Assessing the Impact of Western-Russia Tensions on Strategic Stability and Emerging Market Risk Premiums

The global geopolitical landscape in 2025 remains fraught with volatility, as Western-Russia tensions persist at a critical inflection point. The war in Ukraine, coupled with Russia's expanding influence in Central Asia, the Arctic, and the Middle East, has created a multipolar world order where strategic stability is increasingly fragile. For investors, the implications of this instability extend beyond headlines, directly shaping risk premiums in emerging markets (EMs) and commodity price dynamics. This analysis explores how geopolitical risk is reshaping asset allocation strategies and what investors must consider in this high-stakes environment.

Strategic Stability and the Nuclear Arms Race

The expiration of the New START treaty in February 2026 has become a focal point of global strategic instability. Russian President Vladimir Putin's conditional offer to extend the treaty for one year—provided the U.S. reciprocates—has done little to alleviate concerns. While this proposal preserves current limits on deployed nuclear warheads (1,550) and delivery systems (700), it lacks critical inspection and verification mechanisms, leaving both sides in a fog of uncertaintyThe Geopolitical Risk Premium: How Global Tensions Are Shaping Market Valuations^[1]. The absence of formal negotiations, exacerbated by political tensions over Ukraine, risks triggering a new nuclear arms race. Russia's recent military drills with Belarus, including simulations of nuclear-capable Oreshnik missile deployments near NATO borders, further underscore this dangerGeopolitics and emerging market capital flows - Brookings^[3].

The U.S. and its allies are not passive observers. NATO's military buildup in the Nordic region and increased defense spending signal a confrontational posture, while Russia's lowered nuclear use threshold and cyberattacks on NATO members heighten the risk of miscalculationGeopolitics and emerging market capital flows - Brookings^[3]. For investors, the erosion of strategic stability translates into elevated geopolitical risk premiums, which disproportionately affect EMs.

Emerging Market Equity Risk Premiums: A New Normal

Emerging markets have long been sensitive to geopolitical shocks, but the Russia-Ukraine conflict has amplified this vulnerability. According to a report by the Brookings Institution, EM equity risk premiums have surged due to heightened uncertainty, with investors demanding higher returns to compensate for exposure to sanctions, capital flight, and currency depreciationGeopolitics and emerging market capital flows - Brookings^[3]. The Russia-West standoff has disrupted global supply chains, forcing businesses to prioritize domestic manufacturing over globalization—a trend that further destabilizes EM economies reliant on trade.

Historical data from 2020 to 2025 reveals asymmetric correlations between geopolitical risk (GPR) and EM equity volatility. A study of the top-seven emerging markets (E7) found that GPR shocks during the Ukraine war led to heterogeneous responses, with China and Mexico emerging as relative safe havens in a fragmented global economyEmerging markets equities’ response to geopolitical risk: Time ...^[2]. Meanwhile, non-China EMs have seen stable capital inflows, reflecting a shift toward regionalization over integrationGeopolitics and emerging market capital flows - Brookings^[3]. This bifurcation highlights the need for investors to differentiate between EMs based on their exposure to geopolitical fault lines.

Commodity Price Volatility: A Double-Edged Sword

The Russia-Ukraine war has been a seismic event for global commodity markets. Energy and agricultural prices have become deeply entangled with geopolitical risk, incorporating a “geopolitical surcharge” that reflects the likelihood of further disruptions. For instance, wheat prices surged by 29% in March 2022, while European natural gas prices spiked by 7.5% due to war-related supply shocksThe Geopolitical Risk Premium: How Global Tensions Are Shaping Market Valuations^[1]. These surges were compounded by pre-conflict inventory shortages, creating a volatile environment for producers and consumers alike.

The persistence of Western sanctions and Russia's pivot to China and Central Asia have further complicated trade dynamics. While a potential ceasefire remains elusive, the risk of renewed conflict—exacerbated by Russia's Arctic and Middle East ambitions—ensures that commodity price volatility will remain elevatedGeopolitics and emerging market capital flows - Brookings^[3]. Gold, as a traditional safe-haven asset, has seen a surge in demand, reflecting a “fear premium” in investor behaviorThe Geopolitical Risk Premium: How Global Tensions Are Shaping Market Valuations^[1].

Investment Implications: Navigating the New Geopolitical Order

For investors, the key takeaway is clear: geopolitical risk is no longer a peripheral concern but a central driver of asset valuations. In EM equities, selective exposure to markets with lower geopolitical exposure—such as Mexico or India—may offer better risk-adjusted returns compared to more vulnerable regions like Eastern Europe or Central Asia. Similarly, commodity investors must hedge against price swings by diversifying across energy sources and agricultural suppliers.

The New START treaty's expiration and the broader nuclear arms race also necessitate a reevaluation of long-term risk. A breakdown in arms control could trigger a global security crisis, with cascading effects on financial markets. Investors should consider allocating to defensive assets, such as gold or sovereign bonds from stable economies, while maintaining liquidity to capitalize on potential market dislocations.

Conclusion

The interplay between Western-Russia tensions, strategic instability, and financial markets in 2025 underscores the need for a nuanced, risk-aware investment approach. As geopolitical risk premiums continue to shape EM equity valuations and commodity prices, investors must remain vigilant, adapting their portfolios to a world where volatility is the new normal. The coming months will test the resilience of global markets—and those who prepare for the worst may find themselves best positioned to thrive.