The veneer of stability at Russia's flagship economic forum was shattered today as drone attacks struck St Petersburg, casting a long shadow over President Putin's attempt to project business confidence. The assaults, which targeted the venue and surrounding infrastructure, underscore the fragility of Russia's financial hub even as the Kremlin scrambles to attract foreign capital. The immediate market impact was clear: the rouble weakened sharply against the dollar, and Russian sovereign bond yields spiked, reflecting renewed risk aversion.
For the City of London, this is a stark reminder that geopolitical risk remains the primary driver of volatility in emerging markets. British security chiefs, meanwhile, are being briefed by G7 allies on the implications, likely focusing on the credibility of Russia's air defence systems and the potential for escalation. This incident will not improve the investment case for Russia, which has already seen significant capital flight since the Ukraine invasion.
The attempt to sanitise the St Petersburg forum as a showcase for economic diplomacy has backfired. From a fiscal perspective, the increased military expenditure needed to counter such threats will further strain an already overstretched Russian budget, forcing the central bank to choose between hawkish monetary policy and currency stability. For global markets, the key takeaway is that the war in Ukraine is far from contained, and any illusion of a return to normalcy in Russian markets has been shattered.
The G7 briefings suggest intelligence sharing is intensifying, but the real question for investors is whether this heralds a new phase of sanctions or simply a recognition of enduring instability.
