News of Russia’s full-scale invasion of Ukraine sent a shockwave to the market before it staged a rebound. Russia had first sent troops in to two separatist regions, Donetsk and Lugansk, which Russia considers to be independent from Ukraine, on 22nd February 2022; and launched a ferocious full-scale invasion two days later.
Russia had taken offence at Ukraine’s bid to be part of the European Union (EU) and the North Atlantic Treaty Organization (NATO) and moved to stop it.
We think that Russia was clear of the risks and rewards of this strategy and they are prepared for the sanctions which might most probably hurt the Eurozone more than Russia.
What prompted Russia’s move?
Tensions had been running high between Russia and Ukraine since 2014 when Russia annexed Crimea.
On the other hand, the Russian government also feared that Ukraine’s membership in the EU and NATO will “complete a Western wall of allied countries” united against it by restricting Russia’s access to the Black Sea1. Moscow would only be about 500km away from the nearest allied country.
NATO was established to create a military alliance that would be a counterweight to Soviet armies stationed in Central and Eastern Europe after World War II.
Thus NATO’s eastward expansion allows NATO to place forces and weapons in closer range to Moscow, and Russia views NATO’s intention to offer Ukraine membership as a hostile act, even though Ukraine is much weaker in terms of military prowess.
This treaty was signed in 1987 between the US and the Soviet Union which banned all land-based missiles of the particular range in the two countries. By May 1991, 2,692 missiles from both countries had been destroyed1.
However, US President Donald Trump announced in 2018 that he was withdrawing from the Treaty due to supposed Russian non-compliance amidst the continuing growth of China’s missile forces. And the US formally withdrew from the Treaty in August 20191.
These agreements were designed to end a war by Russian-backed separatists in eastern Ukraine, and its provisions included prisoner exchanges, withdrawal of heavy weapons, and deliveries of humanitarian aid. However, many had remained unimplemented due to a major impasse – Russia insisted that it was not a party to the conflict and therefore not bound by its terms2 – one of the points had called for a withdrawal of all foreign forces from Donetsk and Luhansk, and Ukraine said this referred to Russian forces, but Moscow had denied that there were any of their forces in the region.
Impact of sanctions
Europe also depends on Russia for about 46% of coal imports, 38% of natural gas imports and 27% of oil imports – and sanctions will probably further fuel inflation in Europe.
Brent oil had surged past $100 per barrel3 - the first time it did so since 2014.
And since 2014 when the sanctions were placed on Russia, Russia had also built up their gold and forex reserves and developed their own financial alternatives to global payment networks such as SWIFT, Visa and Mastercard. Their banks and companies had also reduced dependence on the global debt market.
Russia had been building up its financial shield to be more resilient against possible sanctions while Europe's energy needs remain dependent on Russia. This meant that sanctions could impact Europe more than Russia.
Is it an opportunity or an adversity?
Looking back at the major conflicts over the years, i.e. the Gulf War, the Iraq War, and the 9/11 attacks, the Dow Jones Industrial Average (DJIA), representing the US market, had corrected between 6 - 16% when they broke out, and usually recovered between 1-8 months.
And through the periods of military conflicts (inclusive), the DJIA has increased 600% over the 30 years.
Unfortunately, wars cause insufferable pain and had also roiled the market in the short-term.
They, however, did not alter the existing economic situations, and would usually create a window of opportunity to invest. Hence, our existing strategy of “1-step back, 3-steps forward” enacted prior to this war and the window of opportunity remain intact, except it may mean a greater opportunity in the initial period if this war exacerbates the decline in stock prices.
And we think that we are hedged well as the safe haven asset classes in our portfolio rise while the equity markets fall. It’d also be an opportunity to pick up the good buys especially with regular monthly investments as the market gets more volatile, and lump sum investments as the equity markets correct. Do strategise as soon with your Unicorn Financial Consultant.
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