Russia/Ukraine Update

Shortly after we sent out our market update yesterday, Russia invaded Ukraine with military strikes throughout the nation, clearly going well beyond the disputed Donbas region. While not yet a worst-case scenario as civilians/major cities do not appear to have been targeted, these events represent a dramatic escalation and go far beyond the fighting that occurred in Ukraine in 2014. Russia’s end goal remains unclear. At the very least, they appear to be looking to expand and strengthen control of the Donbas region. Repercussions for Russia have already begun:

• Bipartisan condemnation from Washington, with President Biden expected to announce severe sanctions later today after coordinating with world leaders this morning
• Strong statements of unity and resolve from NATO, which does not include Ukraine, but does include members that directly border Russia (Estonia and Latvia)
• The Russian stock market index crashed more than 30% today in anticipation of increased sanctions/investor outflows¹

On the other hand, China today approved increased imports of Russian wheat, potentially offering a solution to Russia in the event of severe sanctions.²  China is likely watching how events unfold in Ukraine very closely as it decides what to do itself with the disputed territory of Taiwan.

As we wrote in our note yesterday, the biggest immediate financial market impact of an invasion is on energy prices, and Brent oil prices are now trading above $100 per barrel for the first time since 2014. The slump in oil prices in 2015 caused a sharp decline in global oil exploration/capital expenditures and now the world is faced with a scenario where excess production capacity is very limited. Therefore, it is not even an option to cut off Russian supplies (11% of world production) entirely from the market.³ The fact that oil prices are now rising further and with the Federal Reserve and Washington focused on combatting inflation means that a near-term monetary or fiscal bailout of markets is not likely, though they could slow the tightening steps planned for later this year.

We will continue to closely monitor this fluid situation, not for the purposes of trying to time the market, but to properly incorporate these risks into our individual stock analyses and ensure clients’ risk levels remain on target as prices move. History has repeatedly shown that it is times like these —when downside risks seem the highest —that it is most important to stay the course on your long-term investment plan and remain fully invested. Please do not hesitate to reach out to your advisor should you have any questions.