By: The Kimsa Team
The military invasion of Ukraine by Russia is an unwelcome jolt to the world order. As with any military engagement, the individuals that pay the highest price are the civilians caught in the crossfire. Everyone at Kimsa sends our thoughts and prayers to the Ukrainian people.
Our job as your financial advisor is to assess the impact of Russia’s military actions against Ukraine. There are several items to cover here and as you will see, our conclusion is not one of global military conflict nor financial market collapse. First, Russia has invaded Ukraine before, so this is not an entirely unexpected development. While the deaths of Ukrainian civilians is incredibly sad and morally reprehensible, Vladimir Putin’s ambitions in the area will not be deterred by those innocent deaths. What could potentially slow or stop Putin is money, or lack thereof. As the US and its allies ramp up their sanctions on Russia, these will have an increasingly negative impacts on Russia’s finances. Many consider that the first round of sanctions lacked the required punch due to their exclusion of raw material exports from Russia, but the situation is fluid and Russia’s oil and gas exports to the US are to be banned.
We see a similar story for Russian banks. Some banks have been locked out of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), but several major banks continue to have access. SWIFT is the global system by which most banks transact with other international institutions and the platform through which they facilitate international financing. Access restrictions to SWIFT could prove economically disastrous for Russia financially and Putin personally. Over the years the Russian financial industry as well as those in the US, UK, and EU have gradually reduced reliance on one another, but Russia still heavily relies on SWIFT for the vast majority of its financing activities. Therefore, any negative economic impact experienced by Russia will be significant, but not devastating to the rest of the world.
Russian exported oil is another area of interest. While Russia does account for 11% of global oil production, there are numerous other methods of distributing oil and sources for extracting oil. We are currently seeing market forces begin to move oil markets into equilibrium. With the threat of oil being cut off from Russia, the rest of the global oil producers see the price of oil increase and therefore potential profits increase. This is a huge incentive for producers to tap into inventory and activate idle reserves. This will take some time, but the groundwork is already in place.
According to the International Monetary Fund (IMF), as of 2021 Russia is only the 11th largest economy in the world and ranks just behind South Korea, and just above Brazil. Couple the size of the economy with the relative isolationist trend since 2014 and again you have a recipe for a significantly muted global economic impact. Lastly, regional conflicts are rarely the cause of global financial crises.
For example, the majority of the regional conflicts of the last 70 years did not cause a widespread financial crisis: the Korean War, the Cuban Missile Crisis, the Six Day Way, the first or second wars in Iraq, the Balkan Way, the Israeli conflict with Hezbollah, the Syrian Civil War, the US involvement in Libya or Afghanistan, or Russia’s invasion and annexation of Crimea. There are exceptions, but investment and financial decisions should be made on the more likely outcome rather than the exception.
In this case a global economic recession or financial bear market is not the likely outcome. Therefore, our outlook remains that economies and markets will continue their gradual movement upward. US and international economies show material and durable signs of strength, and we believe that you can take comfort in knowing that there are more drivers providing upward support than downward pressure.