RSMR Update: Russian Invasion of Ukraine

10 Mar 2022

RSMR Update: Russian Invasion of Ukraine

It has been just over a week since the last update on the invasion and it is clear that the Russia/Ukraine situation has worsened, and that Europe faces a crisis that it has not faced for several decades. The humanitarian problems have significantly increased with nearly two million people exiting the Ukraine, mostly to those countries bordering the country such as Poland, where over half have so far fled.   

The west have sought to put extreme pressure on Russia through economic sanctions which have gradually been increasing over the last week. It is highly unlikely that the west will risk any military confrontation with Russia at this point and sanctions are the strongest form of protest. The sanctions range from an oversees freeze on the assets of the Russian central bank to a ban on buying sparkling wine from a bottler in Crimea. The rouble has collapsed in value, bond default risks have spiked, and the Moscow stock exchange has closed to trading. There is a growing movement around the globe for self-imposed sanctions, examples include ports turning away Russian ships and the taking down of Russian made goods from shops without official instructions or sanctions.  There has also been some specific targeting; the US, EU and UK have added about 400 individual names to the sanctions list along with another 600 companies. Even the Hungarian leader has done a U-turn from holding a pro-Russian stance to denouncing the invasion and supporting Kyiv.

The key sanctions are focused on financial assets and commodities. The west, and for the most part this means Europe, depends on Russia for its energy supplies, both oil and gas. Russia exports much of its oil and produces around 5-7% of global supply. It also supplies close to 30% of Europe’s gas for households and manufacturing. This is not easy to replace and the threat of this has caused the price of gas and oil to surge over the last few days. Whilst the US want to impose sanctions on oil, European leaders are reluctant without a replacement. From $80 a barrel, prices for Brent crude lifted to $139 on Monday 7th March with some traders expecting it to go much higher as risks and rhetoric intensifies. Russia is also responsible for a significant share of the global steel, copper and nickel production which has sent these commodity prices soaring as well. The knock-on effects of all these actions are obvious in that they increase the inflationary pressure on the global economy, potentially leading to a recessionary environment if interest rates have to rise and consumption slows down. Higher energy costs will eat into the profitability of manufactured goods reducing supply, and we have already seen significant smelting capacity taken offline for aluminium and steel production. At the moment these risks have yet to fully play out as oil and gas sanctions have not been agreed across the west but the potential implications are clear to see.  

The effect for most UK retail mutual fund investors is relatively limited at the moment as most direct Russian exposure is small and held in emerging market funds which are viewed at the higher end of equity risk for most investors. The wider risk is the contagion that it may cause in terms of global risk as the economic linkage between countries is very interwoven. If events do spiral, then risk assets will struggle, and investors will seek safe havens. This tends to happen in all crisis situations and sentiment around this will change day by day causing higher levels of volatility.

The effect on the global economy will depend on the time it takes to resolve the situation both in the sense of the military resolution but also the political one. The longer it takes, the greater the uncertainty and more negative the position becomes as sanctions bite. We have to remember that Russia is only a small part of the global economy (3-4%) but its effect on sentiment at the moment is far greater and is affecting the pricing of all assets. At this stage in the crisis it is difficult to predict the path it will take, as there are so many variables, but we still believe in asset diversification with a view to the longer term rather, than running to safety or betting on a quick recovery in the shorter term.

RSMR

 

This information is for UK Professional Advisers only and should not be given to retail clients.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company Registration Number 5227656. Registered office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark. 


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