Geopolitical risks shoot up: Russia's redline crossed

Two major conflicts have been going on for a while now, one in Ukraine and the other in Gaza. Neither has impacted the world economy in a major way except for a brief period in 2022 when oil prices rose above $100 a barrel.

But we just don't know how long it will remain that way. There has been progressive escalation in the conflict in Ukraine. It appears that a new and dangerous redline has been crossed. Ukraine sent ATACMS (Army Tactile Missile Systems) into Sevastopol in Russia's Crimean region a few days ago. Four were intercepted and one was blown up, it appears, and the debris fell on people holidaying on a beach, with an estimated five children among those killed. The ATACMS were provided by the US.

Quite recently, the Americans lifted an earlier restriction on American weapons being fired into Russia territory with the proviso that the weapons must be for military targets alone. The relaxation by America came following a broad offensive by Russia that threatened to overwhelm Ukraine's defenses in some parts. Ukraine contended that the only way to thwart the Russians was to disable the artillery and other batteries from which Ukrainian positions were being pounded. The Americans relented.

Whether the proviso was observed in the latest salvo is not clear. Some military analysts say that there is an airfield nearby but it is of little value, so the drones were intended for civilian targets. We don't know, for sure. Regardless, the loss of civilian losses has create fury across Russia and there's a demand for a punitive response.

Intelligence on targets is obtained through American satellites. The programming of the missiles is done by American technicians. The Ukrainian contribution, military analysts say, is to press the button. So it wil be hard for the US to disclaim responsibility. 

Russia summoned the American ambassador and conveyed to her that retaliatory measures would follow. There's now speculation on what these measures would entail. One conjecture is that Russia would declare the Black Sea a ' no fly' zone which means American reconnaisance satellites entering the area would be taken out. That would be an act of war. Others suggest the Russians will arm a range of parties - Iran, North Korea, etc- in ways not done earlier. Yet others say Putin will first take the issue to the UN Security Council and prepare the ground for a Russian response.

Whatever the response, it's clear that we now have a significant escalation. Why the financial markets, including our own, have not taken notice is a a mystery. It's hard to see how the global economy will remain unaffected for much longer.