter monetary conditions. At the same time, rapid investment in artificial intelligence may sustain strong demand for capital, electricity and skilled labour, adding structural inflationary pressures beyond the immediate energy shock.

Market implication: Higher-for-longer interest rates support the US dollar while reducing the valuation of long-duration growth assets, although continued earnings growth in AI-related sectors may partially offset this effect.

2. European Central Bank

The euro area faces imported energy inflation alongside relatively weak economic growth. Monetary policy must therefore distinguish between temporary increases in energy prices and more persistent domestic inflationary pressures. The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be increased to 2.25%, 2.40% and 2.65% respectively, with effect from 17 June 2026.” (European Central Bank, 2026, June 11).

Compared with the United States, Europe faces a different structural challenge. The euro area combines slower productivity growth with a more cautious approach to the deployment of artificial intelligence and stronger emphasis on labour-market protection and social welfare. As a result, AI-related demand pressures are currently weaker than in the United States, while economic growth remains comparatively subdued. Consequently, imported energy inflation places a greater burden on manufacturing competitiveness and household purchasing power.

Market implication: Imported energy inflation continues to weigh on European manufacturing, increasing uncertainty for corporate earnings while limiting the scope for monetary easing.

3. Bank of Japan

Japan remains highly dependent on imported energy, making inflation particularly sensitive to exchange-rate movements. Although the Bank of Japan has gradually tightened monetary policy, the overnight call rate remains around 1.0% (Bank of Japan, 2026, June 16).

The structural weakness of the yen reflects more than temporary energy shocks. Expansionary fiscal policy, a comparatively accommodative monetary-policy stance and the persistent interest-rate differential with the United States continue to place downward pressure on the currency. Higher oil prices and safe-haven demand for the US dollar during periods of geopolitical uncertainty further reinforce these pressures.

The yen’s structural depreciation continues because neither the Japanese government nor the Bank of Japan has taken sufficiently strong measures to contain inflation, as reflected in the sharp rise in long-term government-bond yields. Financial markets generally place downward pressure on currencies when investors perceive that monetary authorities are less committed than their peers to restoring price stability.

Unlike in previous episodes of yen weakness, the benefits for Japanese exporters are now more limited because many large firms have shifted production abroad. A significant share of their foreign earnings is retained and reinvested in local currencies rather than repatriated and converted into yen. This reduces foreign-exchange demand for the yen and reinforces its structural depreciation. Moreover, the traditional expenditure-switching mechanism associated with currency depreciation has weakened in an economy characterised by highly mobile capital and global value chains. Rather than expanding domestic production in response to a weaker yen, many Japanese multinational firms now expand output through overseas affiliates located closer to final markets or in countries offering more favourable production conditions. As a result, a larger share of the gains from yen depreciation accrues to foreign operations instead of strengthening domestic production, exports and employment.

Market implication: Continued yen weakness raises imported inflation and complicates monetary-policy normalisation. Compared with previous decades, however, the positive effect on Japanese exporters is more limited because production and earnings have become increasingly internationalised.

The common limitation

The common constraint is institutional. Interest-rate policy can restrain aggregate demand and anchor inflation expectations, but it cannot repair damaged energy infrastructure, reopen disrupted shipping routes or diversify energy supply. Monetary policy therefore remains a second-round stabilisation instrument, while governments retain primary responsibility for strengthening energy security, strategic reserves and supply-chain resilience. The longer geopolitical fragmentation persists, the greater the likelihood that temporary supply shocks become embedded in inflation expectations and financial-market pricing.

Figure 4. Selected monetary-policy rates, July 2026.
Sources: Federal Reserve, ECB and Bank of Japan; author’s presentation.

6. 6. Policy and Investment Implications

The central lesson is that persistent geopolitical risk has become a structural determinant of macroeconomic performance and investment decisions. While central banks can anchor inflation expectations and maintain financial stability, they cannot resolve supply disruptions caused by war, sanctions or transport bottlenecks. Governments therefore have a complementary role in strengthening energy security, strategic reserves and resilient supply chains.

Five policy implications follow:

1. Assess geopolitical shocks as an interconnected system, recognising that overlapping conflicts generate a cumulative geopolitical risk premium. 

2. Distinguish crude-oil supply risks from refinery and diesel disruptions, as they require different market and policy responses.

3. Strengthen energy resilience through diversified import routes, strategic reserves and critical infrastructure investment.

4. Coordinate monetary, energy and sanctions policies so that policy instruments reinforce rather than offset one another.

5. Integrate geopolitical risk into macroeconomic and financial-market analysis, treating it as a structural rather than temporary source of uncertainty.

7. 7. What Investors Should Watch

Persistent geopolitical uncertainty is likely to influence portfolio allocation through changes in inflation expectations, interest-rate paths and risk premia (Table 1).

