Our view on the advance on Ukraine

  • Stephen Mann: Head of Investment Specialists
  • 28 February 2022
  • 5 mins reading time

Russian troops are advancing ever deeper into Ukrainian territory, and, as they do so, we are witnessing military aggression in Europe on a scale not seen since the Second World War. The economic ramifications of these tragic events are being felt right across the world. However, while we can recover from these repercussions, the lives of many Ukrainians will be changed forever by this onslaught.

Market responses to these terrible events were swift. In the week ending 25th February, European stocks fell by 2.8% (1) while Asia Pacific equities fell by 4.6% (2). Markets appeared to view these regions as particularly susceptible to the economic fallout from the attacks. The price of gold, seen as a safe haven in times of economic uncertainty, also spiked upwards as the invasion commenced. But it fell back at the end of the week (3). And the price of Brent crude oil also rose sharply, as markets appeared concerned about possible sanctions on Russian oil, but then dropped back again (4).

Early last week, prior to the full-scale invasion, Russian president Vladimir Putin declared his recognition of the independence of the Eastern Ukrainian regions of Luhansk and Donetsk. The Ukrainian government and separatists have been engaged in civil war in these regions since 2014.

Western sanctions

The US and Western allies announced new sanctions against Russia in response to Putin’s declaration. Perhaps most significantly, given its dependence of Russian natural gas, Germany froze the approval process for Russia’s Nord Stream 2 natural gas pipeline. This pipeline runs between Russia and Germany and has already been completed. European Union sanctions targeted Russian individuals and entities thought to be connected with the actions against Ukraine and members of Russia’s parliament who voted to recognise the breakaway regions.

American sanctions were aimed at two Russian banks and several individuals, while Americans are now banned from financial or investment activities connected to Luhansk and Donetsk. Meanwhile, the UK has frozen the assets of three Russian citizens and sanctioned five Russian banks.

Harsher sanctions are now being drawn up following Russia’s full-scale invasion, some of which are now beginning to emerge. The US, UK, Canada, France, Germany, Italy and the European Commission issued a joint statement to place sanctions on Russia’s central bank. They will also remove some of the country’s lenders from the vital Swift global payments system, which enables international banking transactions to take place. So the US and Western allies are putting in place increasingly stringent measures to isolate Russia economically.

In addition, the UK and several East European nations have banned Russian planes from their airspace. F1 has cancelled the Russian Grand Prix. Poland has boycotted a World Cup football play-off football match with Russia. And the 2022 European Champions League final will now be played in Paris, not St Petersburg.

Oil price rise

The sanctions have, though, so far stopped short of curbing Russia’s oil exports. We believe this had the effect of calming markets somewhat towards the end of last week.

Even so, the oil price has risen from around $65 (£48) a barrel to around $95 in the past year (4), with demand picking up as we emerge from the pandemic. Disruptions to the transportation and delivery of goods across the world have also helped drive up the prices of many goods and increased levels of inflation. This has led to rises in the cost of living for many people.

Read more: The ups and downs of inflation

Keith Wade, Chief Economist at Schroders, believes the attacks on Ukraine will probably lead to further upward pressure on global inflation and a dampening down of global economic growth. We call this scenario ‘stagflation’ and it could lead to an unwelcome squeeze on general standards of living.

Keith thinks the US Federal Reserve now looks set to raise interest rates more gradually than we previously expected. And last week’s events reinforced his conviction that the European Central Bank (ECB) won’t raise rates this year. But Keith thinks the ECB will probably raise rates in the second half of 2023.

Impact on Russia

The impact of Putin’s aggression is already being felt within Russia itself. Russian equities fell by 34.8% in the week ending 25 February (5). Meanwhile the Russian ruble, which hit a recent peak against the US dollar of $0.0144 in October 2021, was worth just $0.012 on 27 February this year (6). And Russians have been withdrawing money en masse from cash machines and bank branches following the intensified sanctions (7).

Against this backdrop, I would like to reassure you that our investment exposure to Russia is very small. For example, our SPW Balanced Portfolio has less than a quarter of 1 per cent exposure to Russia.

As we point out in our article What Ukraine developments could mean for your investments, markets have a history of recovering from events of high geopolitical risk, although, as with all investments, nothing is guaranteed. Even so, it is understandable that, under the current circumstances, people might prefer to move into perceived safer assets and avoid riskier ones. Such a strategy could, though, involve potentially missing out on any market recovery. In Keith’s view, ‘You would generally be better off trying to shut your eyes and leaving your portfolio for six months.’

We believe there are benefits to holding a diverse selection of assets that match your investment requirements. Such diverse assets can react differently from each other to particular events, which can potentially offer you some investment protection. We are also convinced of the advantages of long-term investing, which can allow you to ride out the ups and downs that markets undergo. We are closely monitoring events in Ukraine and, where necessary, making tactical changes to your holdings. For now, however, our thoughts are on the plight of the Ukrainian people.

(1) FactSet, MSCI Europe ex UK index, 26 February 2022

(2) FactSet, MSCI Asia Pacific ex Japan index, 26 February 2022

(3) Royal Mint, Gold Price (sterling), 26 February 2022

(4) FactSet, Brent Crude Oil Continuous, 26 February 2022

(5) FactSet, MSCI Russia index, 27 February 2022(6), Russian Ruble to US dollar, 27 February

(7) Financial Times, ‘Russian forces push into Ukraine’s second-biggest city after west imposes toughest sanctions yet’, 27 February 2022

Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and are not guaranteed. 

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