Russia-Ukraine Conflict: Investment & Economic Implications + Appeal

Coordinated sanctions are battering Russia's economy

Western powers are responding to Russia's increasingly brutal invasion of Ukraine with increasingly punitive sanctions.

With Ukraine not being a member of NATO, there is no obligation or appetite to intervene militarily. Instead, financial and economic sanctions are the preferred weapon of response even though some measures will inflict pain on many economies.

Almost certainly the most damaging to Russia of the steps taken so far are the sanctioning of Russia's central bank ("CBR") and the exclusion of some of Russia's largest commercial banks from the SWIFT international payments network. The sanctioning of the CBR effectively freezes a large proportion of Russia's foreign exchange reserves and its ability, therefore, to defend the value of the Russian rouble. On Monday, the day after the CBR was sanctioned, the rouble slumped by more than 20% even though Russian interest rates were more than doubled from 9.5% to 20%. Soaring inflation, caused by the freefall of the rouble, and the huge increase in the cost of borrowing will inflict immense economic hardship on ordinary Russian people and companies. At the same time, the banning of Russian banks from SWIFT makes it much more difficult for Russian companies to conduct international trade, including all-important exports of gas and oil.

Financial markets could remain very volatile but prices of commodities have soared

Unsurprisingly, the prospect of supply being disrupted has caused commodity prices to spike. The price of natural gas has risen by more than 20% so far in 2022 and this follows a rise of more than 50% in 2021. The price of wheat, of which Russia is the world's biggest exporter and Ukraine the fourth biggest, has risen by almost 30% and the price of oil is above US$100 per barrel for the first time since 2014. These increases will only exacerbate the cost-of-living squeeze in Western economies. They will also fuel inflation and dampen economic growth, although the latter may make central banks more cautious with regard to the pace of interest rate increases.

Global equity markets will remain volatile whilst the conflict rages and, despite the country's size, both geographically and economically, Russia's stock market is very small in global terms.

Wars don't have a long term impact on markets

The temptation and tendency to panic when share prices are falling is completely understandable. Making investment decisions and major changes to portfolios against such a volatile and uncertain backdrop is, of course, extremely difficult. Past precedents suggest that the best investment strategy is to hold one's nerve and wait for greater clarity to emerge about the medium-term impact on economic growth, inflation, interest rates and corporate profits.

If the war remains contained within Ukraine and Russia, then historical precedent suggests stock market losses will be short-lived and investors will quickly look beyond the conflict.

Humanitarian Crisis

As we watch the horrific events unfold in Ukraine, we do not want to downplay for a moment the scarring effects being inflicted on those who are directly and unintentionally being caught up in the conflict. Millions of civilians are being displaced and a full-blown refugee crisis is underway.

If you would like to help by making a donation that will assist in getting vital supplies and aid to people affected by the conflict, we have provided direct links to the appeals from both the British Red Cross and Save the Children below.

British Red Cross - Ukraine Appeal

Save the Children - Ukraine Appeal

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Credit: Square Mile Investment Services