1. Equity markets: Energy-intensive sectors—including transport, chemicals, airlines and manufacturing—face greater cost uncertainty. By contrast, defence, cybersecurity, energy infrastructure and selected commodity producers may benefit from higher public expenditure, stronger demand and sustained geopolitical tensions. Companies providing maritime security, specialised insurance and logistics services may also experience increased demand. For shipping and maritime logistics firms, however, the effect is mixed: longer routes and capacity constraints can support freight rates, while higher fuel costs, war-risk insurance premiums and operational disruptions may offset these gains.
2. Government bond markets: Safe-haven demand may initially support high-quality sovereign bonds and lower yields. However, if energy shocks persist, higher inflation expectations and concerns about fiscal support measures can place upward pressure on long-term yields. The effect is therefore likely to differ across issuers: highly rated, fiscally credible sovereigns may retain safe-haven demand, while countries with high debt levels, large energy-import bills or weaker policy credibility may face greater term premia and refinancing pressure.
3. Corporate bond markets: Credit spreads tend to widen, particularly for highly leveraged firms and companies with significant exposure to energy costs, transport disruption or weak pricing power. Refinancing risks are greatest for lower-rated issuers and firms with near-term debt maturities, while energy producers, defence companies and firms with strong cash flows may prove more resilient. Large, cash-rich AI and technology issuers may remain relatively resilient, whereas debt-financed data-centre and AI-infrastructure projects are more exposed to higher borrowing and electricity costs.
4. Foreign-exchange markets: Heightened geopolitical risk often supports the US dollar through safe-haven demand and demand for dollar liquidity. Higher oil prices may support the Norwegian krone and, to a lesser extent, the Canadian dollar by improving energy-export revenues and the terms of trade. However, this positive effect can be outweighed by global risk aversion, domestic interest-rate expectations and capital flows. The Australian dollar is less directly linked to oil prices: it is more sensitive to metals prices, Chinese demand and global risk sentiment, and may therefore depreciate during broad risk-off episodes despite stronger commodity prices. The euro is generally vulnerable to a sustained energy shock because the euro area is a net energy importer. Higher oil and gas prices worsen its terms of trade, raise imported inflation and may place downward pressure on the euro against the dollar, although the final exchange-rate response also depends on relative monetary-policy expectations
5. Volatility and uncertainty:  Geopolitical shocks often raise implied volatility in commodity markets, reflected in higher oil-volatility measures such as the OVX, while broad equity-market volatility, measured by the VIX, may remain more contained when investors continue to expect strong earnings growth in sectors such as artificial intelligence, defence and digital technologies. In such periods, uncertainty may be expressed through sectoral and geographical reallocation rather than broad-based equity-market declines. Financial assets in resource-rich and institutionally stable economies—particularly Norway and Canada, and in some circumstances Australia—may attract greater investor interest during periods of energy-market stress because of their commodity endowments, relatively strong external positions and lower geopolitical exposure. Australia is a less direct beneficiary of an oil-price shock because its external position is driven more by liquefied natural gas, coal, iron ore and other minerals, as well as demand from China. Australian assets may therefore become more attractive when the shock raises broader energy and commodity prices, but may weaken when global risk aversion, slower Chinese growth or lower metals demand dominates. This does not imply automatic currency appreciation or equity outperformance, as outcomes also depend on interest-rate differentials, domestic growth prospects and global risk sentiment.
6. Commodity markets: Oil, natural gas and refined petroleum products are likely to continue incorporating geopolitical risk premia, resulting in higher price volatility and stronger sensitivity to military and diplomatic developments.

Table 1. Investment Implications of Persistent Geopolitical Risk across Financial Markets

Asset class	Likely effect of persistent geopolitical risk
Energy equities	↑ Potential support from higher prices and investment
Defense equities	↑ Higher public defense spending may support demand
Airlines & transport	↓ Pressure from fuel costs and insurance
Energy-intensive manufacturing	↓ Margin compression from higher input costs
Government bonds	Mixed: safe-haven demand versus inflation pressure
Corporate bonds	↓ Wider credit spreads
Oil & gas	↑ Higher volatility and geopolitical risk premium
Gold	↑ Continued safe-haven demand
US dollar	↑ Safe-haven appreciation
Euro	↓ Pressure from higher imported-energy costs
Norwegian krone & Canadian dollar	↑ Potential support from stronger energy-export revenues
Australian dollar	Mixed: supported by commodity exports but constrained by global risk sentiment and Chinese demand

8. Bottom line

Russia's war against Ukraine has become a structural source of geopolitical risk for the global economy. Ukraine's strikes on Russia's energy sector affect refining capacity, petroleum products and market expectations, while broader risks associated with the Gulf reinforce pressure on energy markets. Together, these developments influence inflation, monetary policy and financial-market pricing. For policymakers and investors alike, geopolitical risk should therefore be treated as a persistent component of macroeconomic and investment analysis rather than as a temporary external shock. 

9. Conclusion 

From a financial-market perspective, the principal implication is not to predict individual military events, but to recognise that geopolitical uncertainty is likely to remain embedded in asset prices for the foreseeable future. Portfolio performance will increasingly depend on exposure to energy-price volatility, inflation persistence, interest-rate uncertainty and elevated geopolitical risk premia. With US, EU and allied sanctions against Russia likely to persist for the foreseeable future, alongside continuing defence rearmament, energy-system adjustment and unresolved security tensions, geopolitical risk will remain an important influence on financial markets over the near to medium term.

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