What Geopolitical Conflict Means for Investors

Note that investors should judge political decisions based on constraints, rather than on preferences. Constraints always determine the action.^[7]

Figure 1.  Global Grain Trade

The current geopolitical conflict in Ukraine spells bad news not just for Ukrainians but for the outlook for investors, too.  Over the weekend, the US and western allies said:^[3]

They will place sanctions on Russia’s central bank and remove some of the country’s lenders from the Swift global financial messaging system, in their harshest response yet to the invasion of Ukraine.

Sanctioning the Central Bank of Russia could prove devastating — the true "nuclear" option in the West's financial arsenal.

Russia currently holds about $640 billion in reserves. About 32% held in euros, 22% in gold, 16% in dollars, and 13% in Yuan.

As Elina Ribakova, deputy chief economist for the Institute of International Finance, said: 

Sanctioning Russia’s central bank is likely to have a dramatic effect on the Russian economy and its banking system, similar to what we saw in 1991 (see Fig. 1).

 

Figure 2.  $RTSI (similar to MOEX Russia Index) and RSX (Courtesy of stockcharts.com)

More Inflation and Slower Growth Expected

As James Mackintosh warned that "investors should pay close attention to the long-run shifts that Russia’s move will intensify, because they probably mean more inflation and slower growth. They come in three parts:^[1]

1. More military spending expected
• Which means less spending on other parts of the economy
2. Less globalization expected
• It means higher energy prices and domestic sourcing, which could hurt profit margins
3. Geopolitics is scary again
• More countries may want to secure nuclear weapons as a nuclear deterrence
• Geopolitical tension also has a tendency to spread

Figure 3.  Oil and Natural Gas Trades in Asia (Source: @Albert Park)

Impact of the Russia-Ukraine War on Asia’s Economies

The Russia-Ukraine war will increase food prices:

• Russia and Ukraine supply 22% and 18% of global wheat and barley exports, Ukraine supplies 15% and 12% of global rapeseed and corn exports, and Russia supplies 12% of global fertilizer exports.

In addition, 

• Russia and Ukraine together produce 1/3 of palladium and the vast bulk of the neon used in semiconductor production
• The latest sanctions will also affect trade in metals like aluminum, nickel where Russia is a major producer

As @Albert Park summarized:

The impact of the Russia-Ukraine war on Asia’s overall trade is expected to be limited, as Russia and Ukraine account for only 2.5% of Asia’s imports and 1.5% of Asia’s exports. Developing Asia also accounts for only 5% of FDI in Russia. 

However, the biggest impact of Russia-Ukraine war on Asian economies will be higher oil and gas prices, which will fuel inflation and slow growth in energy-importing countries, but help net exporters (see Figure 3).

Figure 4.  Cost of living expected to rise sharply in many countries as energy & food prices skyrocket (Source: @Gita Gopinath)

References

1. What Russia’s Invasion of Ukraine Means for Investors
2. Long-Term Investments: Morgan Stanley's 30 for 2019
3. West to impose sanctions on Russian central bank and cut some lenders from Swift
4. The Last The Ruble Crashed Like This, LTCM Collapsed
5. Stocks Tied To China's SWIFT Alternative Are Soaring
6. Ukraine war disrupts global market for grains
• Black Sea port closures threaten food supplies around the world
  
7. 3 Dividend Stocks To Buy When 98% Of CEOs Predict A Recession In 2023
8. Natural Gas Weekly Update (EIA)
9. World Oil Supply Set To Decline In Coming Decade?