On 24th February 2022, the first Russian forces invaded Ukraine and it seems the situation has worsened. Europe faces a crisis that it has not had to face for decades. The humanitarian problems have significantly increased with millions of civilians being displaced from their homes and fleeing from Ukraine.
The west have sought to put extreme pressure on Russia through economic sanctions, which have gradually been increasing in severity over the last week. It is highly unlikely that the west will risk any military confrontation with Russia at this point, as such financial sanctions are the strongest form of protest. Sanctions have ranged from freezing assets of the Russian Central bank and Russian oligarchs to bans on purchasing Russian manufactured goods. The Rouble has collapsed in value and the risk of Russia failing to fulfil re-payment of loans has increased.
The key sanctions are focused on financial assets and commodities. A lot of European nations depend on Russia for Energy supplies, both oil and gas. Russia exports around 5-7% of the global supply of oil as well as close to 30% of Europe’s gas for households and manufacturing. It is a difficult task to replace this and this has caused the prices of both oil and gas to surge. Russia is also responsible for a significant share of the global steel, copper and nickel production, which has also surged in price.
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 must 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 price 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.
At such times, it is important to remember that investments are intended for the medium to long term, rather than focusing on short term volatility. We have experienced similar events in the past and markets have always continued to perform well over the long term. The graph below is a useful reminder that markets continue to provide good returns over the medium and long term, despite short term events.
Please remember that past performance is not a guide to future returns and that the value of investments will fall as well as rise.
Source: Financial Express. FTSE® All-Share Index, total return with dividends reinvested, from 31 December 1985 to 27 February 2020. These figures don’t take into account any charges or the impact of inflation. Figures refer to the past, and past performance isn’t a reliable guide to future performance. https://lib.standardlife.com/library/uk/cus358b.pdf
