24 Feb 2022
Western intelligence has for some time suggested that Russia was primed for a full scale attack on Ukraine and as of today (24.2.22) this now looks to have played out. As is the case with most politically motivated events, there are many possible scenarios and outcomes to consider.
The immediate aftermath of such an event is the time for opposing nations to condemn the action, and to work together to impose sanctions against the aggressor. Some sanctions have already been put in place following Russia’s recognition of the already separatist-held territories of Donetsk and Luhansk in the east of Ukraine, allowing Russia to have troops there guarding the border and using and building infrastructure. The sanctions imposed were relatively low grade, allowing for an escalation should Russia invade other parts of Ukraine, which has now happened. Market reaction is often swift, and we have already seen the rise in the oil price and in the value of gold with indications that investors are seeking more defensive assets, as is normal in times of political or economic uncertainty.
This widening of the conflict does bring into scope greater military conflict and loss of life on both sides, which the west was keen to avoid. There will certainly be an escalation of sanctions, but the west has to be careful because of the energy links between Russia and much of Europe. The US state department has already issued statements that any sanctions need to be targeted so that they don’t interrupt global oil and natural gas flows. Financial sanctions seem the most likely to be upgraded, targeting the more systemic Russian leaders, restricting Russian banks trading roubles and blocking high tech exports to sectors critical to the economy. Not all the options will be used at once however, as the west needs to have further leverage should the conflict escalate further.
In some ways we have seen this situation occur before with the annexation of Crimea in 2014 when sanctions included a ban on buying new Russian dollar debt for US investors, which is still in place. A ban on primary market participation has now been backed by a ban on secondary market participation which closes the loophole that allowed western lenders to indirectly finance the Russian state. These actions in 2014 did not stop the Russian annexation of Crimea and we might see the same outcome in Ukraine, although in this case there are greater military issues at stake. The immediate effect is to increase the cost of financing for Russia, but they have significant reserves from oil revenues and so can live with this for the time being.
Ultimately there remains a high level of uncertainty over the coming weeks which will create volatility in global markets as rhetoric and actions unfold. We cannot make any specific predictions, but we do know that at points of stress markets dislike two things: fear, and uncertainty, and just like in March 2020 the current climate is fuelling both of these. Reflecting this backdrop, markets have been difficult recently, however we continue to highlight that investors should focus on the long term rather than being traders, building diversified portfolios to navigate these uncertain times.
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