The City of London woke to the thud of geopolitics this morning as the UK issued a stark warning to the Kremlin following an audacious Ukrainian drone strike on St Petersburg. The attack, described as ‘unprecedented’ in its reach, marks a significant escalation in the war and sent a shiver through the gilt markets. For an investor, this is a classic tale of tail risk materialising: when the unexpected happens, markets reprice the probability of worse outcomes.
The yield on the 10-year gilt ticked up as safety was sought, though the move was muted, a sign that the market has perhaps become numb to the conflict’s volatility. Yet this strike is different. Hitting a city 1,000 kilometres from the border changes the calculus.
It suggests a capability that was previously off the table, and with it, the risk of Russian retaliation that could disrupt energy flows or escalate further. The Treasury will be watching nervously; any sustained spike in gilt yields would increase the cost of servicing our already bloated national debt. This is a reminder that war is inflationary, and the Bank of England’s job just got harder.
Vladimir Putin’s red lines are being tested, and when they are crossed, the reaction is rarely proportionate. For the UK, the warning was clear: do not mistake this for a tactical victory; it is a strategic gamble. The cost of this war, borne by taxpayers from London to Kyiv, just got a little more expensive.
