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Ukraine, Russia and the Markets

The markets have been volatile, nothing new there; thanks to Putin putting the whole world at edge with his actions around Ukraine, and a possible invasion. While the news has been flooded with pieces everyday, here are some bullets (wrong choice of word, maybe!) from a market standpoint.


The history

  • Russia-Ukraine ties go back a long way, thousands of years back. In fact, the Russian civilisation more or less began in today’s Ukraine.

  • Ukraine was part of the Soviet Union till 1991, when Ukraine gained independence with a bunch of other countries towards the West of Russia.

  • Russia however, never fully pulled back its influence from Ukraine. It also annexed Crimea in 2014.

Trigger

  • In January 2022, Russia stationed >100k troops at the Russia-Ukraine border, fuelling fears around the globe of an invasion.

  • Other than the number of troops, the world also took it seriously because well, Crimea happened not so long ago.

  • Putin doesn’t believe for Ukraine to be an independent country, but as part of the greater Russian empire. Whilst Putin wants to ‘liberate’ the people of Ukraine, this view isn’t obviously loved uniformly across Ukraine.

Why is Russia doing this?

  • For starters, since the collapse of the USSR and the formation of the NATO, the West has inducted several nations from Eastern Europe into its alliance. Several of these countries were lured by the military, economic and cultural significance of being part of this party.

  • Russia had a problem with the induction of these countries because it considered the east of Europe as its sphere of influence, and NATO was getting creepily close to it. Plus, NATO stands for North Atlantic Treaty Organisation. Many of these new additions aren’t even close to the Atlantic Ocean.

  • Ukraine’s addition to the NATO would mean extreme discomfort to Russia. A strong military alliance breathing down its neck is the last thing Russia wants.

What’s happening now?

  • Putin put pressure on the world by placing troops near the border, and use a potential invasion as a negotiation tactic, or as an exhibition of retaliation. Russian troops then entered rebel-led regions in Ukraine on Monday.

  • Biden viewed this as the beginning of an invasion and announced a new wave of sanctions against Russia (Russia is kinda already accustomed to sanctions though). The EU then agreed to ban the purchase of Russian government bonds to cut off their financing.

  • Then Germany cut off a key pipeline that carried gas from Russia to Germany. P.S. It’s the end of winter and Germany could afford doing this without freezing its citizens.

Why are the markets reacting?

  • First, the markets don’t like uncertainty. Large events with a high probability of going bad don’t work very well for the markets in the near term. Note, this is happening when the markets are already jittery, and rather shaken by high inflation, and regressive central bank measures to come.

  • Further sanctions could cause inflation to rise even more. Russia supplies more than a third of EU’s natural gas, is an oil exporter, and makes a lot of food items like corn. Inflation is already a worry, and these events are an additional real risk to sparking more of an up-move.

How are the markets likely to react?

  • Markets have been reacting negatively to any escalation in the situation. And that is likely to continue in the short-run.

  • Since there are progressive inflation fears that are also kicking in, movements towards safer assets has also been seen as a trend. This could mean more money flowing from developing to developed economies, or from equities to safer assets like gold, a shift to defensive sectors, and/or even movement from high-risk growth stocks to safer value bets.

  • In the long term however, the markets tend to recover from major geopolitical events.

What can you do?

  • Diversify. Spread your money across different asset classes. For example, if you had gold in your portfolio over the last month, it would have reduced your losses at a portfolio level.

  • Diversify again! Build a portfolio and avoid concentration risk. Give yourself the flexibility of moving towards defensive, or towards value, or away from places where oil-related inflation can be a major bummer on profits.

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