Russian Conflict and Financial Markets

As tensions across Europe are rising due to Russian aggression towards Ukraine, many global financial markets are in turmoil. To fully understand and give proper context to the situation, it is important to at least have some understanding of how this conflict came to be in the first place.

Russian President Vladimir Putin sees Ukraine as historically and culturally part of Russia, and without condoning his use of force, he is not completely wrong. Many Ukrainian citizens, for example, speak Russian, especially in the east.

In 2014, roughly a quarter century after the end of the Cold War, Ukraine elected a very pro-democracy and pro Western government, and began to politically distance themselves from Russia and towards Europe. Seeing this as a threat to Russian power and influence, Putin has been trying to influence Ukraine and Belarus to align more with Russia.

With Belarus, he was clearly successful, essentially installing a puppet government, and with Ukraine, he has been clearly unsuccessful, with the majority of the Ukraine citizenry being very much pro Europe.

So Putin’s likely goal is to either annex Ukraine or forcibly install a puppet government to further extend Russia’s influence, and while European powers have staunchly opposed Russia’s threats against Ukraine, they have taken a “wait and see” approach and have taken very little concrete action.

Russian aggression and the threat of war has caused tremendous turmoil in the world economic markets over the past few weeks. Investors must at least be aware of the major issues surrounding stocks, bonds, currencies and commodities to effectively manage their portfolios. We will take a brief look at each one of these asset classes.

Stock Market

Stock markets around the world have been hit especially hard the last few weeks. The timing couldn’t have been worse, as there had been a substantial run up in the weeks prior to the Russian aggression, many stock sectors were due for a normal and healthy pullback anyway.

When analyzing the facts, the stock pullback is mostly due to fear of the unknown. Ukraine is not a major player in the world economy, their GDP is roughly 156 billion U.S. dollars, which for scale, is roughly what Apple made in profit in 2012 or Costco’s annual revenue today, and while Russia is bigger, they are still a relatively small player on the world stage.

With the prevailing risk-off sentiment in the market at the moment and many investors losing their minds on what the future might hold for their investment portfolios, we have decided to try putting things into perspective by looking back to the Russia-Ukraine tensions from 2014 and their impact on the financial markets. We are using the SPDR®S&P 500 ETF (SPY) as a reference point in this comparison.

Geopolitical crises and military conflicts have always presented a certain level of systemic risk to the global financial markets. As a result, investors tend to flee away from risk-assets (stocks) and towards proven safe-haven assets like Gold, Bonds etc. However, history shows that after the initial sharp knee-jerk move lower on the back of the developing conflict, equities (stocks) have always managed to post a sharp recovery to the upside in the months that followed.

There really is no concrete reason why this conflict should significantly affect most sectors of the stock market, other than the market does not like unknowns. It is similar to how the market usually declines in the weeks leading up to a presidential election, and then rises immediately after, regardless of the winner. As long as this conflict is unresolved, expect to see a lot of volatility in the market as a whole, most of which will eventually pass.

There are exceptions, of course, namely stocks related to energy, and if the conflict gets severe, there may be repercussions throughout Europe, especially Germany if they are unable to get Russian natural gas which powers much of their economy. But as of now, unless the natural gas gets cut off to Germany, many stock declines will likely be buying opportunities.


Certain commodity prices, on the other hand, may see significant disruption. As mentioned, Russia is a major supplier of natural gas, much of which is piped to Germany. As of now, it is probably unlikely the supply will be affected. As dependent as Germany is on Russian natural gas, Russia is even more dependent on payments from Germany. Both countries will remain highly incentivized to keep the pipelines running.

Expect to see the price of natural gas to increase, as the fear of the unknown will likely cause supply hoarding, and well as the price of oil. Russia is a fairly large supplier of the world’s oil as well, and the oil market is especially sensitive to any geopolitical tension anywhere.

In addition to fossil fuels, both Russia and Ukraine are among the top exporters of wheat and grain to the European markets. As of now, there is little evidence of supply chain interruptions, but the fear of such disruptions will likely cause those prices to increase as well.

Gold is widely considered as the best safe-haven asset and gold prices always tend to see significant capital inflows in times of political, economic and military uncertainty and risks. On January 13th, 2022 we posted our detailed analysis on why we expected Gold prices to move sharply higher this year. The price of the yellow metal at the time was sitting at around $1,820 per troy oz. This morning the price has hit $1,950 per troy oz and is not showing any signs of slowing down.

Bond Market

The bond market will likely see some across the board price increases as many people flee to safety. We have seen in past wars that this is a common reaction. As a lot of money is leaving the stock market, many investors will see the bond market as a way to safely hold their assets.

There is one caveat, however. Bond prices are inversely related to interest rates. As interest rates go up, bond prices go down. Interest rates in the U.S. and around the world are rising. So there are simultaneously forces pushing up and pulling down on bond prices, which could cause some relative volatility in the market.


The Forex market is already seeing some disruption due to the threat of war in Europe. The price of gold is already at a 13 month high, which doesn’t sound like much but 13 months ago the entire world economy was reeling from Covid fears and shutdowns. The Swiss Franc, seen as the safe currency, is already at a 7 year high. Expect those trends to continue as long as the threat of war is present.

Looking Ahead

As of now, nothing concrete has happened that would affect anything in any world market, all the moves have been due to the fear of the unknown, and especially coupled with the stock market due for a normal pullback anyway.

Cutting of natural gas to Germany or sanctions keeping Russia from selling its oil on the world market would have a serious and concrete negative impact on the stock market. Germany’s economy would be severely hampered and oil prices around the world would see a rise, possibly quite dramatically in the short term. Both of those scenarios could have a severe impact on stock markets around the world.

It should be noted that the price of oil is unlikely to rise too much in the long term regardless of what happens. The United States has the ability to pump tremendous amounts of oil from fracking operations in North and South Dakota. Fracking is significantly more expensive than other drilling techniques, so when the price of oil is low fracking mostly comes to a halt. If the price of oil rises too much, U.S. oil drillers will simply start fracking again which will put a cap on oil prices.

Oil field services company Shlumberger, for example, is up roughly 40% since the crisis began, and would be in for a windfall of profits if Russian oil were to be cut off.

As of now, it appears that while Europe and the U.S. do not want Russia in Ukraine, they are unwilling to risk an all out war with a nuclear power. Also, it is unlikely that Russia could legitimately afford an all out war either. Sanctions against Russia, many likely aimed at the wealthy Oligarchs, may be quite effective in hampering both Russia’s power externally and even Putin’s grip on power internally.

As of now, it is just important to understand the forces that are acting on the world economy. As the situation progresses, having these basic understandings will allow an investor the ability to make good decisions in a timely manner.


Add a comment